The Financial Services Authority (FSA) has today imposed a penalty of £6,363,643 on Deutsche Bank AG (Deutsche). The penalty was levied for breaching FSA Principle 5, by failing to observe proper standards of market conduct, and Principle 2, by failing to conduct its business with due skill, care and diligence.
These breaches arose from two separate transactions conducted by Deutsche during March 2004. The first was in relation to a book build in Scania AB (Scania) B shares, while the second involved the stabilisation of Cytos Biotechnology AG (Cytos) shares.
The FSA has also imposed a financial penalty of £350,000 on Mr David Maslen, Deutsche's former Head of European Cash Trading, for being knowingly concerned in the failure to observe proper standards of market conduct in the Scania transaction.
The FSA found that Deutsche breached FSA Principle 5 due to Mr Maslen, who had an active role in the Scania book build, giving instructions for proprietary trading which occurred at a sensitive time during the book build. This trading was not transparent to the market and was of a size and manner that contributed to material changes in the Scania B share price during the book build. It prevented potential investors from gaining a full understanding of the nature of supply and demand for Scania B shares that was independent of Deutsche.
In conducting this trading Deutsche was also found to have breached FSA Principle 2 as, despite Mr Maslen's role in the book build, he gave the instructions to commence the trading without notifying or seeking clearance from Deutsche compliance or senior management or checking Deutsche's own restricted list.
Deutsche was also found to have breached Principle 2 as during the course of the book it made some announcements about the Scania transaction which were incomplete or inaccurate. Deutsche also released an announcement to its own sales force, which was subsequently communicated to clients, about its holding of Scania shares prior to notifying the Stockholmbörsen.
In the second transaction Deutsche conducted a stabilisation of Cytos shares on the Swiss SWX exchange through a Deutsche trader in Zurich. Deutsche failed to ensure that the trader conducted the trades in accordance with its internal procedures, and its staff involved in the trades failed to escalate the matter in a timely fashion.
Hector Sants, FSA Managing Director for Wholesale Business said:
"The FSA has previously expressed a determination to act against institutional market misconduct and Deutsche's failure is an example of the type of conduct which the FSA will act against in its efforts to improve the overall quality of markets.
"The market rightly expects that firms involved in running book build transactions ensure that they observe proper standards of market conduct and act with due skill, care and diligence in their activities during these transactions.
"We expect firms, and their staff, to be aware of the issues that are inherent in all transactions, and to ensure that they take steps to manage those appropriately. This is fundamental to maintaining efficient, orderly and clean markets."
Scania Transaction
Scania B shares are listed on Sweden's Stockholmbörsen, which is not a prescribed market. On 4 March 2004, Deutsche agreed to purchase 63.7 million Scania B shares for £1.1 billion from Volvo AB and to dispose of them through an accelerated book build. Potential investors were guided to the likely allocation price of the book build by setting a marketing range for the book build shares. While Deutsche was conducting the book build, Scania B shares were being traded on the open market.
During the course of the morning the share price dropped to below the marketing range and Mr Maslen instructed a Deutsche trader to commence buying shares in Scania on the open market. This was undertaken using two external Swedish brokers.
The trading by Deutsche at times represented 90% of trading in Scania B shares and contributed to the Scania price moving to within the book build marketing range. The manner in which Deutsche traded the shares meant that it was not transparent to the market and that potential investors were unable to obtain a full understanding as to the supply, demand and price of the shares independent of Deutsche. The trading in Scania B shares was also in breach of Deutsche's own internal restrictions.
During the book build information was provided to potential investors by Deutsche's Equity Sales team. This sales force was updated using a messaging system internal to Deutsche. This information was incomplete or inaccurate in relation to the level of demand in the book. Furthermore, on the 5 March 2004 certain customers were notified of Deutsche's holding in Scania B shares by Deutsche's sales force before it made an announcement to the Stockholmbörsen.
Cytos Transaction
Deutsche offered shares in Cytos Biotechnology AG (Cytos) on 25 March 2004, which were stabilised on the SWX exchange. Deutsche failed to ensure that the Zurich trader conducting the stabilisation trades understood and followed its internal procedures. The supervising London staff, although aware of the trading, failed to escalate the matter to the proper level.
This case was settled under the procedures introduced following the Enforcement Process Review. In reaching its decision, the FSA has taken into account Deutsche's conduct in relation to this matter which included reporting the matter to the FSA; taking disciplinary action against individuals; undertaking an internal review of its systems; and introducing new senior management in the area. It has also taken into account the disciplinary action Mr Maslen has been subject to in determining the level of his penalty.
Background
- The full text of the Final Notices issued by the FSA, which includes the background to the case, the relevant statutory provisions, regulatory requirements contravened, examples of contravening publications, and the factors taken into account when setting the level of the fine may be found below.
Final Notice: Deutsche Bank AG [PDF]
Final Notice: David John Maslen [PDF] - Deutsche penalty comprised of:
- £3.5m in respect of the Principle breaches relating to the Scania transaction;
- £2,363,643 in respect of the loss it avoided through its actions in the Scania transaction and;
- £500,000 in relation to Cytos transaction.
- For information on the FSA's thinking in relation to the level of fines in market misconduct cases and its attitude to regulated firms and how they deal with misconduct themselves please see Margaret Cole's speech "Enforcement priorities and issues for 2006".
- Financial penalties are not treated as income by the FSA. They are applied for the benefit of authorised persons (or the issuers of securities admitted to the official list) as appropriate, and so given back to the industry in subsequent years.
- FSA Principle 2 states:
"A firm must conduct its business with due skill, care and diligence." - FSA Principle 5 states:
"A firm must observe proper standards of market conduct." - Neither the Stockholmbörsen nor SWX were prescribed markets for the purposes of the Code of Market 'Conduct in force at the time of the transactions.'
- The following definitions may prove useful for readers:
Book building – A book build is way an investment bank may try to sell a large parcel of shares to several investors at one time. The Bank will typically approach a number of potential investors and see if they are interested in purchasing some stock. Although the price won't be set at that time, an indication will be given (this is called the "marketing range"). If the client is interested, their interest will be recorded in a "book", together with any restrictions they may place – such as the maximum price they would be willing to pay.
Stabilisation – Stabilisation trades involve the purchase of shares, typically by a lead manager immediately after an offering, with a view to supporting the price. Stabilisation is price manipulation and the circumstances in which it is conducted are closely regulated e.g. by FSA's Price Stabilising Rules (MAR2).
In order to facilitate subsequent purchases to support the price a lead manger may overallot shares. The lead manger will typically have in place an arrangement with the issuer whereby the issuer will issue further shares to the lead manager at the issue price, to cover such an overallotment. This is known as a "greenshoe option". A lead manger may sell securities that he has acquired via stabilisation to re-establish a short position and thus facilitate further purchases. This is known as "refreshing the greenshoe". - The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
- The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness