Dissenting Statement in the Matter of Deutsche Bank AG, Regarding WKSI

I respectfully dissent from the Commission’s Order (“Order”), approved on May 1, 2015, by a majority of the Commission.[1] The Order grants Deutsche Bank AG a waiver from ineligible issuer status triggered by a criminal conviction of its subsidiary, DB Group Services (UK) Ltd. (collectively with Deutsche Bank AG, “Deutsche Bank”), for manipulating the London Interbank Offered Rate (“LIBOR”), a global financial benchmark.[2] This waiver will allow Deutsche Bank to maintain its well-known seasoned issuer (“WKSI”) status, which would have been automatically revoked as a result of its criminal misconduct absent a Commission waiver.

Created by the Commission as part of the Securities Offering Reforms of 2005, WKSI status is available “for the most widely followed issuers representing the most significant amount of capital raised and traded in the United States.”[3] This status confers on the largest companies certain advantages over smaller companies. WKSIs are granted nearly instant access to investors through the capital markets. WKSIs enjoy greater flexibility in their public communications and a streamlined registration process with less oversight than smaller businesses. For example, unlike smaller businesses, the WKSI issuer does not have to wait for the Division of Corporation Finance to review and declare a registration statement effective prior to selling financial products to investors.[4] WKSI companies also enjoy a number of other privileges related to the payment of fees.

With these WKSI advantages comes a modicum of responsibility. WKSIs must meet the very low hurdle of not being ineligible. This means that, among other things, they have not been convicted of certain felonies or misdemeanors within the past three years.[5] In granting this waiver, the Commission continues to erode even this lowest of hurdles for large companies, while small and mid-sized businesses appear to face different treatment.[6]

Deutsche Bank’s illegal conduct involved nearly a decade of lying, cheating, and stealing. This criminal conduct was pervasive and widespread, involving dozens of employees from Deutsche Bank offices including New York, Frankfurt, Tokyo, and London. Deutsche Bank’s traders engaged in a brazen scheme to defraud Deutsche Bank’s counterparties and the worldwide financial marketplace by secretly manipulating LIBOR.[7] The conduct is appalling. It was a complete criminal fraud upon the worldwide marketplace.

Prior Commissions sensibly did not grant WKSI waivers for criminal misconduct. At least, that was the practice until September 19, 2013, when Commission staff granted a waiver to a large institution that pleaded guilty to criminal fraud.[8] This Commission granted another waiver on April 25, 2014, to another large institution that had also been criminally convicted of manipulating LIBOR.[9] A majority of this Commission, with this current action, continues the trend by granting its third waiver for criminal conduct at a large institution in a little less than two years. It is safe to assume that these waiver requests will continue to roll in, as issuers are now emboldened by an unofficial Commission policy to overlook widespread and serious criminal conduct — and ensure that the largest companies retain their array of advantages in our capital markets.

It is unclear to me how this waiver can be granted, for reasons substantially similar to those I outlined in my dissent regarding another institution involved in LIBOR manipulation.[10] Among other factors, the egregious criminal nature of the conduct and the duration of the manipulation (almost a decade) weigh heavily in my mind when considering this waiver. Additionally, Deutsche Bank is a recidivist, and its past conduct undermines its current promise of future good conduct. Since 2004, Deutsche Bank has, among other violations, a criminal admission of wrongdoing connected to promoting tax shelters,[11] a settlement involving misleading investors about auction rate securities,[12] and a violation against its investment bank for improperly asserting influence over research analysts.[13] Deutsche Bank requested and was previously granted a WKSI waiver in 2007 and 2009.

This criminal scheme involving LIBOR manipulation was designed to inflate profits, and it was effective. It created the impression that Deutsche Bank was more creditworthy and profitable than it actually was. Accordingly, the conduct affected its financial results and disclosures. Because LIBOR plays such an important role in the worldwide economy, manipulation of it goes to the heart of many aspects of Deutsche Bank’s disclosures. Interest rates represented to clients and the public also were clearly false. Based on this conduct, I do not find any basis to support the assertion that Deutsche Bank’s culture of compliance is dependable, or that its future disclosures will be accurate and reliable.

Finally, Deutsche Bank has not shown good cause for receiving a waiver from automatic disqualification, in this, its third WKSI waiver request in eight years. I am unable to conclude that Deutsche Bank’s culture of compliance and the reliability and accuracy of its future disclosures establishes good cause for a waiver. As the U.S. Commodity Futures Trading Commission’s (“CFTC”) Director of Enforcement noted: “Deutsche Bank’s culture allowed such egregious and pervasive misconduct to thrive.”[14]

For all of these reasons, I cannot support the Commission’s latest waiver.

In addition, the Commission adopted rules disqualifying felons and other “Bad Actors” from Rule 506[15] offerings on July 10, 2013.[16] Based on the criminal conduct in this case, I expected to receive a request from Deutsche Bank AG for a waiver from the automatic disqualification contained in Rule 506.[17] After all, the final CFTC order was “based on a violation of any law that prohibits fraudulent, manipulative, or deceptive conduct.”[18] It should therefore trigger an automatic disqualification absent a waiver.

However, based on a loophole contained in Rule 506(d)(2)(iii), the CFTC has intervened and prevented the bad actor disqualification question from even coming before the Securities and Exchange Commission. The CFTC saw fit to opine on the SEC’s Rule 506 jurisprudence about whether Deutsche Bank AG should receive a waiver from automatic disqualification under SEC rules. It is unclear to me what, if any, analysis went into this decision and what prompted the CFTC to insert language into its final order stating that a bad actor disqualification “should not arise as a consequence of this Order.”[19] The implications of the CFTC’s actions here — and in other actions[20] — are deeply troubling. The Commission should closely review this provision and how it is being used.