Massachusetts fines Deutsche Bank $17.5 million over CDO conflicts

BOSTON (Reuters) - Massachusetts on Wednesday fined Deutsche Bank AG $17.5 million, saying it deceived clients in creating and marketing $10 billion worth of collateralized debt obligations.

Secretary of the Commonwealth William Galvin said Deutsche Bank Securities Inc, a unit of Germany's largest bank Deutsche Bank, failed to fully disclose what was in the financial products or that hedge fund Magnetar Capital was betting their value would fall.

"We are pleased to have reached a settlement and to put this matter behind us," a spokesman for Deutsche Bank said.

Deutsche Bank Securities and Magnetar co-invested in at least six different CDOs with a value of $10 billion, Galvin's office said. Galvin's office specifically investigated Deutsche Bank Securities Inc's (DBSI's) role in a $1.56 billion CDO named Carina between December 2005 and November 2007.

A year ago, Galvin's office fined custody bank State Street Corp $5 million for its role in deceiving investors about the product. State Street was the collateral manager of Carina.

"Nowhere in the marketing materials for Carina was there any reference to the conflicts of interest with DBSI SSG (DBSI Special Situations Group) and Magnetar in the structuring, underwriting and marketing of Carina," Galvin's office said, noting that investors suffered "catastrophic losses" when ratings agencies downgraded the notes to junk status within a year after Carina was created.

Packaging collateralized debt obligations was very profitable at the height of the housing market boom; in 2006 some $520 billion of CDOs were issued. Deutsche ranked fourth in issuance in 2006 and 2007, behind Merrill Lynch, JP Morgan Chase & Co and Citigroup.

(Reporting by Svea Herbst-Bayliss; Editing by Gerald E. McCormick and Phil Berlowitz)