The SEC has walked away from its fraud case against Edward Steffelin, a financial adviser who helped J.P. Morgan structure a CDO deal. On Friday, Judge Miriam Cedarbaum approved the SEC’s decision to dismiss the case with prejudice. The SEC had alleged that Steffelin knew that a hedge fund had helped select the assets for the CDO and then bet against the CDO and that Steffelin had failed to make sure that the hedge fund’s involvement was disclosed to investors. Steffelin was the first individual in a case arising out of the financial crisis who was charged by the SEC with only negligence under the securities laws, instead of intentional fraud.

Although the two-page stipulation dismissing the charges with prejudice does not indicate why the SEC decided to drop the charges against Steffelin, the jury’s rejection of similar negligence charges against Citigroup executive Brian Stoker this summer (a case we have covered) cannot have escaped the SEC’s attention.   That verdict combined with Judge Cedarbaum’s ruling last year that Steffelein did not owe a duty to investors of the CDO and his conduct did not amount to a “fraud or deceit” upon investors must have caused the SEC reconsider its case. Perhaps these developments will also force the SEC to reconsider, in general, the wisdom of bringing negligence — or what the SEC often calls “non-scienter fraud” — charges against individuals who had no intent to do anything wrong and who acted in compliance with industry standards.