Federal regulators said Tuesday that JP Morgan Securities LLC will pay $ 153.6 million to settle federal charges that it “misled” investors in a complex mortgage securities transaction “just as the housing market was starting to plummet.”

Federal regulators said Tuesday that JP Morgan Securities LLC will pay $ 153.6 million to settle federal charges that it “misled” investors in a complex mortgage securities transaction “just as the housing market was starting to plummet.”

Under the settlement, “harmed investors” will receive all of their money back, said the Securities and Exchange Commission.

JP Morgan also agreed to “improve the way it reviews and approves mortgage securities transactions,” the SEC said.

JP Morgan Securities is an affiliate of New York-based JP Morgan Chase Bank, a unit of JPMorgan Chase & Co. (NYSE: JPM), which acquired the assets of Washington Mutual Inc. after it was seized by federal regulators in the nation’s largest bank failure in September 2008.

The SEC alleged that JP Morgan structured and marketed a synthetic collateralized debt obligation “without informing investors that a hedge fund helped select the assets” in that portfolio and had “a short position in more than half of those assets.”

As a result, the hedge fund — Evanston, Ill.-based Magnetar Capital LLC — would benefit if those assets defaulted.

The deal closed in May 2007.

Robert Khuzami, director of the SEC’s division of enforcement, said JP Morgan marketed the product “with promises” that the mortgage assets underlying it “would be selected by an independent manager looking out for investor interests.”

However, the firm “failed to tell investors” that a prominent hedge fund would “financially profit from the failure” of the assets.

“With today’s settlement, harmed investors receive a full return of the losses they suffered,” Khuzami said in a prepared statement.

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