by Howard Haykin

An opaque secondary market and inadequate supervision enabled greedy traders and sales people at Deutsche Bank Securities, Inc., to cheat customers on negotiated sales of commercial mortgage-backed securities.

On Tuesday, the SEC announced sanctions against Deutsche Bank Securities (“DBSI”) and Benjamin Solomon, its former global head of securitized products trading. DBSI will pay approximately $4.5 million in disgorgement, remediation, prejudgment interest and civil penalties to settle the SEC charges. Solomon, who was U5’d by DBSI in 2015, agreed to pay a $165,000 fine and serve a 12-month suspension.

In determining its sanctions, the SEC considered DBSI’s prompt remedial acts, significant cooperation, terminations of responsible personnel, and revision of procedures and controls – which included: (i) new compliance training; (ii) improved coordination between supervisory and compliance staff; (iii) a larger compliance staff; and, (iv) enhanced surveillance of communications and trade information.

SEC FINDINGS.    Between 2011 and 2015, DBSI traders and salespeople made false and misleading statements while negotiating sales of commercial mortgage-backed securities (“CMBS”) in the secondary market. Customers overpaid for CMBS because they were misled about the prices at which Deutsche Bank had originally purchased them. 

The purchase and sale of a CMBS bond often took place within minutes or hours and involved little or no risk to DBSI - essentially "riskless principal transactions."

DBSI 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. Solomon, who served as the head trader of DBSI’s CMBS trading desk, failed to 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.

Because the CMBS secondary market is opaque and lacks easily accessible information on the prices at which CMBS trade, the broker-dealer arranging the sale of CMBS often provides information about the current market price of the bond.

[For further details on this case, click here:  SEC Order.]