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Wall Street Journal puts gold on Page 1 but mostly gives central banks a pass
U.K. Sets Fine for Deutsche Bank
By Alistair MacDonald
The Wall Street Journal
Wednesday, April 12, 2006
LONDON -- Deutsche Bank AG was fined 6.4 million ($11.1 million) by
Britain's markets regulator for misleading investors after its
proprietary-trading operations boosted two stock sales being handled
by the big German bank.
The fine, the third-largest ever levied by the Financial Services
Authority, underscores the potential conflicts of interest faced by
banks that use their own cash, through so-called proprietary-trading
books, to trade securities. Many of the world's biggest investment
banks have increased their proprietary trading, and strong profits
from that trading helped banks post record profits recently.
But ensuring that the operations remain at arm's length from other
parts of the bank that deal with outside clients is a sensitive
issue. Last month, Australian regulators alleged that a proprietary
trader at a unit of Citigroup Inc. bought stock in a company before
it became the target of a takeover bid from a firm advised by the
U.S. bank. Citigroup has denied the charges.
"There is always a danger there with prop books, and it is down to
the banks to manage it," said Jon Peace, an investment-banking
analyst at Fox-Pitt, Kelton. "In theory they have Chinese Walls that
are strong enough to keep information flow within the proper
departments, although the banks have to trust their employees to
comply with the internal controls."
The FSA found that Deutsche Bank used its own cash to prop up the
share price of Swedish truck maker Scania AB in March 2004 when
Deutsche Bank was struggling to sell Scania stock valued at 14.9
billion Swedish kronor ($1.93 billion), which the bank
had bought from Volvo AB.
The FSA said Deutsche Bank's trading, which was conducted through
two Swedish brokers and sent Scania's share price up nearly 1%, led
the market to believe the deal had stronger demand than it did. The
bank also issued statements internally that talked up the level of
demand, according to the FSA.
The regulator also found that Deutsche Bank breached market
principles when its proprietary book traded in Cytos Biotechnology
AG, a Swiss firm for which the bank was selling securities.
"The events in question took place over two years ago and were
isolated instances involving a small number of individuals," a
spokeswoman for the bank said. "There is no finding of deliberately
wrongful conduct or of systems failures."
In addition to fining Deutsche Bank, the FSA fined David Maslen, who
was head of European cash trading at the time, 350,000. Mr. Maslen,
a 16-year trading veteran, also was forced by Deutsche to forfeit
1.8 million ($2.2 million) of his 2004 bonus. He has left the bank.
In a statement, Mr. Maslen said he had cooperated with the
investigation.
While the FSA has no set rules against investment banks trading in
their own deals, banks are told to erect Chinese Walls to stop them
benefiting from information others don't have and to inform the
market when they are trading in the securities. Last June, UBS AG
moved its fixed-income proprietary-trading activities from its
investment bank into Dillon Read Capital Management, a unit within
asset management, partly to address concerns of conflicts of
interest.
Deutsche Bank said that after the Scania deal, it began an internal
investigation which led to an overhaul of two of its most successful
divisions -- equity and equity capital markets.
Rival bankers also say Deutsche Bank has become more cautious with
taking the sort of risks with its balance sheet that led to the
Scania transaction.
Proprietary trading remains on the agenda of many investment banks.
Credit Suisse Group has promised to build its proprietary trading,
citing lack of muscle in this area as one reason it had
underperformed peers. Morgan Stanley has also promised to increase
the market risk it takes with its own cash.
Investment banks will typically buy a large issue of shares from
companies and sell them into the market, which means any shares not
sold are left with the bank. Deutsche Bank was left with almost 10%
of Scania's share capital after the 2004 sale.
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