Mizuho Financial Group Inc. (8411) agreed to pay $128 million to settle U.S. regulatory claims that it used “dummy assets” to inflate the credit ratings of a financial product tied to subprime mortgages as the housing market deteriorated in 2007.
The U.S. brokerage unit of Japan’s third-biggest bank by market value gave Standard & Poor’s inaccurate information about the assets backing a $1.6 billion collateralized debt obligation that it was structuring, the Securities and Exchange Commission said in a statement yesterday. Once the inaccurate portfolio was rated, Mizuho used the misleading ratings to sell the CDO, known as Delphinus CDO 2007-1, which defaulted in 2008.
Delaware Asset Advisers, which managed the Delphinus collateral, agreed to pay about $4.8 million to settle related claims, the SEC said.
The settlement is the latest of several SEC cases involving complex investments tied to souring mortgages that helped exacerbate losses during financial-market turmoil in 2008. The agency has brought similar actions against banks including Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM)
“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,” SEC Enforcement Director Robert Khuzami said in a statement. “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.”
Mizuho cooperated with the SEC’s investigation and the conduct in question “was isolated to a few persons,” the Tokyo-based bank said in a statement.
Shares of Mizuho rose 2 yen, or 1.6 percent, to 130 yen as of 9:31 a.m. on the Tokyo Stock Exchange. The Topix Banks Index (TPNBNK) climbed 1.3 percent.
Alexander Rekeda, who headed the group that structured the deal, and Xavier Capdepon, who modeled the transaction for the rating companies, each agreed to pay $125,000 and to be suspended from the securities industry for 12 months, the SEC said. Gwen Snorteland, who was responsible for structuring Delphinus, also agreed to a one-year suspension from the industry. In settling the claims, they didn’t admit or deny the SEC’s allegations.
Steven Kobre, an attorney for Rekeda, said in a statement that the agreement allows his client to close the matter “without protracted litigation that could take years to resolve.”
Snorteland “is pleased with the settlement,” Evan Barr, her attorney at Steptoe & Johnson LLP, said in a statement.
Daniel Horwitz, an attorney for Capdepon, declined to comment and a phone call to Delaware Asset Advisers wasn’t immediately returned.
S&P, which is owned by McGraw-Hill Cos., wasn’t accused of wrongdoing.
To contact the reporters on this story: Joshua Gallu in Washington at firstname.lastname@example.org