Germany’s largest bank says that it is negotiating with the Justice Department but it will not pay the reported amount to settle its RMBS case.
Negotiations have begun between Deutsche Bank and the U.S. Justice Department in an effort to resolve civil claims related to the German bank’s issuance and underwriting of residential mortgage-backed securities (RMBS) and related securitization activities between 2005 and 2007, confirm Deutsche Bank officials in response to media reports.
The Wall Street Journal broke the story last week that delineated the settlement talks between the bank and the DOJ, including the potential penalty of $14 billion to be paid by Deutsche Bank.
Bank officials quickly denied that the penalty would be that high.
In a statement on September 15, Germany’s largest bank confirmed “that it has commenced negotiations with the Department of Justice in the United States (DoJ) with a view to seeking to settle civil claims,” bank officials say in an official statement. “The bank confirms market speculation of an opening position by the DoJ of USD 14 billion and that the DoJ has invited the bank as the next step to submit a counter proposal.”
However, Deutsche Bank “has no intent to settle these potential civil claims anywhere near the number cited,” bank officials say. “The negotiations are only just beginning. The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts.” The WSJ has reported that lawyers for the bank are thinking in terms of $2 billion to $3 billion to settle the probe.
In a similar case this past February, Morgan Stanley faced a total tally of $5 billion in penalties as it settled claims with federal and state government authorities over charges that the firm misled investors via its marketing, sale and issuance of RMBS instruments during the years leading up to the Great Recession. The penalties and related payments stem from the RMBS Working Group, a federal and state law enforcement effort set up by President Barack Obama’s Financial Fraud Enforcement Task Force. The working group is charged with investigating fraud and abuse in the RMBS market that paved the way for the Great Recession, officials say.
For Deutsche Bank, this latest round with U.S. authorities follows several securities operations related violations that have led to financial penalties for the firm and its extensions:
- In August, it was announced that the CFTC and Deutsche Bank are in agreement that a monitor is needed to help the German giant maintain and improve its compliance with its swaps data reporting responsibilities in the wake of charges by the regulator. The CFTC and Deutsche Bank officials jointly filed a motion with the U.S. District Court for the Southern District of New York that will lead to the appointment of a monitor “to ensure Deutsche Bank AG’s compliance with its reporting responsibilities under the Commodity Exchange Act and CFTC Regulations,” according to the CFTC. The regulator points out that registered swap dealers are “required to comply with certain disclosure, recordkeeping, and reporting requirements related to its swap transactions.”
- Also in August, FTF News reported that Deutsche Bank Securities Inc., an indirect, wholly owned subsidiary of the German institution, will be paying a $12.5 million fine for “significant supervisory failures” that allowed “confidential, price-sensitive information” to be spread among employees via the “hoot and holler” system of internal speakers or “squawk boxes” that populate trading floors and offices. Officials at the Financial Industry Regulatory Authority (FINRA) say they “found that Deutsche Bank was aware that its hoot-and-holler or squawk box involving research and trading might contain confidential, price-sensitive information, and that there was a risk that material non-public information could be communicated over them.”
- In July, FINRA officials fined Deutsche Bank Securities $6 million for “failing to provide complete and accurate trade data in an automated format in a timely manner when requested by FINRA and the Securities and Exchange Commission (SEC).” This failure to correctly provide “Blue sheets” data refers to the informal name given to automated trade data. Regulators use the data in their investigations of market manipulation and insider trading. U.S. securities laws and FINRA rules require firms to provide this blue-sheet information to regulators electronically, usually within 10 business days, upon request.
- Toward the end of 2015, FINRA fined Deutsche Bank Securities $1.4 million for violating Regulation SHO, FINRA’s short interest reporting rule, and for “related supervisory failures,” say FINRA officials. Reg SHO “generally allows firms to track their positions in a security from certain trading operations or trading desks separately from other positions maintained at the firm through the use of an ‘aggregation unit,’ ” FINRA officials say. “Reg SHO requires, among other things, that in determining the net positions of aggregation units, firms cannot include the securities positions of a non-U.S.-broker-dealer affiliate.” FINRA officials allege that for more than a decade, Deutsche Bank was “improperly including securities positions of a non-U.S.-broker-dealer affiliate in numerous aggregation units when determining each unit’s net position.”
Officials at the Department of Justice decline to comment upon the current negotiations.
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