The penalty on stock manipulation for Deutsche Bank brokerage unit soon will be removed

In February South Korea's financial regulator suspended some operations of Deutsche Bank's brokerage unit due to violation of prohibition on stock market manipulation.

Deutsche Securities Korea (DSK), the country's securities unit of Deutsche Bank, is banned from partial business operations from April 1 to September 30, 2011, the Financial Services Commission ( FSC) announced.

The scope for suspensions over the next six months includes proprietary stock trading, exchange-traded derivatives transactions as a dealer and a ban on Direct Market Access (DMA) business as a broker in the Korea Exchange.

Back in Nov. 11 last year, the South Korea's key stock index plunged almost 3 percent in the last minutes of trading due to massive selling by the DSK.

Deutsche's local brokerage unit sold 2.4424 trillion won (2.2 billion U.S. dollars) worth of stocks in seven orders during the last ten minutes of trading on the KOSPI200 options expiring day.

Due to the massive sell orders, the KOSPI200 index tumbled 2.79 percent to 254.62 from 247.51.

According to the FSC, Deutsche's South Korean unit dumped a record amount of holdings at 4.5 to 10 percent lower prices than the immediately preceding price with the intention of gaining improper profits in derivatives trades.

Deutsche Bank earned 44.87 billion won (40.5 million dollars) from derivatives trading by constructing abnormal positions in advance through the combination of short synthetic futures and long put option positions, the FSC said.

WHY DEUTSCHE BANK WAS PENALIZED

The FSC ruled that Deutsche's South Korean unit distorted local stock markets by taking abnormal arbitrage positions to gain illegal profits in derivatives trading.

According to the FSC, Deutsche Bank's branches in Hong Kong and New York conspired in advance with the Seoul unit, before placing massive sell orders to manipulate market prices in the local stock markets.

Five Deutsche Bank employees concerned were found to have discussed and reported to each other on market manipulation, the FSC said.

The DSK, the window to execute the selling orders, breached stock exchange rules by filing a report on the selling one minute late on Nov. 11, according to the Korea Exchange.

THE PENALTY SOON WILL BE REMOVED

Some market watchers here harbored suspicion about whether the FSC's investigation was made thoroughly and transparently.

"Deutsche Bank earned only 40 million dollars in the derivatives trading after massive selling of local stocks worth more than 2 billion dollars at lower prices, in danger of being spotted by the financial regulator," an analyst at a local brokerage said by phone on condition of anonymity.

"I doubt that the FSC investigated into the trading accounts completely because Deutsche Bank's branches concerned would not risk such dangerous trading to earn a tiny 40 million dollars," he added.

"The penalties imposed by the FSC were too weak, relative to their misconducts of market manipulation," an unnamed fund manager at a local asset management firm told Xinhua.

"Assuming that Deutsche Bank intentionally distorted local stock markets like the FSC insisted, the suspension of some business operations for only six months could be too generous," he said.

Another analyst at a local brokerage said that Deutsche Bank's South Korean unit will not be damaged by the penalties because the brokerage focused on over-the-counter trading, not on the exchange- traded derivatives, ordered to be suspended for six months.

After Fang Yang, Xinhua