by Jake Bernstein and Jesse Eisinger, ProPublica, June 22, 2011, 1:57 p.m.by Jake Bernstein and Jesse Eisinger, ProPublica, Dec. 22by Jake Bernstein and Jesse Eisinger, ProPublica, Aug. 26by Jesse Eisinger and Jake Bernstein, ProPublica, April 9

The $154 million settlement the Securities and Exchange Commission wrested from JPMorgan Chase involved only one of more than two dozen mortgage securities deals that the hedge fund Magnetar helped create. As we detailed last year, many banks in the waning days of the boom created collateralized debt obligations, or CDOs, with the help of Magnetar, which also bet against many of the same investments.

So, is the SEC going to do anything about any of the other deals? The answer to that question reveals as much about the difficulties in policing Wall Street as it does about the excesses committed in the lead up to the financial crisis.

In the SEC’s complaint [PDF] released yesterday it accused JPMorgan of misleading investors in a complex mortgage deal it peddled in 2007. Neither the bank, nor the manager of the deal had disclosed to the investors that Magnetar not only helped choose the assets in the deal, called “Squared,” but also bet against much of the deal.

Magnetar participated in at least 28 similar deals, worth more than $40 billion. Other hedge funds, such as Paulson & Co., asked Wall Street banks to design billions worth of other similar deals, crucial aspects of which were not clearly disclosed to investors.

While the SEC may yet reach a few more settlements over similar conduct at other banks, it’s likely that only a fraction of those responsible on Wall Street will be caught in the dragnet.

“It is impossible for the SEC to sweep the Street on every one of these bum deals,” says Charles Landy, a partner at Pillsbury who was a former attorney in the SEC’s enforcement division.

The largest stumbling block may be lack of resources. The SEC spent two years investigating Squared. A special group within the agency that helps the enforcement staff examine these complex securities was formed in January 2010 and wasn’t fully staffed until May of that year. To cut through the complexity of the deals and the legal defenses of the banks takes time and knowledge.

Understanding the mechanics behind Squared was no easy matter. It was a collateralized debt obligation, usually the last stop for mortgages on an assembly line of slicing, dicing and repackaging. But Squared took the process a step further; it was a CDO consisting entirely of other CDOs. To make it even more confusing, it didn’t consist of actual cash bonds but side bets on those bonds, credit default swaps, so-called synthetics that mimicked the physical bonds. Neither CDOs nor CDSs received much regulatory attention in the lead-up to the crisis. CDSs were private transactions, outside the SEC’s traditional jurisdiction. Congress specifically prohibited the SEC and other regulators from regulating derivatives such as CDSs. As the financial crisis was hitting, “there wasn’t one piece of paper on file relating to a CDO” at the agency, says one SEC official. That meant “we couldn’t see the forest or the trees.”

The banks generally swathed their prospectuses for these deals in dense legalese detailing all kinds of risks, real and imagined. These warnings became so standard and voluminous that they lost any power to help investors. The banks might seek to use them as a legal defense when regulators come calling. In the case of “Squared,” however, the SEC wrote in its complaint that a generic disclosure covering the possibility that an investor might bet against the deal was inadequate because it didn’t disclose that Magnetar was involved in the asset selection process. Since JPMorgan settled, that theory was never tested in court. The banks also argue that they sold these bonds only to “sophisticated investors” who should have been fully aware of what they were buying.

Once they unwrapped the deals, regulators needed to identify the players and the nature of their relationships. This required poring over months of email traffic from multiple parties. In the case of Squared, in addition to JPMorgan, the banker, and Magnetar, the hedge fund whose small purchase got the deal started, there was also GSC, an asset manager. CDO managers like GSC served as the referee between the investor and the bank. They selected the assets and had a fiduciary duty to ensure the investment was described fairly to potential buyers. The SEC alleges that GSC failed in this duty, and it is pursuing charges against Edward Steffelin, the manager who worked on the deal. GSC did three other Magnetar deals in the same time period with similar characteristics. The bank was Citigroup, which has said its activities are under investigation by the SEC.

Steffelin denies the charges, and his lawyer has said he will contest them. Citigroup declined to comment.