Kick-Backs Put Deutsche Bank in SEC’s Crosshairs
Deutsche Bank is in the news again, this time for false and misleading sales practices. At the heart of a complaint filed by the Securities and Exchange Commission (SEC) was a quid pro quo relationship in which Deutsche Bank offered only those funds whose sponsors agreed to kick-back a portion of their management fees to Deutsche Bank. The problem with this kind of arrangement is that investment recommendations tend to be influenced not by the client’s best interest, but by the amount of money the Deutsche Bank received from the fund sponsor.
In marketing materials and other related documents provided to clients, Deutsche Bank said that for the funds it offered, it relied on an independent, in-house research group that used a multi-step due diligence process to identify, evaluate, and select best-in-class asset managers from an “extremely large universe” of funds. However, what Deutsche Bank did not say was that it only evaluated those funds that would kick-back a portion of their management fees to Deutsche Bank. Clients who were relying on loyal, independent investment advice from Deutsche Bank were unaware that Deutsche Bank may have had an ulterior profit motive for recommending these specific funds.
According to the SEC, Deutsche Bank’s failure to tell its clients that it recommended only hedge funds that paid them kick-backs rendered their marketing materials misleading in violation of the Securities Act of 1933. As a result, Deutsche Bank agreed to pay a civil penalty in the amount of $500,000. In the Matter of Deutsche Bank Trust Company Americas (April 25, 2019)
This proceeding came on the heels of another SEC proceeding against a Deutsche Bank affiliate that alleged breaches of fiduciary duty related to excessive fees it received from mutual funds it recommended to clients. According to the SEC complaint, Deutsche Bank Securities recommended that its advisory clients purchase share classes of certain mutual funds whose fees were higher than those of lower-cost share classes of the same funds for which the clients were eligible to buy. Deutsche Bank Securities benefitted from the receipt of those higher fees at the expense of their clients. Clients who were relying on Deutsche Bank Securities to furnish loyal, independent advice were not aware that Deutsche Bank Securities was, in effect, overcharging them.
The SEC concluded that Deutsche Bank Securities’ failure to disclose the conflicts of interest related to its receipt of these higher fees amounted to breaches of fiduciary duty and investor fraud under the Investment Advisers Act of 1940. As a result, Deutsche Bank Securities paid disgorgement of $2,657,063.46 and prejudgment interest of $314,399.39. In the Matter of Deutsche Bank Securities (March 11, 2019)
Financial advisers owe a fiduciary duty to their clients, which includes the twin sacrosanct duties of undivided loyalty and prudence. The lesson here is that all too often greed drives some financial advisers to forsake these duties and put their interests ahead of their clients. If you feel you have been the victim of securities fraud, call one of the Sanford Heisler Sharp Financial Services Litigation lawyers in New York or San Diego for an assessment of your case.