The new and improved Securities and Exchange Commission has finally decided to investigate the role of collateral managers who helped banks like Merrill Lynch sell CDOs designed to fail. Their first target is a Long Island hedge fund manager, Corey Ribotsky of N.I.R. Group. Kara Scannell of the Financial Times was first to report on the SEC’s new investigation into Ribotsky and the Merrill Lynch executives who hired him to co-sale a toxic $1.5 billion CDO called Norma.

The mortgage security in question, packed with derivatives of sumprime residential loans, plummeted into defaults within the first year of its 2007 issuance while funds like N.I.R Group kept reaping million dollar fees to manage it. But what the SEC appears to be most interested in is the notion that Ribotsky didn’t do any managing or independent selection of the collateral that went into creating the CDO. Instead he allegedly handed off that responsibility to a large Merrill client and hedge fund called Magnetar; who was building short positions betting against the success of the CDO. The sausage making of toxic CDO’s like Norma was first exposed in December 2007 by Carrick Mollenkamp and Serna Ng at the Wall Street Journal. Some how these intrepid reporters got Ribotsky on the record bragging about how Merrill’s Kenneth Margolis, co-head of their CDO business, deemed his firm to be some kind of ethical, experienced CDO manager even though he had zero experience in the mortgage business and was consistently being sued for stock manipulation by the penny stock companies he did PIPE deals with.

It wasn’t until late 2008 that Ribotsky’s miss-management style showed up in his $800mn-ish hedge funds. He put the screws to his investors by suddenly throwing up a gate and locking in tons of mom and pop investors who still haven’t seen a return of their money. I first learned about Ribotsky when one of those investors, Sequoia Sun, contacted me while I was reporting for the New York Post. Sun had a sob story about Ribotsky promising to return his $250,000 investment, that he was going to use for a humanitarian project getting food to remote coastal villages, before the gate went up and then reneged on the redemption. The story was set to run at the NY Post in November 2008 but was held when NIR Group wrote News Corp counsel saying Sun was trying to bribe the fund and make up bad news about Ribotsky to get his investment returned. We latter learned it was NIR Group who did the attempted bribe and Sun agreed to testify to the Brooklyn DOJ who’d just began an investigation into how NIR was valuing his PIPE deals and charging investors excessive fees.

Since then I’ve reported multiple stories on the troubles at NIR Group at Dealbreaker, Greenwich Time, and Deal Flow’s The PIPES Report. Nathan Vardi at Forbes has also reported detailed accounts of Ribotsky’s shady dealing with investors and his top director Daryl Dworkin was even criminally charged with accepting bribes last year. Dworkin’s sentencing was delayed until July 15th and it’s our understanding he’s been working with the DOJ to help build their case against Ribotsky. Yet still with the DOJ’s investigation over 2 years old, and a very knowledgeable co-operating witness, no charges have been filed. Investors in NIR who contact me on the condition I don’t disclose their names, have lost hope in the DOJ’s investigation and I don’t blame them.

Based on my recent reporting it appears the SEC is finally much more active than the DOJ and interested in charging NIR and Ribotsky with securities violations but then we’ve seen the regulator get actively interested in 2005 and as Matt Goldstein of Reuters reminded us nothing happened. In April, I detailed at DealFlow Media how one of NIR’s portfolio companies, Ingen, had turned over evidence on the hedge fund’s role in pumping the stock before Ribotsky converted it and using unregistered broker dealers to move the penny stock. So I’m not surprised the SEC picked his firm as their first guinea pig to go after third parties, CDO collateral managers, role in misleading other institutional investors and breaching their fiduciary duties. But still we have to wonder if they can really build a case this late in the game.

Jonathan Pickhardt, a rockstar securities attorney who represented a foreign bank Rabobank, tried to sue Merrill in 2009 for getting the bank involved in the Norma CDO when they knew NIR Group was allowing Magnetar to really ‘manage’ the collateral selection. He fought with NIR Group for over six months to turn over documents relating to their interaction with Magnetar but as usual NIR Group stalled and wouldn’t comply with subpoenas. The case eventually settled for an undisclosed amount in August 2010 but not before Pickhardt filed public letters to the judge calling out NIR and Merrill’s shady partnership.

Pickhardt wrote in March 2010, “One of Rabobank’s central allegations is that Merrill fraudulently induced Rabobank’s loan by falsely touting the integrity of NIR and the rigorous and independent process NIR employed to select assets. Rabobank alleges that Merrill knew that NIR was a corrupt manager that was beholder to Merrill for its existence and the NIR had abdicated its responsibilities by allowing Norma’s portfolio to be used for effecting hedge and short positions.”

Pickhardt claimed he’s come to this conclusion based on discovery obtained through Merrill and clearly someone thought he had a solid claim because Merrill quickly pulled out the checkbook to make sure all that discovery wasn’t aired in open court.

ProPublica ended up writing a series of stories on the Magnetar-Merrill self destructing CDO saga last year and even won a Pulitzer for their coverage (I personally think this award should have been split with the WSJ who was first to break and highlight the problems). With multiple documented, on the record, reports on the methods and alleged (but blatant) illegal actions of Ribotsky dating as far back as late 2007 we have to shake our heads and wonder why the SEC cares now. Does it really take the pressure of the press, and a journalism award, to finally get the SEC to do their job and go after the players who cheat investors and give Wall Street capitalism a dirty image? At this point how do we know there’s even any evidence still around to build a case? If the SEC needs some direction I’d suggest they start by asking: Did the biggest microcap short seller (NIR) use their insider look at Norma and also buy credit default swaps against Norma’s demise?

Let’s hope for the sake of free markets at least one bull dog regulator finally figures it out.