There's No Messing with Massachusetts Regulators.

[ by Melanie Gretchen ]

Deutsche Bank has agreed to settle accusations by the Commonwealth of Massachusetts that it deceived clients who investing in collateralized debt obligations (CDOs) that the German bank created and marketed.  Secretary of the Commonwealth William Galvin earlier fined custody bank State Street $5 million for its role in deceiving investors about the product. 

Findings and Allegations.   Deutsche Bank Securities ("DBSI"), a unit of Deutsche Bank, Germany's largest bank, and Magnetar Capital co-invested in at least 6 different CDOs with a value of $10 billion.  In his complaint, Mr. Galvin's office refers to DBSI's role in the $1.6 billion CDO, referred to as "Carina," between December 2005 and November 2007.

Deutsche allegedly failed to fully disclose the nature and risk of the assets underlying the CDO product, or the fact that hedge fund Magnetar Capital, which had a role in selecting the underlying portfolio, was betting their value would fall.  As a result, investors suffered "catastrophic losses" when ratings agencies downgraded the debt obligations to junk status within a year after Carina was launched.

"Nowhere in the marketing materials for Carina was there any reference to the conflicts of interest with DBSI SSG (DBSI Special Situations Group) and Magnetar in the structuring, underwriting and marketing of Carina." -- Mr. Galvin's office.

State Sanctions.   The bank agreed to a $17.5mn fine.

For further details, go to [Reuters, 3/13/13].