The US Federal Deposit Insurance Corporation and the Securities and Exchange Commission have begun a review of DDS, a bank-controlled DAS, after it was accused of paying millions of dollars to a company that bought shares in its rival, the DAS subsidiary, on behalf of a competitor.
The US Justice Department on Tuesday filed a civil lawsuit against DDS on behalf and against the SEC and the Federal Deposit Association, accusing the bank of defrauding customers by failing to disclose that the DDS subsidiary owned shares in DAS.
“The banks must stop acting as an investment bank, or a ‘dollars for dollars’ investment bank,” said Benjamin J. Lawsky, acting assistant attorney general in charge of the securities division, in a statement.
The complaint alleges that DDS failed to disclose in its 2016 annual report that it owned a significant number of DAS shares, and also failed to file disclosure reports that disclosed the DASH subsidiary had purchased these shares.
The bank is accused of offering DASH shares to investors as part of a “dollar for dollars” investment.
The SEC and FDCAC allege that DAS used DASH funds to buy DAS stock.
In addition to the securities suit, the US Department of Justice also filed a criminal complaint against DAS and DDS in the US District Court for the Eastern District of New York.
It alleges that the bank engaged in “possible insider trading by engaging in sales and other transactions with DASH, a subsidiary of DRS [the subsidiary of the bank that owns DDS],” the US DOJ said in a release.
The company, which has since been sold, has denied wrongdoing.
“We remain committed to the principle that all financial institutions must be transparent about the risks and opportunities of investment, and we believe the law should also require that these risks and options should be disclosed to investors,” a spokesperson for DDS said in response to the DOJ’s complaint.
In February, DRS reported its third-quarter profit fell short of analysts’ expectations, citing a rise in customer inquiries as a result of the government investigation.
The agency has said that its bank-issued securities portfolio had a total of $1.9 billion as of the end of September.DRS had $2.2 billion of assets under management at the end-September.
The bank said it planned to invest in “new assets, strategic initiatives and the development of a strategic investment fund.”DRS did not immediately respond to a request for comment.
The lawsuit comes at a time when Wall Street is struggling to recover from the collapse of the housing bubble, and investors are increasingly wary of the investments made by Wall Street banks.
In October, the Federal Reserve said it was considering raising rates by up to 2 percentage points from the current rate of 0.25 percent.
The Fed has already signaled that it is looking to take more aggressive steps to rein in the banks.
The agency last month increased its benchmark lending rate to 0.75 percent.
Investors are also worried about the impact of the SEC’s ongoing investigation into the bank.
On Wednesday, a key shareholder of DFS, the parent company of DASH Corp., announced he will sue the bank in the next few weeks to recover $4.5 million he invested in the bank during the 2016 campaign.
The Federal Deposit Board is also looking into the matter.
The SEC and Federal Deposit Administration declined to comment on the civil complaint.