WKSI Waivers For A Recidivist – And a Dissent By Commissioner Stein

The question of waivers from certain disqualifications under the securities laws which are triggered automatically in certain instances — such as on the entry of a guilty plea — continues to be a controversial topic at the SEC. Earlier this year Commissioners Luis Aguilar and Kara Stein dissented from granting waivers to Oppenheimer & Co. from the “bad actor” provisions of the statutes (here). Commissioner Gallagher (here) and Chair White (here) have each delivered remarks addressing the application of the provisions, offering conflicting views.

Commissioner Stein again dissented from the granting of a waiver. In an order dated May 1, 2015 the Commission granted Deutsche Bank AG a waiver from being disqualified from the WKSI provisions based on the guilty plea of a subsidiary in the LIBOR scandal (here). The brief order provides that the bank subsidiary must comply with the terms of its guilty plea for the waiver to continue in effect. Those terms are not specified in the SEC order.

Commissioner Stein dissented (here). The WKSI, or well-known seasoned issuer provisions, created as part of the Securities Offering Reforms of 2005, apply to the most widely followed issuers who raise the most significant amounts of capital in the U.S. markets. The provisions give eligible issuers, advantages over other firms by affording them virtually instance access to the capital markets.

These privileges come with what Commissioner Stein called a “modicum of responsibility . . . the very low hurdle of not being ineligible.” To avoid being ineligible the issuer need only not have been convicted of, or plead guilty to, certain felonies or misdemeanors within the last three years. To obtain a waiver the issuer must show good cause.

Until recently the SEC did not grant WKSI waivers for criminal misconduct, according to Commissioner Stein. In September 2013 and then in April 2014, however, that changed. Waivers were granted to, respectively, UBS AG and RBS.

Deutsche Bank can now be added to the list of those who obtained waivers in the face of a criminal guilty plea despite the fact that it has failed to demonstrate good cause, according to Commissioner Stein. This failure is apparent in view of “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. The conduct is appalling. It was a complete criminal fraud upon the worldwide marketplace.”

The bank is also a recidivist. “Since 2004, Deutsche Bank has, among other violations, a criminal admission of wrongdoing connected to promoting tax shelters, a settlement involving misleading investors about auction rate securities, and a violation against its investment bank for improperly asserting influence over research analyst. Deutsche Bank requested and was granted a WKSI waiver in 2007 and 2009,” Commissioner Stein noted.

In view of Deutsche Bank’s conduct in connection with the LIBOR scandal, and its past violations, Commissioner Stein was “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 Commissioner’s (“CFTC”) Director of Enforcement noted: ‘Deutsche Bank’s culture allowed such egregious and pervasive misconduct to thrive.’” This is not a predicate for granting a waiver.

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