S.E.C. Investigates S.& P. Over Mortgage Securities

The company said in its filing that it received a so-called Wells notice from the Securities and Exchange Commission on Thursday and it was cooperating with the S.E.C. in the investigation.

If the investigation leads to a case against S. P., it would be the first federal case against a ratings company for its work evaluating the mortgage securities that toppled the nation’s financial system. Delphinus was included as an example of an egregiously bad deal in a report issued in April by the United States Senate Permanent Subcommittee on Investigations.

The S.E.C. may decide to issue a civil injunctive action against S. P. and may demand monetary fines or disgorgement of fees, the company said.

The mere existence of an investigation does not mean that there will be a law enforcement action. There have been few cases against major institutions in the financial crisis.

“The Wells notice is neither a formal allegation nor a finding of wrongdoing,” McGraw-Hill said in a statement.

S. P. has been under scrutiny for months by the commission as part of its broader look at the mortgage securities that cost banks and investors hundreds of billions of dollars in losses when the housing market collapsed.

The S.E.C. has brought cases against banks — notably Goldman Sachs — over the marketing of such mortgage deals, but has yet to bring one involving the overwhelmingly positive mortgage ratings issued by firms like Standard Poor’s, Moody’s Investors Service or Fitch Ratings.

S. P. is also at the center of a Justice Department investigation into whether the company put business interests ahead of its duty to accurately rate deals, according to people briefed on that investigation. Standard Poor’s has been criticized by prominent lawmakers since it downgraded its assessment of the long-term credit of the United States in August, and McGraw-Hill recently announced plans to separate the company into two parts in response to a shareholder uprising.

Spokesmen for Standard Poor’s and the S.E.C. declined to comment.

Companies have been quicker to disclose that they received Wells notices since last year, when Goldman was criticized for not having disclosed the one it received related to the S.E.C.’s mortgage security investigation.

Delphinus was just one of many ill-fated mortgage securities called collateralized debt obligations, or C.D.O.’s, that represented bundles of mortgage bonds which were themselves bundles of home loans. The securities were supposed to be diversified so that if some homeowners stopped paying their bills, others loans inside the securities would be unlikely to default at the same time. But many of those securities turned out to be full of poorly underwritten mortgages that defaulted at the same time.

In the past, when the S.E.C. has looked into mortgage cases, it has focused its investigations on one deal per company. Its case against Goldman, for instance, was centered on only one deal called Abacus, even though there were nearly 20 other similar deals at Goldman. It was unclear if Delphinus, which was arranged by a unit of Mizuho Financial Group, would be the only one the S.E.C. pursued to see if S. P. violated federal securities laws.

There was so much demand for the Delphinus 2007-1 deal in July 2007 that Mizuho Securities increased its size from $1.2 billion to $1.6 billion, according to a Mizuho news release. The bank’s head of structured credit for the Americas said in that release that investors wanted “better quality collateral.” A spokesman for Mizuho declined to comment.

Standard Poor’s and other rating agencies were not generally the architects of deals like Delphinus, but the AAA ratings they placed on parts of those deals were critical to the banks’ abilities to sell them to investors. S. P. and other agencies made record profits placing ratings on mortgage securities like Delphinus, but they did not provide any sort of promises to investors that their ratings were accurate.

If investigators at the S.E.C. or the Justice Department find that analysts at S. P. intentionally gave inaccurate ratings, it could be a violation of the law.

The Senate subcommittee report in April said that in 2006, S. P. made $561 million in revenue in its structured finance group, where mortgage bonds were rated, and that the firm charged from $30,000 to $750,000 to rate each deal. In the three years before the crisis, S. P. rated 5,500 mortgage bonds and 835 C.D.O.’s, many of them AAA, despite being aware of increasing risks, the report said.

Delphinus, like so many of those deals, soon began to struggle. The deal went into default by January 2008, some six months after it was created, S. P. said in a 2008 client notice.

Analysts who rated the Delphinus deal, however, noticed problems sooner than that. Within weeks of the rating, S. P. analysts e-mailed each other to say that some of the bonds that went in it were not exactly quality collateral. According to e-mails released with the Senate report, analysts saw about 25 of the assets in the deal change within one day of its closing. The creators of the deal put placeholder bonds in, as allowed, but the ones they put in were not of the appropriate quality and “would not have been passing,” one S. P. analyst wrote in the summer of 2007.

The discrepancy those analysts noted was kicked upstairs to superiors, the e-mails show.

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