The U.S. Securities and Exchange Commission accused the New Jersey firm Harding Advisory LLC and its owner, Wing F. Chau, of fraud, alleging they allowed a hedge fund to control which assets backed a $1.5 billion complex structured product, without disclosing to investors the fund's role in the process.

Chau appeared in Lewis' bestseller about the financial crisis and later sued the author for defamation but lost.

According to the SEC, Harding and Chau compromised their independent judgment as collateral manager for a collateralized debt obligation known as "Octans I CDO Ltd."

A lawyer for Harding and Chau could not immediately be reached for comment.

The SEC did not charge the hedge fund, Magnetar Capital LLC, which the agency said was allowed to select and acquire a portfolio of subprime mortgage-backed assets to serve as collateral for the debt issued to investors in the CDO.

According to a complaint filed in the SEC's administrative court, Magnetar's role in helping to select the assets for Octans I was "unbeknownst to investors and in conflict with marketing materials."

Magnetar's name has repeatedly surfaced in connection with risky bonds sold as the housing market began to collapse. Multiple regulators have said the firm helped structure certain deals and bet against them even though its role was not disclosed.

A year ago, Massachusetts' top securities regulator forced State Street Corp to pay $5 million for failing to tell investors about the role Magnetar played in creating CDOs. Magnetar itself has not been charged in any of the financial crisis-era cases.

Magnetar spokeswoman Melinda McMullen declined to comment.

The CDO at issue in the Chau case failed in April 2008 and left investors with $1.1 billion in losses, the SEC said.

Chau and his Morristown, New Jersey, advisory firm also breached their duty to investors in several other CDOs, the SEC said, by buying into troubled CDOs "after receiving pressure" from Merrill Lynch, which marketed the deals, and a "direct request" from Magnetar.

In agreeing to buy the bonds, the SEC said, Chau wrote an email to the head of CDO syndication at Merrill Lynch saying: "I never forget my true friends."

Bill Halldin, a spokesman for Bank of America, which now owns Merrill Lynch, declined comment.

The SEC said on Friday that it was still investigating related matters in the case.

"A collateral manager's independent selection of assets is an important selling point to potential CDO investors," said George Canellos, co-director of the SEC's Division of Enforcement.

"Investors had a right to know that Harding and Chau had chosen to accommodate the interests of others and abandon their own obligations to act in the best interests of the CDO they advised."

(Reporting by Sarah N. Lynch and Aruna Viswantha in Washington and Svea Herbst in Boston; Editing by Jeffrey Benkoe and John Wallace)

By Sarah N. Lynch and Aruna Viswanatha