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