) -- The

Securities and Exchange Commission

is investigating the sale by

Merrill Lynch

of a complex mortgage-related security it created for an Illinois hedge fund,

The Financial Times

reported, citing people familiar with the matter.

The SEC is investigating whether Merrill told buyers that hedge fund Magnetar helped select the assets included in a $1.5 billion CDO and bet against those same assets, the people told the newspaper. Magnetar has denied claims it selected the portfolio.

Regulators are also looking into whether Merrill Lynch mispriced assets in the CDO, the people said.

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, Merrill Lynch's parent company, declined to comment for the newspaper. The bank previously said it lost $900 million on the CDO known as Norma.

The SEC also is investigating whether the deal's collateral manager, NIR Capital Management, a Roslyn, N.Y., firm run by Corey Ribotsky, fulfilled its obligations,

The Financial Times

reported. Ribotsky and his attorney didn't return calls from the newspaper seeking comment.

-- Written by Joseph Woelfel

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Joseph Woelfel

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