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Firm to pay USD127.5m to settle charges

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The Securities and Exchange Commission has charged the US investment banking subsidiary of Japan-based Mizuho Financial Group and three former employees with misleading investors in a collateralised debt obligation by using “dummy assets” to inflate the deal’s credit ratings.



The SEC also charged the firm that served as the deal’s collateral manager and the person who was its portfolio manager.

According to the SEC’s complaint against Mizuho Securities USA, the firm made approximately USD10m in structuring and marketing fees in the deal. Mizuho agreed to pay USD127.5m to settle the SEC’s charges, and the others charged also agreed to settle the SEC’s actions against them.

The SEC alleges that Mizuho structured and marketed Delphinus CDO 2007-1, a CDO that was backed by subprime bonds at a time when the housing market was showing signs of severe distress. The deal was contingent upon Mizuho obtaining credit ratings it used to market the notes to investors. When its employees realised that Delphinus could not meet one rating agency’s newly announced criteria intended to protect CDO investors from the uncertainty of ratings downgrades, they submitted to the rating firm a portfolio containing ms of dollars in dummy assets that inaccurately reflected the collateral held by Delphinus. Once the firm rated the inaccurate portfolio, Mizuho closed the transaction and sold the notes to investors using the misleading ratings. Delphinus defaulted in 2008 and eventually was liquidated in 2010. Mizuho sustained substantial losses from Delphinus.

“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,” says 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.”

According to the SEC’s settled administrative proceedings against the three former Mizuho employees responsible for the Delphinus deal, Alexander Rekeda headed the group that structured the USD1.6bn CDO, Xavier Capdepon modelled the transaction for the rating agencies, and Gwen Snorteland was the transaction manager responsible for structuring and closing Delphinus. Delaware Asset Advisers (DAA) served as Delphinus’s collateral manager and the DAA portfolio manager was Wei (Alex) Wei.

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