SEC Investigation Stalks Ellington

Chidem Kurdas

Michael Vranos’ plan to take a mortgage-backed securities investment vehicle public was bold in view of the fact that his firm’s hedge funds have been slowly winding down with redemptions frozen for years. The approaching initial public offering  looks even more daring as details emerge of an investigation by the Securities and Exchange Commission into mortgage-related collateralized debt obligations.

The investigation is not new—despite media reports in December 2009 that the regulator just started to ask questions about this.  SEC interest in CDOs goes back to the momentous collapse of the two Bear Stearns hedge funds in early 2008, in which the instruments played a key role.

Mr. Vranos’ Ellington Management Group was a collateral manager—that is, it managed the pools of mortgage securities underpinning CDOs. Many of the securities have defaulted or are otherwise impaired. In March 2008, with the Bear Stearns losses in the headlines, the SEC subpoenaed Ellington for documents and other information relating mostly to CDOs underwritten during 2007 and 2008. Now this may sound like an old story. Ellington provided the material and that was that.

But the investigation is continuing. In August 2009, Ellington and an affiliate got another subpoena, this time for CDOs set up in 2006 and 2007. The managers say they have responded to the subpoenas and intend to cooperate with any further requests.

It not unknown for the SEC to collect information for years with nothing obvious coming of it. CDOs being complicated, this investigation may take even longer than usual for the regulator. Still, one wonders about the Ellington mortgage vehicle IPO. It sounds like there could be a regulatory cloud hanging over the firm.



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