A Japan bank, Mizuho Securities, was hit with an enforcement action and fine from the SEC today for not telling the mortgage security raters the truth about the quality of the loans they were rating on a $1.6 billion CDO.
The Security & Exchange Commission says Mizuho rushed to sell a 2007 CDO called Delphinus at the same time S&P made a change in the formula they used to measure prime v. subprime loans. With the subprime valuation rating change the CDO filled with subprime rmbs likely wouldn’t have received the needed rating to convince investors to buy. The SEC claims the Japanese bank used an industry method know as packing the CDO with ‘dummy assets’ to get the security rated by S&P in a short amount of time. The problem is Mizuho didn’t actually package the CDO with mortgage bonds that had the high quality collateral they told the rating agency would be in the CDO. Delphinus 2007-1 closed on July 19th 2007 and six months later it started to default. As a result of this mortgage security fraud the SEC now gets $127.5 million in fines on a CDO the bank only earned $10 million on.
And guess what – Bear Stearns mortgage division run by Tom Marano and it’s mortgage packing team at EMC did the same thing on BILLIONS of mortgage securities but the SEC hasn’t sued or lobbed a settlement with the American bank now owned by JP Morgan. News of internal EMC whistleblowers falsifying mortgage info to get a 20 minute AAA rating from S&P was first reported by me at The Atlantic in May 2010. Since then most of the monoline insures and a ton of RMBS investors have sued JP Morgan/Bear Stearns for rmbs fraud. In fact JP Morgan admitted in recent financial fillings they are being sued for up to $120 billion of mortgage securities. In New York, lying to a rater and getting an insurance company to invest in and insure the mortgage security based on a false rating is criminal Insurance Fraud. Which is what investor lawsuits and over 30 whistleblowers have alleged Bear Stearns did.
The SEC has plenty of evidence available to sue JP Morgan/ Bear Stearns for sins it says Mizuho Securities executed. They can read emails from an EMC whistleblower cited in the Assured Guarantee amended complaint starting on paragraph 78 that describes how EMC rmbs analyst were directed to mislead raters by Bear Stearns management. Assured’s lawyers at PBWT have all kinds of internal documents and signed whistleblower testimony the SEC can get its hands on. There is even a documentary film about Bear Stearns now showing at film festivals across Europe and the U.S. called, Confidence Game, that actually has real live people on camera describing how they used ‘dummy assets’ and lied to raters. In fact, I’m pretty sure the filmmaker Nick Verbitsky of Blue Chip Films would even send them a copy of the DVD and his unedited tape for free. Last year I reported for The Distressed Debt Report the NY AG asked Verbitsky to see his whistleblower tapes and was actively interviewing some of the whistleblowers with hope of charging the Bear mortgage traders with the Martin Act. The SEC has even told JP Morgan earlier in the year they want to sue them for Bear Stearns mortgage sins via a Wells Notice but still NOTHING has been done.
Mizuho doesn’t have to admit guilt when they settle with the SEC and neither will JP Morgan if they settle for similar actions. Unfortunately it looks like the SEC even had to downplay the actions of the three individuals from Mizuho to get a settlement from the bank. The traders who no longer work for Mizuho received short-term bans (6mns-1yr) from the industry and were labeled negligent, instead of knowingly, in misleading clients. It will take a DOJ securities fraud charge or NY AG arrest to officially state these bank traders have committed criminal fraud against the investment community. An event I know many from Main Street to Wall Street are waiting to see – the question is when will our authorities have the political will to execute this kind action against an American Bank.