Deutsche Bank Securities has agreed to repay more than $4.5 million for misleading customers while negotiating sales of commercial mortgage-backed securities, according to the SEC.
A former head trader for the bank was also suspended by the SEC for a year in connection with the violations.
The SEC’s investigation found that traders and salespeople made false and misleading statements while negotiating sales of commercial mortgage-backed securities (CMBS) between 2011 and 2015. To settle the charges, Deutsche Bank has agreed to a $750,000 fine and repayment of more than $3.7 million to customers—including $1.48 million that was ordered as disgorgement.
Customers overpaid for CMBS because they were misled by traders and salespeople about the prices at which Deutsche Bank had originally purchased the securities, the SEC said.
In many instances, CMBS desk traders and CMBS salespeople, through electronic communications, usually instant messages or Bloomberg chats, misrepresented the bid and offer prices on one or both sides of the transaction, including the price at which Deutsche Bank Securities (DBSI) or the current owner of the securities had paid, according to the SEC order.
The SEC’s order specifically cites supervisory failures by the former head trader of Deutsche Bank’s CMBS trading desk, Brooklyn, N.Y.-based Benjamin Solomon, 42, “who did not take appropriate action after becoming aware of false statements made to customers by traders under his supervision, including specific misrepresentations about the prices that Deutsche Bank paid for the CMBS,” the order stated.
Solomon, who was fired by Deutsche Bank after the case came to light, agreed to pay a $165,000 penalty and serve a 12-month suspension from the securities industry, the SEC said.
The SEC’s order also found that Deutsche Bank failed to have compliance and surveillance procedures in place that were “reasonably designed to prevent and detect the misconduct that consequently increased the firm’s profits on CMBS transactions to the detriment of its customers.”
“We’re committed to ensuring that firms communicate accurate pricing information when transacting with customers in opaque markets,” said Daniel Michael, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “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.”
Often, the purchase and sale of a CMBS bond at the firm took place within minutes or hours and involved little or no risk to DBSI, the SEC said. DBSI traders did not charge commissions, but could generate a profit by purchasing the CMBS from a customer and selling it to another customer at a price higher than the purchase price.