Deutsche Bank Faces Probe Over CDO Paulson Shorted

Jan 30 2012 | 2:05pm ET

Deutsche Bank is in hot water over allegedly allowing Paulson & Co. a hand in picking the mortgage-backed securities that went into a collateralized debt obligation.

The Securities and Exchange Commission is investigating the START CDO, the German magazine Der Speigel reports. The allegations are similar to those that Goldman Sachs paid $550 million to settle a year-and-a-half ago: that the bank allowed the hedge fund to pick the securities that went into the CDO and then failed to tell other investors that Paulson was shorting the CDO.

Deutsche Bank said it will investigate the possible SEC allegations and, if it disagrees with the regulator, will defend any enforcement action.

The SEC last year moved to put an end to the practice of hedge funds participating in CDO structuring, voting to approve new conflict of interest rules for asset-backed securities. The rule forbids banks from allowing third parties that had a hand in selecting the securities for an ABS to short the ABS.

The SEC investigated a number of CDO transactions on the Goldman-Paulson grounds, including several linked to Magnetar Capital. No hedge fund has been accused of any wrongdoing in the process.

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