The SEC and several major Wall Street banks are negotiating a settlement over fraud charges related to toxic mortgage-bond deals - the ones that helped fuel the financial crisis, the WSJournal reports.  Participating in the negotiations are JPMorgan Chase - is expected to settle allegations related to its sale of a $1.1bn mortgage-bond investment, called Squared - Citigroup, Morgan Stanley, Merrill Lynch (now part of Bank of America Corp.), and UBS.

The expected settlements, some of which could be reached as soon as next week, collectively mark the biggest attempt by enforcement agencies to hold Wall Street accountable for its role in the subprime mortgage bust.  Other deals could take months to work out.  The cases highlight the aggressive tactics banks used to sell these securities to investors who suffered big losses.  They also show how the banks' desire to keep the $1 trillion mortgage securities business going helped fuel the housing bubble.

The SEC is aiming to reach a series of settlements with individual firms over the sales of the investments, rather than a big industrywide deal, according to people familiar with the matter.  Settlements are expected to vary significantly from bank to bank - though few, if any, are expected to surpass the $550 million penalty that Goldman Sachs Group Inc. paid last year to settle allegations that it misled investors in a mortgage-bond investment called Abacus 2007-AC1.  That penalty was the largest ever paid by a Wall Street firm to settle SEC charges.

The agency's decision not to try to adopt a common industry template for the settlements reflects substantial differences in the nature of the civil fraud allegations faced by each bank, people familiar with the matter said. It's expected that any and all SEC settlements will be closely scrutinized in Congress.  There's mounting political pressure on law-enforcement agencies to take more aggressive action against Wall Street over the financial crisis. 

Criminal prosecutors have not brought cases against senior executives of any of the major financial firms involved in the crisis, including those that failed or were bought as they were collapsing, in part because they are not confident they can prove the individuals intended to defraud investors. 

        Senate Committee Report on the Financial Crisis.   On Wednesday, a Senate committee released a scathing report accusing Wall Street firms of duping their clients by selling them securities tied to subprime mortgages that they knew were destined to lose money. 

The Senate materials included an in-depth analysis of Goldman's and Deutsche Bank's activities in the mortgage market. The report heavily criticized the two firms over their behavior in creating mortgage-bond deals, known as collateralized debt obligations—a complex pool of mortgages and other loans that were made up in part of risky subprime mortgages. Slices of these CDOs were sold to allegedly unsuspecting investors.

A spokesperson for Goldman said: "While we disagree with many of the conclusions of the report, we take seriously the issues explored by the Subcommittee." A spokesman for Deutsche Bank declined to comment.

        SEC/Bank Negotiations.   The banks involved in the SEC negotiations are keen to reach deals, rather than get involved in a public fight with the agency, according to people familiar with the matter. They said Wall Street had learned a lesson from the damage to Goldman's share price when the securities firm was sued by the SEC last year. Goldman shares fell 14% the day the suit was announced.  Goldman initially contested the fraud charges before reaching the $550 million settlement in July.

The allegations the SEC is weighing include claims that banks failed to tell investors who bought slices in a CDO that the investment had been created with input from hedge funds that were betting on the fall of the housing market—an event that would damage the value of the investments.

The settlement with J.P. Morgan is expected to involve potential conflicts of interest of this kind. One of the investors in the Squared CDO created by the bank was Magnetar Capital, an Illinois hedge-fund firm that invested in a number of CDOs.

Magnetar has said that its investment strategy was not based on a fall in the housing market and that it "did not at any time require or expect any specific assets to be purchased into the Squared transaction." Another investment-management firm acting as manager for the CDO, GSC Group, "at all times exercised its own discretion and judgment" on the selection of the assets, Magnetar said in a statement last year.

Magnetar declined to comment. GSC Group could not be reached for comment.

A former J.P. Morgan executive was warned by the SEC in January that he could face civil charges over the Squared CDO. A lawyer for Michael Llodra, the former head of collateralized debt obligations at J.P. Morgan, declined to comment.

A former executive at GSC Group also received notice from the SEC in January that he could be sued in connection with the J.P. Morgan investment. Edward Steffelin, who now works for Walton International Group (USA) Inc., a real estate investment firm, declined to comment.

The notices against Messrs. Llodra and Steffelin were first reported by Bloomberg.

The SEC has to date brought three CDO-related cases, including the landmark Goldman settlement. Wells Fargo Securities LLC this month agreed to pay $11 million to settle SEC charges that Wachovia Corp., which Wells Fargo & Co. acquired in 2008, charged excessive mark-ups to investors buying CDOs. Wells neither admitted nor denied the charges.

The agency last year charged a New York-based investment advisor, ICP Asset Management LLC, and its chief executive, Thomas Priore, with defrauding investors in four CDOs by causing them to pay inflated prices for mortgage-backed securities. In a statement at the time, Mr. Priore said: "We at all times acted in the best interest of our clients and intend to vigorously defend ourselves against these allegations."    [Wall Street Journal, 4/15/11]