Mizuho Securities USA Agrees to Settle SEC Charges for $127 Million

Mizuho Securities USA, Inc. (“Mizuho”), a U.S. subsidiary of Japan-based Mizuho Financial Group and member of FINRA, has agreed to settle charges by the Securities and Exchange Commission (“SEC”) that it misled investors about a collateralized debt obligation (“CDO”) named Delphinus CDO 2007-1 (“Delphinus”). According to the SEC, Mizuho received fees of approximately $10 million for structuring and marketing Delphinus to investors.

According to the SEC’s Complaint filed on July 18, 2012 in New York federal court, Mizuho was responsible for structuring and marketing Delphinus, a $1.6 billion CDO whose collateral mostly consisted of subprime residential mortgage backed securities (“RMBS”). In July 2007 when the Delphinus CDO was being structured, the residential real estate market and the securities tied to it were showing signs of severe distress.

The SEC claimed that the marketing materials for Delphinus stated that the notes issued by the CDO would obtain specific ratings from the major credit rating agencies including Standard & Poor’s (“S&P”). The SEC alleged that on July 18, 2007, the day before the Delphinus deal was scheduled to close, S&P announced tougher rating criteria for CDO’s. The SEC further alleged that the Mizuho employees involved in the Delphinus deal knew that Delphinus’ actual portfolio would not meet its required rating targets under the new, more stringent S&P standards.

According to the Complaint, in order to get the Delphinus deal done as scheduled, Mizuho employees submitted a portfolio to S&P that contained millions of dollars’ worth of fictitious assets that were superior in credit quality to the assets that were actually contained in the Delphinus portfolio. According to the SEC, Delphinus was then able to obtain the required ratings from S&P based on the dummy assets and the CDO was then marketed and sold to investors using the misleading credit ratings. The SEC alleged that Mizuho misled investors by representing that Delphinus had earned the higher credit rating, when in reality, the assets contained within the portfolio could not support the advertised credit rating.

In early 2008, Delphinus defaulted and was eventually liquidated in 2010. According to an announcement by the SEC, Mizuho consented to settle the SEC’s Complaint and has agreed to pay $10 million in disgorgement, $2.5 million in pre-judgment interest and a $115 million penalty.

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