Massachusetts Secretary of State William F. Galvin said Wednesday he had fined Deutsche Bank Securities Inc. $17.5 million for allegedly failing to disclose conflicts of interest related to collateralized debt obligations, or CDOs, before the financial crisis.
CDOs were widely created and structured by Wall Street firms in the run up to the crash in 2008; these investments are sliced up pieces of debt, many of them mortgage-related, that are repackaged and sold as securities. Many of these investments plummeted in value as the housing market slumped and a global credit crunch ensued.
The Massachusetts Securities Division, which Galvin oversees, investigated Deutsche Bank Securities for its alleged failure to disclose its roles in proposing, structuring, and co-investing in a $1.56 billion CDO named Carina.
The state’s investigation into Deutsche Bank Securities focused on a proprietary trading desk of the bank’s Special Situations Group. That group worked with a hedge fund, Magnetar Capital, on the CDO proposal, and the two co-invested in six of the investments, the state said. When Carina was being marketed to investors, one investor backed out upon learning that.
Galvin said the product marketing materials did not disclose the alleged conflicts of interest Deutsche Bank and Magnetar had in underwriting and selling Carina, as well as investing in it.
Within a year, rating agencies downgraded Carina’s notes to junk status, resulting in “catastrophic losses to investors,” Galvin said.
Deutsche Bank neither admitted nor denied that it violated the law. A spokesman for the firm, Duncan King, said, “We are pleased to have reached this settlement and put this matter behind us.”