The Securities and Exchange Commission announced today that it has settled charges against Deutsche Bank Securities Inc., a brokerage firm and investment bank with its headquarters and principal executive offices in New York, New York, arising from an investigation of research analyst conflicts of interest. This settlement is related to the global settlement that ten other firms reached with the Commission, NASD, Inc., the New York Stock Exchange, Inc. ("NYSE"), and state securities regulators in April 2003. In connection with this matter, the Commission today filed a Complaint against Deutsche Bank Securities in the U.S. District Court for the Southern District of New York, alleging violations of the federal securities laws and NASD and NYSE rules. In the SEC action, Deutsche Bank Securities has agreed to a federal court order that will enjoin the firm from future violations of the federal securities laws and NASD and NYSE rules and require the firm to make changes in the operations of its equity research and investment banking departments. As part of the settlement, Deutsche Bank Securities has agreed to pay $25 million as disgorgement and $25 million in penalties for the conflicts of interest. Deutsche Bank Securities has agreed to pay an additional penalty of $7.5 million for failing to timely produce all e-mail during the investigation. One-half of the $57.5 million total of these payments - $28.75 million - will be paid in connection with the SEC action and related proceedings by the NASD and NYSE and will be placed into a distribution fund for the benefit of customers of the firm. The remainder will be paid to resolve related proceedings by state securities regulators. In addition, Deutsche Bank Securities will pay, over five years, $25 million to provide the firm's clients with independent research, and $5 million to be used for investor education.
According to the Commission's Complaint, from at least July 1999 through June 2001, Deutsche Bank Securities research analysts were subject to inappropriate influence by investment banking at the firm. The Complaint also alleges that Deutsche Bank Securities published exaggerated or unwarranted research or research that lacked a reasonable basis, received payments from other firms to publish research on certain companies without ensuring that such payments were disclosed, and made payments to other firms for those firms to publish research on Deutsche Bank Securities' underwriting clients. The firm also failed to maintain appropriate supervision over its research operations. Finally, during the investigation, Deutsche Bank Securities failed to timely produce all e-mail in response to regulatory requests and subpoenas.
Specifically, the Commission's Complaint alleges that:
Deutsche Bank Securities' compensation system provided an incentive for research analysts to participate in investment activities and to assist in generating investment banking business. Deutsche Bank Securities analysts also participated in pitches for investment banking business and prepared portions of pitchbooks used in such solicitations. Some pitchbooks contained information that implied to issuers that Deutsche Bank Securities would provide positive research coverage if selected for an investment banking transaction, and that such coverage could result in rising stock prices for those companies.
In certain instances, Deutsche Bank Securities published exaggerated or unwarranted research. For example, one of Deutsche Bank Securities' analysts issued positive recommendations on Oracle, notwithstanding his privately expressed view to a large institutional shareholder that the stock should be sold. In another instance, an analyst in the software application sector referred to Eprise Corporation as "permanent toast" despite having a market perform rating on the company. Finally, an analyst communicated to an executive officer of Deutsche Bank Securities' investment banking client, Getty Images, Inc., about the price target he had given the company in an April 5, 2002 report. He told the executive not to worry about the current price target, because he would consider raising it at another time:
Deutsche Bank Securities failed to disclose that it had received payments of over $1 million from other investment banks to provide research coverage of those firms' investment banking clients in offerings for Transkaryotic Therapeutics, Inc., Emisphere Technologies, Inc., United Therapeutics, Inc. and Trimeris, Inc. Deutsche Bank Securities also made payments of approximately $10 million to several investment banks for research coverage of Deutsche Bank Securities' investment banking clients in at least twenty-five offerings without ensuring that such payments were disclosed.
Deutsche Bank Securities failed to establish and maintain adequate procedures over research analysts to prevent or manage conflicts of interest.
I thought my approach was appropriately supportive of my favorite company, but still realistic
. My best guess is the stock stays in a trading range pending another quarter's evidence of [the client's] superior operating skills, leveraged by further improvements in the ad market. This leaves me room to boost the target price in conjunction with future increases in the earnings estimates. I certainly wouldn't want to put you under any near-term pressure by raising the bar too high. After all, I'm only thinking about you!
Deutsche Bank Securities also failed to promptly produce copies of all e-mail communications that had been requested by the staff during the investigation. Despite repeated inquiries from the regulators, Deutsche Bank Securities assured the staff during the investigation that its production of the e-mail was complete. In fact, Deutsche Bank Securities had produced less than one-fourth of the responsive e-mail by April 2003. Over the next year, Deutsche Bank Securities produced another 227,000 e-mail, more than tripling its original production and delaying completion of the investigation for over a year.
Deutsche Bank Securities has agreed to settle the Commission's action and has consented, without admitting or denying the allegations of the Complaint, to the entry of a final judgment that, if approved by the court, permanently enjoins Deutsche Bank Securities from violations of Section 17(b) of the Securities Act of 1933, Section 17(b) of the Securities Exchange Act of 1934, and NASD and NYSE rules pertaining to just and equitable principles of trade (NASD Rule 2110; NYSE Rules 401 and 476), advertising (NASD Rule 2210; NYSE Rule 472), and supervisory procedures (NASD Rule 3010; NYSE Rule 342). The final judgment also orders the firm to make the payments described above, and provides for the appointment of a fund administrator who, subject to court approval, will formulate and administer a plan of distribution for those monies placed into the distribution fund.
In addition, the final judgment orders Deutsche Bank Securities to implement structural reforms and provide enhanced disclosure to investors, including a broad range of changes relating to the operations of its equity research and investment banking operations. Deutsche Bank Securities has agreed to sever the links between research and investment banking, such that: research and investment banking are physically separated with completely separate reporting lines; analysts' compensation cannot be based directly or indirectly upon investment banking revenues; investment bankers may no longer evaluate analysts; investment bankers will have no role in determining what companies are covered by the analysts; and research analysts will be prohibited from participating in efforts to solicit investment banking business, including pitches and roadshows. In addition, Deutsche Bank Securities must disclose on the first page of each research report whether the firm does or seeks to do investment banking business with that issuer, and when Deutsche Bank Securities decides to terminate coverage of an issuer, Deutsche Bank Securities must issue a final research report discussing the reasons for the termination. Each quarter, Deutsche Bank Securities also will publish on its website a chart showing its analysts' performance, including each analyst's name, ratings, price targets, and earnings per share forecasts for each covered company, as well as an explanation of the firm's rating system.
Deutsche Bank Securities also has agreed as part of this settlement to retain, at its own expense, an Independent Monitor to conduct a review to provide reasonable assurance that the firm is complying with the structural reforms. This review will be begin on April 30, 2005 and the Independent Monitor will submit a written report of his or her findings to the SEC, NASD, and NYSE within 30 days from the completion of the review, but no later than October 31, 2005. On October 31, 2008, Deutsche Bank Securities must certify to the SEC and other regulators that it has complied in all material respects with the requirements and prohibitions of the structural reforms.
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The Commission acknowledges the assistance of NASD, NYSE, the California Department of Corporations, and other state securities regulators in the investigation of this matter.