The FT’s Kara Scannell scoops that the SEC is investigating a Magnetar CDO deal, probing Merrill Lynch and its handpicked CDO manager Corey Ribotsky, though Magnetar itself apparently isn’t being scrutinized.

The SEC, which is looking at several deals banks structured for Magnetar, is investigating whether Merrill told buyers that Magnetar helped select the assets included in the Norma CDO and bet against those same assets, these people say.

Magnetar has denied claims it selected the Norma portfolio.

Regulators are also looking into whether Merrill mispriced assets in the CDO, these people say.

The Norma CDO is the “hairball” The Wall Street Journal wrote about in December 2007. That story, which was really good at the time, has looked better and better as events have unfolded, particularly after Yves Smith and ProPublica showed how diabolical Magnetar’s scheme really was.

Remember Magnetar couldn’t find enough toxic assets to short because no one wanted to buy the riskiest parts of the subprime CDOs. So it bought them itself, enabling it to place shorts in much greater bigger volume and giving it the power to influence what assets went into the deal (for Magnetar, the worse the better). In so doing, it helped prolong the bubble.

And recall that Ribotsky was introduced to the subprime bubble machine after the penny-stock impresario met a criminal defense lawyer on Long Island who introduced him to a bond salesman at Merrill, which was looking to find “independent” CDO managers so it could keep churning out toxic assets.

Yves Smith pulls this very interesting quote from Serena Ng and Carrick Mollenkamp’s 2007 Journal story:

In 2006, Ribotsky says Merrill came to NIR with a new proposition: One of the investment bank’s clients, a hedge fund, wanted to invest in the riskiest piece of a certain type of CDO. Merrill worked out a general structure for the vehicle. It asked NIR to manage it.

“It was already set up when it was presented to us,” Mr. Ribotsky says. “They interviewed a bunch of managers and selected our team.”

CDO managers were typically supposed to be independent and to select the assets that make up the CDO, and Smith says CDO managers had a fiduciary duty to all sides of a deal. It would seem that statement could get Merrill in some trouble.

So what kind of guy did Merrill Lynch think would make a good independent manager of its CDOs? Ribotsky was in the penny-stock business, and focused on PIPE deals, a sketchy area of a notoriously shady industry. The WSJ reported in the 2007 piece that Ribotsky’s company, the NIR Group, was being sued by three companies who said it had manipulated their stock prices.

In February of last year, the Journal reported that the feds were investigating whether NIR Group “paid kickbacks to outsiders as part of a scheme to inflate the value of its holdings.” This should raise anyone’s eyebrows, particularly in the post-Madoff era:

NIR Group reported eight years of positive returns in its biggest fund with no negative months starting in 2001, according to figures in fund documents.

And indeed there was fraud going on at NIR. Five months after that report, NIR analyst Daryl Dworkin pleaded guilty to securities fraud and testified that Ribotsky had put him up to making “material false statements and omissions to NIR’s investors and their representatives.”

Now NIR and Ribotsky are caugh in the (not-so-harsh) glare of an SEC investigation of its CDO activities, and everyone gets to know who Merrill Lynch chose as a fiduciary for its investors.

It’s worth noting that NIR isn’t the first CDO manager to face an SEC investigation. When the SEC charged ICP Asset Management with fraud a year ago, it said it was examining fifty managers.

It would seem a few of them ought to know where some bodies are buried.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.