Time is running out for U.S. securities regulators to file civil charges for alleged wrongdoing during the financial crisis.
SEC enforcement chief Robert Khuzami faces a five-year statute of limitations to file civil counts.
Federal laws under which the Securities and Exchange Commission usually goes after alleged fraud and other misdeeds have a five-year statute of limitations. The five-year limit is causing SEC officials to race to file lawsuits in some cases and ask lawyers representing the targets of certain investigations to give the agency more time, according to people close to the investigation.
The SEC intends to file charges against firms and people involved in the creation of a $1.6 billion mortgage-bond deal called Delphinus CDO 2007-1, people close to the investigation said. The collateralized debt obligation–which is a pool of subprime mortgages or other loans, slices of which are sold to investors–imploded within months.
Among those likely facing civil charges are Mizuho Financial Group Inc. 8411.TO -0.78% and former employee Alexander Rekeda, these people said. The Japanese bank underwrote and sold the mortgage-bond deal, while Mr. Rekeda assembled it.
Investors who bought pieces of Delphinus allegedly weren’t told that a hedge fund was betting that some of the subprime loans and other assets bundled together in the CDO would decline in value.
The SEC has warned the firm that managed the assets, Delaware Investments of Philadelphia, and one of its employees that it may face civil charges, according to an undated notice on Delaware’s website. A spokeswoman for Delaware’s owner, Australian bank Macquarie Group Ltd., declined to comment.
A spokesman for Mizuho Securities, the bank’s brokerage unit, said it had been asked by the SEC for information on its CDOs and was cooperating. A lawyer for Mr. Rekeda declined to comment.
The Delphinus deal was completed July 19, 2007. Some people close to the case believe the SEC should proceed with a civil lawsuit no later than next Thursday in order to meet the five-year deadline.
An SEC spokesman said July 19 “is not a statute-of-limitations cutoff date for Delphinus.” A federal appeals court ruled last year in a separate case that the five-year clock may start to tick only when wrongdoing becomes apparent or should have been discovered, not when it occurred.
Nevertheless, the SEC has asked Standard & Poor’s Ratings Services, which bestowed a triple-A rating on the Delphinus deal, to waive its right to seek dismissal of any civil suit against it on the grounds that alleged misconduct by S&P occurred beyond the statute of limitations, people close to the investigation said. Targets of SEC probes often sign such “tolling agreements” in hopes of persuading the agency not to proceed with formal enforcement action.
Source: Wall Street Journal | JEAN EAGLESHAM, JEANNETTE NEUMANN and REED ALBERGOTTI