SEC Said Probing Ex-Deutsche Mortgage Trader Zhou's Transactions

Former Deutsche Bank AG trader Arnie Zhou is being examined by U.S. regulators for possible misconduct in transactions involving commercial mortgage-backed securities, according to people with knowledge of the matter.

The bank reported Zhou to the U.S. Securities and Exchange Commission after its internal investigation unit found evidence that he mismarked trades and masked the amount of risk he had taken on, said the people, asking not to be identified because the information is private. The regulator is looking at trades that may have prompted his departure from the Frankfurt-based lender earlier this month, the people said.

Zhou, who was a director at Deutsche Bank, didn’t return messages left on his mobile phone number. Catherine Wooters, a spokeswoman for the bank, and Judy Burns, an SEC spokeswoman, declined to comment.

Securitized Debt

The examination comes as Deutsche Bank contends with scrutiny across its teams that buy and sell securitized debt, which is backed by everything from home loans to shopping-mall debt.

At least four employees in the business were terminated in recent months after regulatory inquiries and internal investigations that found they violated bank policies, according to Financial Industry Regulatory Authority records. They included Ben Solomon, global head of securitized-products trading, and Ashish Jain, who ran sales in the Americas for the group. The probe into Zhou is separate from those departures, according to the people.

Zhou had co-run Deutsche Bank’s CMBS trading group in the U.S. last year. He joined the bank three years ago and had previously worked at Bank of America Corp. and Lehman Brothers Holdings Inc., according to Finra records.

Trading in mortgage-backed securities and other securitized debt came under scrutiny after former Jefferies Group LLC bond trader Jesse Litvak was accused of criminal securities fraud for lying to clients in transactions involving taxpayer bail-out dollars. Litvak was convicted last year. A federal court is reviewing his appeal.

Deutsche Bank is cooperating with the government’s investigations into its securitized debt group, the bank said in a Nov. 16 slide presentation. The bank is exiting parts of that unit, including trading in agency residential mortgage bonds, as part of a sweeping strategy by co-Chief Executive Officer John Cryan to reduce costs and improve the bank’s capital ratios.

Enforcement officials are now looking into misconduct ranging from lying to clients to mismarking bonds and hiding losses.

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