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Regulation and Compliance > Federal Regulation > SEC

Deutsche Bank to Pay $37M Fine for Fraudulent Order Routing Practices: Enforcement

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New York Attorney General Eric T. Schneiderman announced that Deutsche Bank Securities will pay a combined $37 million to the state of New York and the Securities and Exchange Commission to settle investigations into false statements and omissions made in connection with the marketing of Deutsche Bank’s electronic equities order routing services, known as its “Dark Pool Ranking Model.”

As part of the agreement, Deutsche Bank admits that it misled investors and violated New York State and federal securities laws. The Attorney General’s Office and the SEC have also censured Deutsche Bank for its conduct.

“Misleading and self-serving statements that defraud investors will not be tolerated. Electronic order routing systems that route investor orders to various markets, including dark pools, are a part of modern equities trading, and companies that promote their routing capabilities must do so truthfully,” Schneiderman said in a statement.

The attorney general’s investigation found – and Deutsche Bank admits – that for two years, from January 2012 through February 2014, Deutsche Bank’s Dark Pool Ranking Model, which Deutsche Bank touted as the “core” of its order router, was not functioning as Deutsche Bank represented. 

In fact, according to Schneiderman, when Deutsche Bank discovered in 2013 that a technological problem was causing a significant malfunction in the model, Deutsche Bank did not fully correct the problem or tell clients about it. 

The bank did, however, ensure that its own dark pool was not affected by the problem and would remain eligible to receive all client orders.

The attorney general’s investigation found, and Deutsche Bank has admitted, that Deutsche Bank’s marketing of its DPRM was materially misleading. 

SEC Files Charges in $26 Million Stock Manipulation Scheme

The Securities and Exchange Commission today charged two New Jersey-based traders with manipulating more than 2,000 stocks traded on the New York Stock Exchange and Nasdaq and reaping more than $26 million in profits from their successful trades.

The SEC alleges that Joseph Taub and Elazar Shmalo utilized dozens of accounts at various brokerage firms to carry out their scheme undetected, typically using two at a time to engage in a flurry of manipulative trading activity that usually lasted less than five minutes. 

“As alleged in our complaint, Taub and Shmalo schemed dozens of times per trading day to artificially move stock prices for their personal benefit,” Andrew M. Calamari, director of the SEC’s New York Regional Office, said in a statement.

According to the SEC’s complaint, they would use one account to buy a position in a stock, and then use a second account to place a series of small buy orders to walk up the price for the first account to sell its larger position into the market at an artificially high price for significant profits. 

In some instances before the first account purchased its position in a stock, they had the second account place a series of smaller sell orders to drive down the price of the stock, allowing the first account to buy its larger position in that stock at the artificially lowered price, according to the SEC.

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey announced criminal charges against Taub and Shmalo.

The SEC’s complaint filed in federal court in Newark, New Jersey, charges Taub and Shmalo with violating and aiding and abetting violations of the antifraud provisions of the securities laws. The complaint seeks a permanent injunction as well as the return of ill-gotten gains plus interest and penalties.

SEC Awards Nearly $1 Million to Whistleblower

The SEC awarded more than $900,000 to a whistleblower whose tip enabled it to bring multiple enforcement actions against wrongdoers, according to a press release. The SEC also recently awarded $3.5 million to a whistleblower.

“With the issuance of this second award in less than one week, we hope to continue to encourage individuals to submit high-quality tips that we can leverage to enforce the law and protect investors, and they can receive significant financial rewards for their valuable contributions to a case,” Jane Norberg, Chief of the SEC’s Office of the Whistleblower, said in a statement.

More than $136 million has been awarded to 37 whistleblowers who voluntarily provided the SEC with original and useful information that led to a successful enforcement action.

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