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
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>, JPMorgan Chase & Co <JPM.N>
and Citigroup Inc <C.N>.
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.
Alex Lipman, a partner at Nixon Peabody representing Chau and
Harding, did not immediately respond to a request for comment.
Lipman has also represented Edward Steffelin, a defendant in the
JPMorgan case. The SEC dropped its civil case against Steffelin in
[to top of second column]
Harding is based in Boca Raton, Florida, according to the complaint,
which is dated March 18.
In adopting the 2010 Dodd-Frank financial reforms, the U.S. Congress
gave the SEC power to seek penalties against a wider array of
defendants in administrative proceedings, which are overseen by
judges on the regulator's payroll.
Critics have said this can be unfair to defendants because
litigation is sped up, discovery is limited, and defense lawyers
cannot generally take depositions.
Lewis' book "The Big Short" was a best seller about the recent
Chau sued Lewis in 2011 for defamation for allegedly portraying him
and other CDO managers in the book as "villains." A federal judge
dismissed that lawsuit in March 2013.
The case is Chau et al v. SEC, U.S. District Court, Southern
District of New York, No. 14-01903.
(Reporting by Jonathan Stempel in New York and Aruna Viswanatha in
Washington, D.C.; editing by Andrew Hay)
[© 2014 Thomson Reuters. All rights
Copyright 2014 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.