New York state attorney general Eliot Spitzer announced a settlement with Deutsche Bank AG today, resolving allegations that the company’s asset management division permitted excessive market timing in its mutual funds, and that its broker dealer division facilitated deceptive market timing and a form of late trading by a client.

Under the terms of the settlement, the bank will pay over US$102 million in restitution and disgorgement to injured investors, and US$20 million in civil penalties. In addition, the firm has agreed to make US$86 million in reduction of fees charged to investors over a five-year period. Today’s agreement was reached in cooperation with the Securities and Exchange Commission.

The bank has also agreed to significant corrective measures and business practice reforms designed to create greater board and advisor accountability to prevent the kinds of abuses that gave rise to these investigations, including: a requirement that its funds’ boards will have an independent chairperson and that at least 75% of the board is independent; a requirement for disclosure to investors of expenses and fees; and, a requirement to hire a full-time senior officer to ensure that fees charged by the funds will be negotiated at arm’s length and will be reasonable.

The AG said that market timing activity within the DB family of mutual funds included improper trading at the Scudder and Kemper families of mutual funds. The investigation by the state and federal regulators revealed that DB entered into a series of arrangements with preferred investors that permitted them to engage in improper, frequent short-term trading. This trading diluted the returns of the funds’ long-term shareholders. The arrangements were not disclosed either to those investors or to the funds’ Board of Trustees.

The agreed-upon trading contradicted language in the prospectuses sent to investors, which said that “you should not consider investing in [the fund] if you’re pursuing a short-term financial goal, and purchases and sales should be made for long-term investment purposes only.”

This agreement is the 21st settlement since the attorney general’s office began a probe of improper mutual fund trading in July 2003. To date, these settlements have resulted in more than US$3.9 billion in restitution for investors.