'Big Short' character sues SEC to stop enforcement case

Fri Mar 21, 2014 7:01pm EDT
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By Jonathan Stempel

NEW YORK (Reuters) - The U.S. Securities and Exchange Commission has been sued by a money manager made famous in Michael Lewis' book "The Big Short," who claims the regulator is violating his constitutional rights in how it is pursuing an enforcement case against him.

Wing Chau and his firm Harding Advisory LLC had been charged by the SEC last October with defrauding investors in a $1.5 billion collateralized debt obligation for which Harding was collateral manager, by failing to reveal that the hedge fund Magnetar Capital LLC had a role in choosing the collateral.

The SEC has said Magnetar took an equity stake in the Octans I CDO and hedged it with a short position, meaning its interests might have conflicted with those of investors who wanted the 2006 CDO to perform well.

In recent years, the SEC has brought several cases involving alleged undisclosed roles in crafting CDOs in federal court, including cases against Goldman Sachs Group Inc (GS.N: Quote), JPMorgan Chase & Co (JPM.N: Quote) and Citigroup Inc (C.N: Quote).

But in a lawsuit made public on Friday, Chau and Harding accused the SEC of "shoehorning" their case into an in-house administrative proceeding - where it can be harder for defendants to raise objections and gather evidence - after having "repeatedly stumbled" in similar cases in federal court.

The SEC is "effectively tying the plaintiffs' hands behind their backs," violating their Fifth Amendment rights to equal protection and due process, according to the complaint filed in Manhattan federal court. "The decision to treat plaintiffs differently is causing and will cause severe prejudice."

Chau and Harding are seeking to permanently halt the administrative proceeding scheduled for March 31.

SEC spokeswoman Christina D'Amico declined to comment.   Continued...

The Securities and Exchange Commission logo in Fort Worth, Texas June 28, 2012. REUTERS/Mike Stone