Advertisement

Deutsche Bank settles mutual fund probes for $208 million

Share
From the Associated Press

Deutsche Bank has agreed to pay $208 million to end state and federal investigations into the timing of trading in mutual fund accounts that could benefit insiders and hurt other investors.

The settlement is the 21st by New York Atty. Gen. Eliot Spitzer in his mutual fund investigation over the last three years. The settlements called for more than $3.9 billion in restitution for investors.

Spitzer had accused the Frankfurt, Germany-based bank’s asset management division of permitting excessive market timing in its mutual funds. Spitzer also accused the company’s broker-dealer division of assisting in what he called deceptive market timing and allowing late trading by one client.

Advertisement

In one scheme, Spitzer claimed, a favored trader would make a trade before the 4 p.m. close of the market, but the trade would then be rejected by a fund company. A senior Deutsche Bank broker then would contact the trader and permit him or her to substitute a different trade, sometimes as late as 5 p.m. That would allow the trader to benefit from changes in the market or news not available to most traders.

“This is yet another example of an advisor who breached their fiduciary responsibility,” said Kay Lackey of the Securities and Exchange Commission. “Ultimately they were more interested in making fees from certain clients than protecting the interests of [all] clients.”

The company did not admit or deny the allegations as part of the settlement.

The company stated that all the alleged improper arrangements originated in subsidiaries before they became part of Deutsche Bank and that those arrangements were stopped before Spitzer and the SEC acted. No current employees approved the arrangements, the company said.

“Deutsche Asset Management and its affiliates fully cooperated with the regulators and are pleased to have reached these settlements of the industrywide mutual fund market timing regulatory matter,” company spokeswoman Mayura James-Hooper said. “We have addressed the issues that were identified and proactively enhanced our compliance and governance policies.”

The settlement calls for $102 million in restitution to investors and $20 million in civil penalties. Deutsche Bank also must reduce fees by $86 million to investors over five years, which the company began doing in 2004.

The company agreed to several reforms, including disclosing to investors expenses and fees and making sure independent officials monitor operations to avoid conflicts of interest that could hurt investors.

Advertisement

The company said it expected to settle a similar case soon with the Illinois attorney general’s office for $4 million.

Market timing, which involves rapid trades in and out of a mutual fund’s shares, is not illegal, but it is prohibited by many funds because it can generate profits at the expense of long-term shareholders. Many of the cases brought by Spitzer and the SEC in recent years have targeted mutual fund companies that allowed favored clients such as hedge funds to engage in market timing.

Advertisement