Former Deutsche Bank Trader Fined $50,000 by SEC Over Valuations

  • Zhou mismarked certain mortgage loans, fabricated documents
  • Trader left company in 2015 after it uncovered the wrongdoing

A former Deutsche Bank AG trader agreed to settle a U.S. regulator’s allegations that he mis-marked loans tied to commercial-mortgage-backed securities to boost his profits.

Tianyu “Arnie” Zhou inflated the value of certain loans by submitting inaccurate data on bond coupons to Deutsche Bank’s valuation group from 2013 to 2015, the Securities and Exchange Commission said. Without admitting or denying the regulator’s findings, Zhou agreed to pay a $50,000 penalty and to a minimum three-year industry bar.

“Mr. Zhou is pleased to have this matter resolved,” said Seth Levine, his attorney at Levine Lee LLP.

The SEC has made policing bond valuations a priority. The agency and the Justice Department have brought civil and criminal cases against traders for lying about bond prices to customers. The SEC is using algorithms to comb through bond trading and has found billions of dollars worth of problematic transactions.

To hide losses in September 2013, Zhou submitted a coupon of 3.03 percent for a loan that actually paid 2.03 percent. Over the next six months, as losses mounted, he submitted increasingly higher yields for that loan, rising to 4.63 percent, the SEC said.

When members of the bank’s valuation group asked Zhou in September 2014 about the discrepancy between his prices and publicly available information, he responded: “no, bbg [Bloomberg] shows curr[ent] cpn … only the loan doc has it [the stepup coupon] … i will send to u.”

In October 2014, Zhou then altered the loan agreement documentation to show a step-up, or higher, coupon starting in February 2016. In November 2015, he admitted responsibility for the mis-marked position and resigned.

Zhou had co-run Deutsche Bank’s CMBS trading group in the U.S. in 2014. He joined the bank in 2012 and had previously worked at Bank of America Corp. and Lehman Brothers Holdings Inc., according to Finra records. The debt he assigned inaccurate valuations to was previously held on Deutsche Bank’s books, the Finra filing shows.