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April 24, 2015 at 05:20 AM
It was a big-dollar week for financial misdeeds and their doers. New York regulators reached a settlement with Deutsche Bank for $2.4 billion on LIBOR manipulation, while the Financial Industry Regulatory Authority ordered RBC to fork over $1.4 million in fines and restitution on unsuitable sales of reverse convertibles.
In addition, the SEC charged 10 individuals for fraud in a penny stock scheme; a real estate investment firm for failure to make required public filings; and a mutual fund firm and its chief compliance officer for disclosure failures on CEO pay.
Deutsche Bank to Pay $2.4 Billion Over LIBOR Manipulation
Deutsche Bank has settled with a passle of regulators from New York to London over the manipulation of benchmark interest rates, including LIBOR, the London interbank offered rate.
The settlement will cost the bank $2.4 billion and calls for the firing of employees involved in the actions and the installation of an independent monitor who will look for violations of New York state banking laws, according to New York financial services superintendent Benjamin Lawsky.
From approximately 2005 through 2009, certain Deutsche Bank traders frequently requested that certain submitters submit rate contributions that would benefit the traders’ trading positions, rather than the rates that complied with the IBOR definitions, for LIBOR, EURIBOR (the Euro Interbank Offered Rate) and TIBOR (the Euroyen Tokyo Interbank Offered Rate). In addition, Deutsche Bank also communicated and coordinated with employees of other banks and financial institutions regarding their respective rate contributions in advance of an IBOR submission.
A bank’s IBOR rates are intended to correspond to the cost at which the bank concludes it can borrow funds, so the rates are an indicator of a bank’s financial health. If a bank’s submission is high, it suggests that the bank is either already paying a high amount to borrow funds, or would have to do so. This could indicate a liquidity problem and serve as a sign that the bank is experiencing financial difficulty.
Traders and submitters at Deutsche Bank knew the IBOR rates did not accurately reflect their definitions. Trails of internal messages indicated that the rate-setting had little to do with reality and everything to do with manipulation. For example, a 2009 email from a vice president to a trader said, “TIBOR is a corrupt fixing and DB is part of it!”
While the investigation resulted in the termination of many employees involved in the manipulation, including within management, others remained. As part of the settlement, the bank has been ordered to terminate seven employees who played a role in the misconduct but who remain employed by the bank: one London-based managing director, four London-based directors, one London-based vice president, and one Frankfurt-based vice president.
Ten of the individuals centrally involved in the misconduct were previously terminated as a result of the investigation, but four were reinstated pursuant to a German Labour Court determination, and two of them are still at the bank. Those employees reinstated due to the court decision who remain at the bank shall not be allowed to hold or assume any duties, responsibilities or activities involving compliance, IBOR submissions, or any matter relating to U.S. or U.S. dollar operations.
The penalty to be paid by the bank includes $600 million to the New York State Department of Financial Services (NYDFS), $800 million to the Commodity Futures Trading Commission (CFTC), $775 million to the U.S. Department of Justice (DOJ), and 227 million GBP (approximately $340 million) to the United Kingdom’s Financial Conduct Authority (FCA). Supervisory Failures Cost RBC $1.4 Million: FINRA
FINRA has ordered RBC Capital Markets to pay a $1 million fine and approximately $434,000 in restitution to customers after the agency found supervisory failures that resulted in the sales of unsuitable reverse convertibles.
According to the agency, RBC did not have supervisory systems in place that would flag transactions for review by a supervisor when reverse convertibles were sold to customers. That was not only a FINRA violation but also ignored the firm’s own guidelines.
RBC’s suitability guidelines for the sale of reverse convertibles set specific criteria for customer investment objectives, annual income, net worth, liquid net worth and investment experience, but these guidelines were not followed. As a result, the firm failed to detect the sale by 99 of its registered representatives of 364 reverse convertible transactions in 218 accounts that were unsuitable for those customers.
The customers incurred losses totaling at least $1.1 million. RBC made payments to numerous customers pursuant to the settlement of a class action lawsuit; FINRA ordered restitution to the remainder of affected customers.
The firm has neither admitted nor denied the findings, but consented to the sanctions.
SEC Charges 10 in Penny Stock Scheme
The SEC has charged 10 people with fraud in a scheme to offer and sell penny stock in undisclosed “blank check” companies bound for reverse mergers while misrepresenting to the public that they were promising startups with business plans.
