Following an investigation into overvalued mortgage securities sold back in 2007, Japanese brokerage Mizuho Securities Co. says its U.S. subsidiary is paying $127.5 million in a settlement with the U.S. Securities and Exchange Commission. Although the company is not admitting any wrongdoing under the terms of the settlement, the SEC claims that three former employees of the U.S. subsidiary used fictitious, or "dummy” assets to inflate the value of the collateralized debt obligation, or CDO. This resulted in the firm receiving a higher credit rating than it actually deserved, as well as misleading new investors of the product because of their assuring rating. Once the inaccurate portfolio was rated, Mizuho used those deceptive ratings to sell the CDO, which then ended up defaulting the following year in ’08. Despite these allegations against the firm, Mizuho claims they are not under investigation by the SEC for any other transaction. In the realm of operational due diligence, taking a thorough look into the company’s asset portfolio, rather than blindly deciding to invest based on ratings, could possibly save an investor from being caught in fraudulent cases similar to that of Mizuho. In addition, checking into the accuracy and completeness of their books and records system could have potentially revealed information that may have raised various warning signs suggesting instability, and even fraudulent behavior by Mizuho. Although the company’s CDO ratings allegedly showed they had great ratings in regards to having low debt and credit risk that does not mean an investor should skip out on doing their due diligence. Regardless of a company’s seemingly good reputation and ratings in the media, before making an investment, an investor should feel compelled to investigate any firm of interest on a more detailed level, as a helpful precautionary tool.
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