The Securities and Exchange Commission has sued the US investment banking subsidiary of Japanese Mizuho Financial Group and three former employees for misleading investors by obtaining false credit ratings for CDO.

The firm has agreed to compensate nearly $127.5m to settle the case, which accused the firm for using "dummy assets" to inflate the deal’s credit ratings.

The US prosecutor alleged that Mizuho Securities had gained nearly $10m in structuring and marketing fees in the deal.

During the course of investigation, SEC found that the firm structured and sold Delphinus CDO 2007-1, subprime bonds backed CDO amid the glooming housing market scenario.

The deal was dependent on Mizuho obtaining credit ratings to market the notes to investors, but the firm failed to obtain the required credit rating, as new rules were implied to save CDO investors from the uncertainty of ratings downgrades.

The firm in an effort to avoid regulatory action, submitted to the rating firm a portfolio containing millions of dollars in dummy assets that inaccurately reflected the collateral held by Delphinus.

SEC said that once the firm rated the inaccurate portfolio, it closed the transaction and disposed the notes to investors using the misleading ratings.

SEC’s Division of Enforcement Director Robert Khuzami said the case demonstrates once again that bankers and market participants who embrace a ‘get the deal done at all costs’ strategy will be identified, charged, and punished.

"This is a constant theme throughout the many SEC enforcement actions arising out of the financial crisis, and is one that everyone involved in securities transactions and our financial markets would be well-advised to respect," Khuzami added.