The headquarters of the U.S. Securities and Exchange Commission (SEC) are seen in Washington, July 6, 2009. REUTERS/Jim Bourg
January 9, 2017
By Nate Raymond
NEW YORK (Reuters) – The U.S. Securities and Exchange Commission has partially overturned a ruling finding an investment adviser featured in the best-seller “The Big Short” liable in a case stemming from the 2008-09 financial crisis, but it increased how much he owes.
The SEC on Friday partially reversed an administrative judge’s 2015 decision finding that Wing Chau and his firm, Harding Advisory LLC, committed fraud in connection with two complex investment products linked to mortgages.
But the SEC took a different approach than the judge in calculating how much the parties must forfeit in ill-gotten gains, resulting in Chau and Harding being ordered to pay a combined nearly $6.8 million, up from $3.04 million.
Alex Lipman, Chau’s lawyer, on Monday said he was pleased the SEC dismissed the “most significant aspect of the case.” Lipman said he plans to challenge the remainder of the decision before a federal appeals court.
An SEC spokeswoman declined to comment.
Chau, a bond manager who unsuccessfully sued author Michael Lewis over his depiction in the financial crisis-focused “The Big Short,” was charged along with Morristown, New Jersey-based Harding by the SEC’s enforcement division in 2013.
The case centered on two collaterized debt obligations, Octans I CDO Ltd and Norma CDO I, a type of investment vehicle comprised of hundreds of mortgage-backed securities, a financial product that was at the heart of the crisis.
The SEC accused Chau and Harding, which served as Octans’ collateral manager, of allowing hedge fund Magnetar Capital LLC undisclosed influence over selecting collateral for the $1.5 billion CDO.
The SEC alleged Magnetar played a role in the deal despite its strategy of taking short positions on mortgage-backed securities in CDOs, including ones it was investing in, as it was in Octans I.
The agency also accused Chau and Harding of committing fraud by acquiring Norma bonds as a favor to Merrill Lynch, which marketed the CDO, and Magnetar to include in two other CDOs that Harding managed to their investors’ detriment.
On appeal, the SEC dismissed claims regarding Octans, saying the “evidence suggests that Magnetar left it to Harding to decide which and how many bonds to include,” and that Magnetar was actually net long in it despite “modest” short positions.
But with regards to Norma, the SEC ruled that the record showed Chau and Harding bought Norma bonds as a favor to Merrill and Magnetar and allocated them to two CDOs “without regard for the creditworthiness of the assets.”
(Reporting by Nate Raymond in New York; Editing by Leslie Adler)