Recent enforcement actions by the SEC and DOL included fines of $127.5 million for a securities firm over false CDO credit ratings and $14.5 million for two short-selling brothers, deferred prosecution for a nonprofit that runs an Amish fund and an order for restoration of more than $500,000 in pension funds.
Phony CDO Credit Ratings Cost Firm $127.5 Million
Mizuho Securities USA, the U.S. investment banking subsidiary of Japan-based Mizuho Financial Group, was charged by the SEC along with three former employees with misleading investors in a collateralized debt obligation (CDO) by using “dummy assets” to inflate the deal’s credit ratings. The SEC also charged the firm that served as the deal’s collateral manager and the person who was its portfolio manager.
According to the SEC, Mizuho made approximately $10 million in structuring and marketing fees. The firm has agreed to pay $127.5 million in disgorgement and penalties to settle the charges; the others charged, Alexander Rekeda, Xavier Capdepon, Gwen Snorteland, Delaware Asset Advisers (DAA) and Wei (Alex) Wei, have also agreed to settle.
The SEC alleged that Mizuho structured and marketed Delphinus CDO 2007-1, a CDO backed by subprime bonds at a time when the housing market was foundering. The deal was contingent on Mizuho obtaining credit ratings it used to market the notes to investors, but Delphinus couldn’t pass muster at Standard & Poor’s, which had just set new criteria to protect CDO investors from ratings downgrades.
When Mizuho employees realized this, they made up a portfolio filled with dummy assets totaling millions of dollars that they submitted to the ratings agency instead of Delphinus’s actual portfolio of collateral. Delphinus was rated based on that fake portfolio, and Mizuho closed the transaction and sold the notes, giving investors the ratings based on the fake. In 2008, Delphinus defaulted; in 2010 it was liquidated. Mizuho experienced substantial losses from this.
Brothers Sell Short, Fined $14.5 Million
Options traders Jeffrey Wolfson and Robert Wolfson, charged by the SEC earlier in the year with short selling, have agreed to pay $14.5 million to settle the charges.
The Wolfson brothers, according to the SEC, engaged in naked short selling by failing to locate shares involved in short sales and failing to close out the resulting failures to deliver; they made approximately $9.5 million in illegal profits.
Jeffrey Wolfson, who lives in the Chicago area, conducted illegal naked short sales while working as a broker-dealer himself and later as the principal trader at a Chicago-based brokerage firm that is no longer in business. Robert Wolfson, who lives in Massachusetts, conducted illegal naked short sales while trading in an account at New York-based broker-dealer Golden Anchor Trading II LLC, which also was charged by the SEC and agreed to the settlement.
Without admitting or denying the findings, the brothers and Golden Anchor settled, with Jeffrey Wolfson required to pay $13.425 million, which includes a $2.5 million penalty in addition to disgorgement and prejudgment interest. Robert Wolfson and Golden Anchor are required to collectively pay $1.1 million in disgorgement, prejudgment interest and penalties.