MASSACHUSETTS FINES DEUTSCHE BANK SECURITIES $17.5 MILLION
(The following is a reformatted version of a press release issued by the Office of Secretary of the Commonwealth William F. Galvin and received via electronic mail. The release was confirmed by the sender.)
March 13, 2013
SECRETARY GALVIN FINES DEUTSCHE BANK SECURITIES $17.5 MILLION FOR CONFLICTS IN MARKETING COLLATERALIZED DEBT OBLIGATIONS
Secretary of the Commonwealth William F. Galvin today fined Deutsche Bank Securities Inc. (DBSI), a subsidiary of Deutsche Bank Akteingesellschaft, $17.5 million for failing to disclose conflicts of interest relating to its collateralized debt obligation (CDOs) business-related activities prior to the Financial Crisis.
The Securities Division investigated DBSI’s failure to disclose its roles in proposing, coinvesting in, and structuring a $1.56 billion CDO named Carina. The Division’s investigation focused on a proprietary trading desk of the bank, DBSI Special Situations Group (DBSI SSG).
DBSI SSG created a co-investment CDO proposal implemented with Magnetar Capital LLC, a hedge fund. In all, DSBI and Magnetar co-invested in at least six different CDOs with a value of $10 billion.
During the creation of Carina, a DBSI SSG Managing Director described the resulting instrument as “not just sponsoring a CDO, but really a highly structured separate account mandate,” illustrating the tailored control of DBSI SSG over Carina.
When Carina was being marketed to investors, one investor backed out upon learning that Magnetar was shorting the BBB rated assets in the CDO, and a DBSI employee e-mailed, “Why does (prospective investor) know Magnetar is shorting BBBs?” Nowhere in the marketing materials for Carina was there any reference to the conflicts of interest with DBSI SSG and Magnetar in the structuring, underwriting and marketing of Carina.
Within a year, rating agencies had downgraded Carina’s notes to junk status, which resulted in catastrophic losses to investors.
During the relevant time period, DBSI ranked fourth in global CDO issuances in 2006 and 2007.
The Securities Division said DBSI failed to supervise its employees who knew but failed to disclose the conflicts of interest. In addition to the $17.5 million fine, DBSI was censured and agreed to cease and desist from conduct violating the state Securities Act.
Contact: Brian McNiff Telephone: 617-727-9180