DSNews The homepage of the servicing industry
The SEC announced Wednesday that the U.S. investment banking subsidiary of ""Mizuho Financial Group"":http://www.mizuho-fg.co.jp/english/index.html agreed to pay $127.5 million to settle charges of misleading investors.
[IMAGE]The accused are charged with using dummy assets to inflate credit ratings in order to execute a collateralized debt obligation (CDO) deal. The SEC also charged the firm that served as the deal's collateral manager and the portfolio manager.
The SEC alleges that ""Mizuho Securities USA Inc."":https://www.mizuhosecurities.com/us/main/welcome.jsp structured and marketed Delphinus CDO 2007-1, a CDO back by subprime bonds at a time when the housing market was in distress. The deal depended on the company being able to obtain credit ratings to market the notes to investors.
According to the SEC's ""complaint"":http://www.sec.gov/litigation/complaints/2012/comp-pr2012-139.pdf, all of the collateral assets for Delphinus had been purchased by July 17, 2007, with the transaction scheduled to close July 19. Around noon on July 18, S&P issued a press release announcing changes to its CDO ratings system that Mizuho employees knew would cause Delphinus to fall short of its rating targets. These employees emailed multiple alternative portfolios that contained millions in dummy assets in order to secure a AAA rating. Using the inaccurately-rated portfolio, Mizuho closed the transaction and sold the notes to investors.
Delphinus defaulted in 2008 and was liquidated in 2010, causing substantial losses to Mizuho.
""Mizuho and its employees undermined the integrity of the rating process by furnishing inaccurate information about the Delphinus portfolio,"" said Kenneth Lench, chief of the SEC's Enforcement Division's Structured and New Products Unit. ""Investors expect and are entitled to receive legitimate ratings in order to help them assess their investments.""
According to the SEC's complaint, Mizuho Securities USA Inc. made approximately $10 million in structuring and marketing fee in the deal. The company agreed to pay $127.5 million to settle the charges. Other parties charged also agreed to settle the SEC's actions against them.
According to the SEC's administrative proceedings against the former employees responsible for the deal, Alexander Rekeda led the group that structured the $1.6 billion CDO, Xavier Capdepon modeled the transaction for the rating agencies, and Gwen Snorteland was the transaction manager who structured and closed Delphinus.
In addition, the SEC settled administrative proceedings against Delaware Asset Advisers (DAA), Delphinus' collateral manager, and Wei (Alex) Wei, DAA's portfolio manager. Everyone charged by the SEC agreed to settlements without admitting or denying the charges.
""This case demonstrates once again that bankers and market participants who embrace a ‘get the deal done at all costs' strategy will be identified, charged, and punished,"" said Robert Khuzami, Director of the SEC's Division of Enforcement. ""This is a constant theme throughout the many SEC enforcement actions arising out of the financial crisis and is one that everyone involved in securities transactions and our financial markets would be well-advised to respect.""
