FINRA fined Deutsche Bank Securities, Inc. $6.5 million for what it deems are "serious financial and operation deficiencies" first identified in 2009 and associated with Deutsche's enhanced lending program.
According to the findings, the operational deficiencies existed from 2009 to 2012 and affected mostly hedge fund customers of the "Enhanced Lending Business" operation. These deficiencies included a lack of required transparency in firm books and records and inaccurate Customer Reserve calculations.
FINRA found Deutsche Bank violated Section 17(a) of the Securities Exchange Act of 1934 by books and records maintenance failures, including the results of a March 2009 FOCUS report which found a $9.4 billion liability payable to the Deutsche Bank AG London affiliate for "non-customer securities accounts," and which itself was an aggregation of multiple Deutsche Bank AG London accounts, including Enhanced Lending as well as non-securities related balances rolled into one balance on the FOCUS report.
Because the balances were condensed down to one line item, Deutsche Bank's records lacked sufficient transparency so that neither FINRA nor the firm itself were able to readily determine which sub accounts originated out of which activities (e.g., proprietary trading vs. Enhanced Lending).
As a result of the inability to obtain immediate and readily understood account information, FINRA believes a critical aspect of its ability to oversee broker-dealers and protect customer assets was potentially affected.
Furthermore, FINRA found that Deutsche Bank incorrectly classified some Enhanced Lending stock loans as inter company payables and receivables instead of as securities lending transactions, amounting to what would be a $31 billion reclassification by April 2010 that resulted in a 102% collateral of stock loan principal value and a house margin call that Deutsche Bank originally reported at $2.7 billion but later advised that figure was incorrect and upped the call to $3.1 billion instead.
Investigators found that Deutsche Bank also inaccurately computed its Customer Reserve Formula by including a debt to which it was not entitled, resulting in hindsight deficiencies ranging from $700 million to $1.6 billion during the period between March 5 and March 26, 2010.
FINRA believes that at the root, at least partially, Deutsche Bank's failure to establish, maintain and enforce a supervisory system including written supervisory procedures ("WSPs") contributed to the aforementioned deficiencies and violations.
Prior to the present case, FINRA fined Deutsche Bank $275,000 in April 2013 for failing to establish and enforce adequate WSPs regarding dividend related yield enhancement on total return swap transactions of US equities. In July 2010, the firm was fined $7.5 million for negligent underreporting of mortgage loan delinquency rates related to subprime residential mortgage backed securities transactions and in February 2010, Deutsche Bank was fined $575,000 for short sale violations, including a failure to establish, maintain and enforce a supervisory system.
If you have invested with Deutsche Bank or with any firm whose failure to establish, maintain or enforce an adequate supervisory system or whose financial and operational deficiencies has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.