State Resolves Trading Issues With Deutsche Bank

Attorney General Spitzer today announced a settlement with Deutsche Bank, AG (DB) resolving allegations that the company’s asset management division permitted excessive market timing in its mutual funds, and that its broker dealer division facilitated deceptive market timing and a form of late trading by a client.

Under the terms of the settlement, DB will pay over $102 million in restitution and disgorgement to injured investors, and $20 million in civil penalties. In addition, the firm has agreed to make $86 million in reduction of fees charged to investors over a five-year period. Today’s agreement was reached in cooperation with the Securities and Exchange Commission.

DB has also agreed to significant corrective measures and business practice reforms designed to create greater board and advisor accountability to prevent the kinds of abuses that gave rise to these investigations.

The measures include the following:

  • A requirement that DB funds boards will have an independent chairperson and that at least 75-percent of the members of the DB funds boards of trustees will have no prior connection to DB or its affiliates;

  • A requirement for disclosure to investors of expenses and fees; and,

  • A requirement to hire a full-time senior officer to ensure that fees charged by the funds will be negotiated at arm’s length and will be reasonable.

Market timing activity within the DB family of mutual funds included improper trading at the Scudder and Kemper families of mutual funds. The investigation by the state and federal regulators revealed that DB entered into a series of arrangements with preferred investors that permitted them to engage in improper, frequent short-term trading. This trading diluted the returns of the funds’ long-term shareholders. The arrangements were not disclosed either to those investors or to the funds’ Board of Trustees.

The agreed-upon trading contradicted language in the prospectuses sent to investors, which said that "you should not consider investing in [the fund] if you’re pursuing a short-term financial goal, and purchases and sales should be made for long-term investment purposes only."

Market timing is the rapid buying and selling of mutual funds by favored traders. Such trading harms long-term holders of a mutual fund by diluting the value of the funds held by them. In 2001, DB created an anti-market timing unit charged with thwarting market timing.

In 2003, one of the brokerage groups within DB facilitated market timing and a "substitute late trading" scheme. This late trading scheme evolved when a client’s trades placed prior to the 4 p.m. close of the market were rejected by a fund company. A senior DB broker would phone the client after 4 p.m. and inform him of the rejected trade; thereafter, the client was permitted to substitute a different trade - - sometimes as late as 5 p.m. - - for the rejected trade. These late trades were treated as if they had been placed prior to 4 p.m., allowing the client to profit unfairly from knowledge gained after the market had closed.

Berlin-based DB is one of the world’s largest international financial service providers, with more than 67,000 employees worldwide, offering financial services globally, including in New York.

The DB agreement is the 21st settlement since the Attorney General’s Office began a probe of improper mutual fund trading in July 2003. To date, these settlements have resulted in more than $3.9 billion in restitution for investors.

The matter is being handled by Assistant Attorney General John Henry with assistance provided by Economist Hampton Finer of the Attorney General’s Public Advocacy Division, under the supervision of Assistant Attorney General Maria Filipakis and Deputy Attorney General Dietrich Snell.

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