SEC Reaches $127.5M Settlement with Investment Bank Over Misrepresentations

WASHINGTON, D.C. - (Mealey's) The U.S. investment banking subsidiary of Japan-based Mizuho Financial Group will pay $127.5 million to settle claims that it provided "dummy assets" to a ratings agency "that inaccurately reflected the collateral held" by a hybrid collateralized debt obligation (CDO) Mizuho structured, marketed and rated in violation of federal securities law, according to a press release filed by the SEC on July 18 (U.S. Securities and Exchange Commission v. Mizuho Securities USA, Inc., S.D. N.Y.).

According to the press release, Mizuho Securities USA Inc. "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."

"The settlement, which requires court approval, also permanently enjoins Mizuho from violating Sections 17(a)(2) and (3) of the Securities Act," according to the press release.

Complaint Filed

The U.S. Securities and Exchange Commission filed a complaint in the U.S. District Court for the Southern District of New York, naming Mizuho as the lone defendant.

The SEC alleges that Mizuho structured, marketed and rated the Delphinus CDO 2007-1, which was backed by subprime bonds, and provided inaccurate information to ratings agency Standard & Poor's (S&P). 

According to the press release, once Mizuho received a favorable rating from S&P, "it sold the notes to investors using the misleading ratings" and made approximately $10 million in structuring and marketing fees.

Securities Act Claims

Claims for violation of Sections 17(a)(2) and (3) of the Securities Act of 1933 were made, and the SEC sought injunctive relief, disgorgement of profits, prejudgment interest, civil penalties and other equitable relief.

Mizuho eventually defaulted in 2008 and was liquidated in 2010.

In related action, the SEC also announced in the press release that it has settled administrative proceedings with "the three former Mizuho employees responsible for the Delphinus deal, Alexander Rekeda headed the group that structured the $1.6 billion CDO, Xavier Capdepon modeled 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."

Later Date

According to the press release, 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."

"In the related administrative proceedings against Rekeda, Capdepon, and Snorteland, 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," according to the press release.

Each of the defendants that was charged by the SEC agreed to settlements without admitting or denying the charges.

The SEC is represented by Kenneth R. Lench, Reid A. Muoio, Robert E. Leidenheimer Jr., Lawrence C. Renbaum and James F. Murtha of the SEC in Washington.

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