UPDATE 2-Mizuho in $127.5 mln deal to settle SEC case

Wed Jul 18, 2012 6:39pm EDT

* SEC: Mizuho sought to bolster credit-rating on toxic deal

* Mizuho provided S&P with inaccurate data for CDO rating

* Three former Mizuho staffers; collateral manager charged

* All defendants settle SEC charges

* Case stems from 2007-2009 financial crisis

By Sarah N. Lynch and Aruna Viswanatha

WASHINGTON July 18 (Reuters) - Mizuho Financial Group Inc settled civil charges its U.S. unit obtained false credit ratings on a 2007 mortgage bond deal stuffed with subprime assets, in the latest case to come out of the financial crisis.

The U.S. Securities and Exchange Commission's lawsuit charged Mizuho Securities USA Inc of using "dummy assets" in a complex product better known as a "CDO" in order to obtain rosier ratings from agencies including McGraw Hill's Standard & Poor's.

CDOS are bundles of securitized mortgages. Leading up to the financial crisis, many of the mortgage-backed assets included in the CDOS consisted of subprime loans that later soured.

The $1.6 billion CDO at the heart of the SEC's case, known as "Delphinus," was highlighted in a report issued by a Senate investigative panel last year as an example of how poorly rated structured products helped fuel the financial crisis.

The SEC also charged three Mizuho employees who structured the deal with misleading the rating agencies. The regulators also charged Delaware Asset Advisers, which acted as collateral manager for the deal as well as another person who served as DAA's portfolio manager.

Everyone agreed to settle without admitting or denying the charges.

The SEC's settlement with Mizuho calls for a $115 million civil penalty, the disgorgement of $10 million of fees, and the payment of $2.5 million of interest. Mizuho did not admit or deny the SEC charges in agreeing to settle.

"Mizuho cooperated fully with the SEC throughout this process. The firm agreed to the settlement to avoid protracted litigation and distraction and believes the settlement is the right outcome for its shareholders, clients and employees," the company said in a statement.

The SEC has brought a number of high-profile cases against banks involving CDOs since the financial crisis, including Goldman Sachs and Citigroup.

This case, however, marks the first time the SEC has charged a bank in connection with its employees trying to a ffect the outcome of a credit-rating.

The other cases, by contrast, involved instances in which clients or the bank itself actively participated in selecting the mortgage assets underlying the CDO in order to bet against it.

The settlement with Mizuho still requires court approval, and has been assigned to U.S. District Judge Ronnie Abrams in Manhattan.

The SEC alleges that when Standard & Poor's changed its rating criteria for CDOs, Mizuho employees realized the deal could not get the rating it needed. They then submitted a portfolio containing millions of dollars in dummy assets that inaccurately reflected the collateral.

S&P rated the CDO based on the misleading information, the SEC said, and Mizuho sold the notes to investors. Delphinus later defaulted in 2008 and was liquidated in 2010.

In September, S&P disclosed that the SEC might charge the company in connection with its rating of the Delphinus CDO.

An S&P spokesman declined to comment on Wednesday's case against Mizuho. The SEC said the investigation is ongoing.

The three Mizuho employees who settled were: Alexander Rekeda, who led the group that structured the CDO; Xavier Capdepon, who modeled the CDO for rating agencies; and Gwen Snorteland, the transaction manager responsible for structuring and closing the CDO.

Rekeda and Capdepon will each pay $125,000. A penalty will be decided at a later date for Snorteland.

The SEC also charged Delaware Asset Advisers, the firm that served as the collateral manager for the deal, as well as DAA's portfolio manager Wei (Alex) Wei.

DAA agreed to settle and pay about $4.8 million in disgorgement, penalties and interest. Wei will pay $50,000. He is also suspended from associating with an investment advisory firm for six months.

Attorneys for the company and Wei did not immediately respond to a request for comment.

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