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US Probe Spreads to Deutsche Bank

Subpoena issued for information on bank's trading practices

Nov 6, 2003 | Business Times Singapore

Germany's largest bank, has become the latest target of the widening US investigation into trading abuses in the mutual fund industry, a person familiar with the situation said on Tuesday.

Watch your step: Mr Spitzer's office also plans to bring charges against other companies and individuals in the coming weeks, sources say
New York attorney-general Eliot Spitzer is investigating whether Deutsche Bank's US arm helped investors make illegal after-market trades in mutual funds, the source said.

The probe could lead to either criminal or civil charges, but no immediate legal moves by Mr Spitzer's office are expected, the source said.

New York state has issued a subpoena asking for documentation about Deutsche Bank's trading practices, the source said.

Deutsche Bank, in a statement, said it is one of at least 88 mutual fund complexes and 34 broker-dealers to receive information requests from regulators about fund practices, and said it is cooperating fully with such requests.

'To our knowledge, no regulator has 'targeted' Deutsche Bank in these industry-wide inquiries,' it said.

Deutsche Bank, which has an asset management and brokerage unit, is suspected of having helped investors trade mutual funds after the market closed, the source said.

It is also being looked at for helping investors profit from rapid trades in and out of the funds, a practice known as market timing.

Meanwhile, Prudential Securities is being investigated by the NASD, parent of the American Stock Exchange, for issues revolving around the after-hours trading of mutual funds, The Wall Street Journal reported yesterday, citing people familiar with the matter.

The NASD is probing whether late trading occurred in the firm's Boston office, and whether Prudential Securities carried out the proper monitoring of mutual fund orders.

The report came after federal and Massachusetts regulators on Tuesday charged seven former Prudential Securities employees with defrauding mutual funds and making millions of dollars in improper trades, with the support of their superiors.

The civil charges, detailed in legal documents, were the first to be levied against brokers in a wide-ranging investigation into the US$7 trillion mutual fund industry.

Regulators said that between at least 2001 and September 2003 the former Prudential employees market-timed mutual funds, at times under false names. Market timing consists of rapidly trading in and out of funds to exploit pricing inefficiencies.

Mr Spitzer's office also plans to bring charges against other companies and individuals in the coming weeks, according to sources familiar with the situation.

As Reuters has reported in recent days, these could include Wisconsin mutual fund Strong Capital Management, its CEO Richard Strong, Phoenix-based retirement fund administrator Security Trust Co, its former CEO Grant Seeger, New York broker DC Capital LLC, and a DC Capital trader, Tariq Zahir.

The New York Times also said yesterday regulators are considering action against Alliance Capital Management for improper trading of mutual funds that may have been done with the knowledge of top officials.

The US Securities and Exchange Commission and Mr Spitzer are looking at rapid trading in and out of Alliance funds by a Las Vegas investor and by Edward Stern, a hedge fund manager who reached a settlement with Mr Spitzer in September, according to the report, which cited people briefed on the investigation.

And Putnam Investments, which has been in the eye of the mutual fund storm since regulators charged it with fraud last week, could see more haemorrhaging of assets.

The treasurer of California urged the state's two giant pension funds to pull their assets from Putnam Investments.

In the Prudential case, the alleged fraud was so rife that state authorities said the brokerage received 25,000 to 30,000 letters from clients in the past year warning Prudential about the improper trading

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