In the News: Recent Developments

Jan 9, 2007

Deutsche Bank, Bank of New York Settle Bond Probe

By David Scheer and Darrell Preston

Jan. 9 Deutsche Bank AG, Bank of New York Co. and Wilmington Trust Co. agreed to pay $1.6 million to settle accusations they manipulated bidding in auction-rate bond sales, the U.S. Securities and Exchange Commission said.

The companies let bidders submit initial or revised offers after deadlines and allowed brokers to intervene in sales, the SEC said in a statement today. The efforts ensured auctions didn’t fail, the agency said.

The settlement is the second in a year involving companies in the $260 billion market for auction-rate bonds, where banks that arrange the sales have been probed for manipulating bids without telling issuers and investors.

“This settlement with the auction agents emphasizes the importance of disclosing accurately the true manner in which auctions are really held,” said Martha Haines, chief of the SEC’s Office of Municipal Securities, in an interview.

Auction-rate securities typically are sold by municipalities or corporations with interest rates that are reset every 7, 28 or 35 days. By accepting late bids, the banks in some cases affected the interest rate issuers must pay to investors until the next auction, the SEC said.

Haines has expressed concern that buyers and sellers in the auction-rate market may be getting hurt because the banks that arrange the sales continue to manipulate some of the bids. Best-practice guidelines proposed by the bond market’s trade group still allow bankers to influence the outcome of auctions as long as they disclose that they may do so. Dealers still don’t make clear that many auctions are rigged, Haines has said.

Auction Agents

Today, the SEC settled with agents that handle the actual auctions, after previously targeting investment banks that underwrite and managed the bond issues. Citigroup Inc., Goldman Sachs Group Inc. and 13 other investment banks agreed in May to pay $13 million to settle charges that they alerted favored customers to other investors’ bids, or put in their own bids while managing the auctions.

“It’s a cleanup,” said Lance Pan, director for Credit Research for Capital Advisors Group in Newton, Massachusetts, which manages $7.5 billion in cash and follows the market. “They’re firing a warning shot for all types of agents. This kind of service doesn’t sit well with the SEC.”


Deutsche Bank Trust Company Americas, a unit of Germany’s biggest bank, and Bank of New York each agreed to pay $750,000, while Wilmington Trust will pay $100,000, the SEC said. The companies neither admitted nor denied the allegations in agreeing to settle an administrative complaint, the regulator said.

“While the broker-dealers were primarily responsible for the widespread problems in the auction-rate securities market, the auction agents enabled the broker-dealers to engage in certain illegal auction practices,” Ken Lench, an SEC enforcement official overseeing the probe, said in a telephone interview.

The SEC said it considered the banks’ cooperation when reaching the settlement. The investigation continues.
“We are pleased to reach a resolution on this matter,” Ted Meyer, a spokesman for Frankfurt-based Deutsche Bank, said in an e-mailed statement. “We have taken appropriate measures to correct the issues that were identified in this industry-wide investigation.”

Wilmington Trust “cooperated fully with the SEC and their investigation and agreed to the order,” spokesman Bill Benintende said in a phone interview from the company’s office in Wilmington, Delaware.

Bank of New York is also “pleased to have resolved this matter,” spokesman Kevin Heine said.

“The auction agent’s first duty is to the integrity of the auction process,” said Joseph Fichera, chief executive officer of Saber Partners LLC, a New York-based advisory firm. “That means ensuring a truly blind auction on a level playing field.”

–Editor: Plungis (bew)
To contact the reporter on this story:
David Scheer in Washington at +1-202-654-4316 or;
Darrell Preston in Dallas at +1-214-954-9454 or

To contact the editor responsible for this story:
Erik Schatzker at +1-212-617-3849 or

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