Deutsche-Bank Securities Ltd. has agreed to pay $1-million in a settlement with Canada's securities regulator over the freeze-up of Canada's non-bank asset backed commercial paper market in 2007.
In an settlement agreement released Friday, the German-owned firm agreed it received an e-mail in July, 2007, notifying it about the levels of distressed U.S. subprime debt held in Canadian ABCP pools, but it did not notify clients about the subprime exposure, and staff did not give the information to the firm's own internal compliance department.
"We are pleased to have settled this matter," Deutsche Bank spokesman Duncan King said Friday.
The settlement provides new details about Deutsche Bank's actions in the summer of 2007, when Canada's $35-billion ABCP market froze, leading to a lengthy and combative restructuring of the notes and many complaints by investors about their treatment in the market.
The $1-million settlement deal follows a long-running dispute between Deutsche Bank and the Investment Industry Regulatory Organization of Canada, which oversees the country's brokerage industry.
Seven other brokerage firms reached an agreement to settle their cases in 2009 by making payments totalling $139-million after facing accusations they failed to alert clients to warning signs that the non-bank ABCP market was in trouble in the summer of 2007.
Deutsche Bank refused to settle in 2009, and asked an IIROC hearing panel to shut down the case against it due to concerns about its ability to call witnesses in its defence. When the hearing panel refused, Deutsche Bank appealed the matter to the Ontario Securities Commission and the Ontario divisional court, losing at both levels.
The firm sought leave to appeal further to the Ontario Court of Appeal, but the application was denied in October.
According to Friday's settlement agreement, Deutsche Bank agreed it was part of a group of brokerage firms who received an e-mail on July 24 from Coventree Inc., which was Canada's largest seller of non-bank ABCP products at the time.
The e-mail outlined how much exposure each of Coventree's ABCP trusts held to U.S. subprime mortgages, showing varying levels of holdings of subprime assets in the trusts. Planet Trust Series A had had the most U.S. subprime exposure, accounting for 26 per cent assets.
Deutsche Bank said in the settlement agreement that it felt the e-mail was a positive statement on the quality of Coventree's ABCP trusts. The firm said it also felt it was Coventree's responsibility to distribute the information to the investor community, and said Coventree told Deutsche Bank it was in the middle of "rebalancing" its subprime assets.
The firm did not distribute the e-mail to its clients. Deutsche Bank said it felt the information would be outdated, not publicly verifiable and presented good news rather than bad news.
IIROC said that during this period, Deutsche Bank clients were asking questions about the U.S. subprime content in their ABCP holdings, and the firm did not ensure its clients received all the information it had about the exposure.
As well, the settlement agreement said Deutsche Bank's compliance department did not receive the e-mail until after the market frozen up on Aug. 13, and was not consulted about potential issues it raised.
"The respondent did not engage the appropriate involvement of compliance in matters related to the worsening conditions of the third-party ABCP market and the potential for a market disruption," the settlement agreement states.
IIROC said Deutsche Bank continued to sell ABCP products to institutional clients before the market froze. On Aug. 8, for example, the Caisse de dépôt et placement du Québec repurchased $51-million of ABCP notes from Deutsche Bank's inventory, which the firm had previously bought from the Caisse in July.
Another unidentified large institutional investor bought $25.8-million of Planet Trust ABCP between July 25 and August 2, the settlement agreement says.
While Deutsche Bank did not provide the Coventree e-mail to the client showing the high proportion of subprime notes in the Planet trust, the firm said it did advise the client that there was subprime content in some Coventree ABCP.
Between Aug. 3 and Aug. 10, Deutsche Bank sold $54.1-million of Coventree ABCP to a large international bank and a large Canadian financial institution and sold $1.3-million of other Coventree ABCP products to a financial institution.
Deutsche Bank said liquidity was discussed generally with these clients, but they did not give them the detailed Coventree e-mail.
Deutsche Bank said it continued to support the Canadian ABCP market during the week of Aug. 7, 2007, before the market froze by buying unsold paper and placing it in inventory overnight to keep the market operating.
The settlement agreement said Deutsche Bank sold ABCP products only to insitutional investors and did not sell any ABCP to retail investors.