According to ProPublica, which cited unnamed persons as sources, regulators are investigating collaterized debt obligations (CDO) known as Squared thought to be worth $1.1 billion
Hedge fund Magnetar Capital is believed to have had some input in selecting underlying securities for the deal, before then betting against them.
A spokesman for the hedge fund, who was quoted by Wall Street Journal, said: âMagnetar did not have a strategy to bet against the mortgage market. Further, it did not originate the Squared transaction; rather that transaction was originated by GSC and JP Morgan prior to Magnetar agreeing to invest in the equity of that deal."
"Magnetar did not select the assets for the Squared transaction or require that any specific assets be put into that transaction."
The investigation is believed to be part of an ongoing probe into CDOs and follows a similar enquiry into an investment offering by Goldman Sachs earlier in the year.
Goldman was accused of misleading investors by not revealing the role of Paulson & Co in selecting assets as part of an offering related to subprime mortgage products.
The bank agreed to pay $550 million as part of a settlement with the SEC but the case against Fabrice Tourre, the bank employee named in the action, is ongoing.
By Jim Ottewill