S&P gets SEC Wells notice on Delphinus CDO

McGraw-Hill Cos said the US Securities and Exchange Commission (SEC) may recommend a civil injunction against the company’s Standard & Poor’s unit in connection with its rating of a 2007 mortgage-linked security.

The SEC’s so-called Wells notice is related to a $1.6 billion collateralised debt obligation known as Delphinus CDO 2007-1, New York-based McGraw-Hill said on Monday in a statement. Agency staff may recommend civil penalties, disgorgement of fee and other actions, the company said.

Delphinus was highlighted in a US Senate panel’s report as a “striking example” of how banks and ratings firms branded mortgage-linked products safe even as the housing market worsened in 2007. S&P rated six tranches of Delphinus AAA in August 2007 and began downgrading the securities by the end of the year, according to the report released in April by the Senate Permanent Subcommittee on Investigations. By the end of 2008, they were rated as junk, according to the report.

 

About three-quarters of the CDO, which was underwritten by Mizuho Financial Group Inc and managed by Delaware Asset Advisors, was based on subprime mortgages, according to a Fitch Ratings Ltd report. Magnetar Capital Partners LLC invested in the deal, according to a ProPublica report.

“S&P has been cooperating with the commission in this matter and intends to continue to do so,” McGraw-Hill said in the statement. A phone call to Steven Lipin, a spokesman for Magnetar, wasn’t immediately returned.

CDOs are pools of assets such as mortgage bonds packaged into new securities in which interest payments on the underlying bonds or loans are used to pay investors.