The Securities and Exchange Commission charged the U.S. investment banking subsidiary of Japan-based Mizuho Financial Group and three former employees with misleading investors in a collateralized debt obligation (CDO) 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.
The SEC alleged that Mizuho Securities USA Inc. made about $10 million in structuring and marketing fees in the deal.
Mizuho will pay $127.5 million to settle the SEC’s charges.
The others charged also agreed to settle the SEC’s actions against them.
The SEC alleged 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 realized 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 millions 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,” 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.”
The SEC alleged that the three former Mizuho employees responsible for the Delphinus deal were Alexander Rekeda, who headed the group that structured the $1.6 billion CDO, Xavier Capdepon, who modeled the transaction for the rating agencies, and Gwen Snorteland who 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.
Everyone charged by the SEC agreed to settlements without admitting or denying the charges.
Mizuho consented to the entry of a final judgment requiring payment of $10 million in disgorgement, $2.5 million in prejudgment interest, and a $115 million penalty.
In the related administrative proceedings against Rekeda, Capdepon, and Snorteland, the SEC found that Rekeda violated Sections 17(a)(2) and (3) of the Securities Act, and Capdepon and Snorteland violated Section 17(a).
Rekeda and Capdepon each agreed to pay a $125,000 penalty while the decision on whether there will be a penalty for Snorteland will be decided at a later date.
Rekeda agreed to be suspended from the securities industry for 12 months, Capdepon and Snorteland each agreed to be barred from the securities industry for one year, and all three agreed to cease and desist from further violations of the respective sections of the Securities Act they violated.
The SEC instituted settled administrative proceedings against DAA and Wei based on their post-closing conduct.
DAA consented to the entry of an order requiring the firm to pay disgorgement of $2,228,372, prejudgment interest of $357,776, and a penalty of $2,228,372.
Wei consented to the entry of an order requiring him to pay a $50,000 penalty and suspending him from associating with any investment adviser for six months. Both DAA and Wei consented to cease and desist from violating Section 17(a)(2) and (3) of the Securities Act and Section 206(2) of the Advisers Act.
Mizuho was represented by Stuart Baskin and John Nathanson of Shearman & Sterling.
Rekeda was represented by Steve Kobre and Jonathan Cogan of Kobre & Kim.
Capdepon was represented by Daniel Horwitz of Lankler, Carragher & Horwitz.
Snortland was represented by Evan Barr of Steptoe & Johnson.
Delaware Asset Advisers was represented by Seth Taub of Baker Botts and Greg Dimeglio of Stradley Ronon.
Wei was represented by Charles Clark of Kirkland & Ellis.