The Commission filed four settled market crisis actions centered on the sale of interests in a collateralized debt obligation. Each center on the CDO known as Delphinus CDO 2007-1 structured by Mizuho Securities USA, Inc. in mid-2007 and for which Delaware Asset Advisers served as the collateral manager. The actions allege that the ratings necessary to closing and marketing the notes were based on misrepresentations about the quality of the collateral. SEC v. Mizuho securities USA, Inc., (S.D.N.Y. Filed July 18, 2012); In the Matter of Delaware Asset Advisers, Adm. Proc. File No 3-14942 (July 18, 2012); In the Matter of Alexander V. Rekeda, Adm. Proc. File No. 3-14953 (July 18, 2012); In the Matter of Xavier Capdepon, Adm. Proc. No. 3-14954 (July 18, 2012).
Delphinus was a mezzanine CDO in which the collateral was largely subprime Residential Mortgage Backed Securities. Those securities were rated slightly higher than junk bonds and credit default swaps referencing subprime RMBS. In mid- 2007 Mizuho structured and market the $1.6 billion CDO. The Mizuho group responsible for the CDO was headed by Alexander Rekeda and included Xavier Capdepon, who modeled the transaction for the rating agencies, and Gwen Snorteland, the transaction manager responsible for structuring and closing the deal. Wei (Alex) Wei was the portfolio manager on the deal at Delaware Assets.
The offering memorandum and marketing materials for the notes issued by the CDO represented that certain specific ratings would be obtained from three credit rating agencies. Those ratings were a condition precedent to the closing and sale of the notes. By July 17, 2007, two days before the expected closing, all of the collateral had been purchased. The next day however Standard & Poor’s announced changes to its CDO rating criteria. The changes required certain categories of subprime residential mortgage-backed securities to be adjusted downward for purposes of calculating their default probability. Portions of the collateral for Delphinus were subject to the revised criteria and would have to be downgraded.
Before the closing could take place, Mizuho had to obtain the necessary ratings from the rating agencies. Following the S&P announcement, Mizuho employees responsible for the transaction e-mailed multiple alternative portfolios to the rating agency. The portfolios were hypothetical assets that would be replaced later with the actual assets. In this instance however, the hypothetical assets, called dummy assets, were superior in credit quality to the actual ones which had been acquired for the CDO. The rating agency was not given the actual assets which had been acquired. This was not disclosed to investors. Overall the Mizuho made about $10 million in fees. The investor losses are not quantified in the court papers. The complaint against Mizuho alleges violations of Securities Act Sections 17(a)(2) and (3) as does the administrative proceeding against Alexander Rekeda. The proceeding involving Delaware also alleges violations of those Sections and, in addition, Advisers Act Section 206(2). Finally, the proceeding against Xavier Capdepon and Gwen Snorteland alleges violations of Securities Act Sections 17(a)(1), (2) and (3).
The Defendant and each Respondent settled with the Commission. In the civil injunctive action, Mizuho consented to the entry of a permanent injunction based Securities Act Sections 17(a)(2) and (3), agreed to pay $10 million in disgorgement along with prejudgment interest and a $115 million penalty. In the proceeding involving Respondents Delaware Assets and Wei, each consented to the entry of a cease and desist order based on Securities Act Sections 17(a)(2) and (3). In addition, the firm will pay disgorgement of $2,228,372 along with prejudgment interest and a penalty equal to the amount of the disgorgement while Respondent Wei agreed to pay a penalty of $50,000 and to be suspended from associating with any investment adviser for six months. Respondents Capdepon and Snortland consented to the entry of a cease and desist order based on Securities Act Section 17(a). Each will also be barred from the securities business with a right to apply for reentry after one year. Mr. Capdepon agreed to pay a penalty of $125,000 while the penalty as to Ms. Snortland will be decided at a later date. Finally, Mr. Rekeda consented to the entry of a cease and desist order based on Securities Act Sections 17(a)(2) and (3), agreed to be suspended from the securities business for one year and to pay a civil penalty of $125,000.