NEW YORK ( TheStreet) -- 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.

Bank of America ( BAC), 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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