SEC Brings Settled Enforcement Action Against Deutsche Bank Investment Advisory Unit in Connection with Its Voting of Client Proxies for Merger Transaction; Imposes $750,000 Penalty


Washington, D.C., Aug. 19, 2003 -- The Securities and Exchange Commission today charged Deutsche Asset Management, Inc. (DeAM), the investment advisory unit of Deutsche Bank AG, for failing to disclose a material conflict of interest in its voting of client proxies for the 2002 merger between Hewlett-Packard Company (HP) and Compaq Computer Corporation. The Commission's Order Instituting Proceedings finds that, unbeknownst to DeAM's advisory clients, Deutsche Bank's investment banking division was working for HP on the merger, and had intervened in DeAM's proxy voting process on behalf of HP. This created a material conflict of interest for DeAM, which had a fiduciary duty to act solely in the best interests of its advisory clients. The Order finds that DeAm violated this duty by voting the proxies on the HP stock owned by its advisory clients, without first disclosing the conflict.

The Commission's Order censures DeAM, directs it to cease and desist from further violations, and imposes a civil penalty of $750,000. DeAM consented to the issuance of the Order without admitting or denying its findings.

"Voting client proxies is a critical function of an investment adviser," said Stephen M. Cutler, the SEC's Director of the Division of Enforcement. "If the adviser has a material conflict of interest, it must tell its clients about the conflict before voting so the clients can decide whether they want to vote the proxies themselves, allow the adviser to vote them, or make some other arrangement, such as having a shareholder service vote the proxies."

According to the Order, HP retained Deutsche Bank's investment banking division in January 2002 to assist in HP's hotly contested merger with Compaq. Pursuant to a confidentiality agreement with HP, Deutsche Bank did not publicly disclose that it was working for HP. Under the terms of the retention agreement, HP agreed to pay Deutsche Bank's investment banking division $1 million guaranteed, and another $1 million contingent upon the approval and completion of the merger.

On Friday, March 15, 2002, the DeAM proxy committee cast all 17 million proxies on HP stock it controlled (on behalf of its clients) against the merger. The following Monday, HP management learned that DeAM had voted against the merger, and called senior-level officials of Deutsche Bank's investment banking division, and asked them to arrange for HP to make a last-minute presentation to the DeAM proxy committee. The Deutsche Bank investment bankers then contacted DeAM's then Chief Investment Officer, who agreed to allow HP, along with the principal dissident shareholder opposing the merger, to make presentations to the proxy committee the next day.

Immediately following these presentations on the morning of March 19, 2002, the members of the DeAM proxy committee discussed whether they should switch their vote and cast the proxies in favor of the merger. During the discussion, the voting members were informed that Deutsche Bank's investment banking division was working for HP on the merger and that HP had an enormous banking relationship with Deutsche Bank. The committee then held a re-vote, and changed its vote in favor of the merger. Shortly before shareholder voting on the merger closed, DeAM personnel succeeded in recasting all 17 million of its clients' votes in favor of the merger.

The Order finds that, due to the involvement of Deutsche Bank's investment banking division in the HP-Compaq merger and its intervention in the proxy voting process, DeAM had a material conflict of interest. As a result, prior to voting the proxies DeAM had a duty to disclose to its advisory clients the circumstances of its investment banking affiliate's work for HP on the proposed merger and the bankers' intervention in DeAM's voting process.

Helane L. Morrison, the District Administrator of the SEC's San Francisco District Office, added, "The Order does not find that the outcome of DeAM's proxy vote was affected by Deutsche Bank's investment banking relationship with HP. Rather, the Order emphasizes that the proxy voting process was tainted by the failure to disclose the conflict. The message is that the process matters."

Based on the foregoing, the Order finds that DeAM violated Section 206(2) of the Investment Advisers Act of 1940.

For Further Information Contact:

Helane L. Morrison, District Administrator, 415-705-2450
Robert L. Mitchell, Assistant District Administrator, 415-705-2351

See Also:  Administrative Proceeding Release No. IA-2160
Last modified: 8/19/2003