Deutsche Bank Sanctioned for Misleading Buyers on Bond Sales

Updated on
  • Lender agrees to pay $4.5 million to settle SEC’s allegations
  • Bank’s former CMBS head trader Ben Solomon also sued by agency
A logo sits illuminated on a new Deutsche Bank AG office building in Frankfurt, Germany, on Monday, Nov. 6, 2017. Photographer: Krisztian Bocsi/Bloomberg

Deutsche Bank AG agreed to pay about $4.5 million to settle a U.S. regulator’s allegations that it misled clients about how much bonds backed by commercial mortgages were worth, earning the lender bigger profits than it should have made.

Salespeople in its Deutsche Bank Securities unit induced customers to pay higher prices for bonds by misrepresenting how much the bank had paid for them, the Securities and Exchange Commission said in a Monday statement. Ben Solomon, the bank’s former head of commercial mortgage-backed securities trading, was also sanctioned and agreed to pay a $165,000 fine.

“Deutsche Bank and Solomon failed to keep watch as traders generated profits for the firm at the expense of CMBS customers by misrepresenting purchase prices and other important details,” said Dan Michael, chief of the complex financial instruments group in the SEC’s enforcement division.

Deutsche Bank will return more than $3.7 million to its clients over the alleged misconduct and pay a $750,000 fine. Neither the bank nor Solomon admitted or denied the SEC’s allegations.

Opaque Markets

The SEC has been focusing on pricing in opaque markets for bonds backed by mortgages ever since the 2008 financial crisis. The regulator has uncovered a wide swath of infractions from brokers engaging in misconduct to hedge fund managers inflating their investment returns.

Even customers who traded frequently with Deutsche Bank were overcharged, the SEC said. In February 2012, a client called Solomon to complain that he wasn’t getting straight answers about a particular bond price. Although Solomon instructed a trader at the bank to treat the client better, the customer was still overcharged by $18,750 on the disputed transaction, according to the SEC.

The agency also alleged that Deutsche Bank’s bond traders and salespeople worked together to mislead customers. In September 2011, a salesperson and a trader made up a story that the owner of a bond was a third party who was being stubborn about selling at a certain price.

After the salesperson outlined the plan, the trader said, “this is just a lie, right?” The salesperson replied, “well, I don’t care.” The trader then said “but I think we should say that.” The deception persuaded Deutsche Bank’s real customer to overpay for the bond, earning the bank an extra $12,354, the SEC said.

Extensive Cooperation

Deutsche Bank cooperated extensively with the SEC’s investigation and took appropriate disciplinary action, including termination in some instances, a bank spokesman said in an emailed statement.

In addition to his fine, Solomon also agreed to a one-year suspension from the securities industry. The SEC said he failed to take appropriate action after becoming aware that traders under his supervision were making false statements to customers.

Judd Burstein, an attorney for Solomon, didn’t immediately respond to a request for comment.

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