Deutsche Bank Says Four Employees, Securities Unit Indicted in South Korea

Four Deutsche Bank AG (DBK) employees and its South Korean brokerage face a trial over a one-day stock rout in November that wiped $27 billion in value from the Asian nation’s equity market.

The Seoul Central District Prosecutors’ Office decided to charge the German bank’s employees and Deutsche Securities Korea Co. on Aug. 19 for manipulating stock prices and making “unfair” profits, according to a statement posted on the prosecutors’ website today. The lender denied wrongdoing in an e-mailed statement yesterday.

“This shows prosecutors and regulators’ determination against unfair trading,” said Nam Gilnam, head of derivatives at Korea Capital Market Institute, a Seoul-based researcher. “Foreign investors might take a more cautious approach to the South Korean market after seeing how this case goes. It’s a blow to Deutsche Bank’s operations as well as to its reputation.”

The Financial Services Commission said in February that five of the Frankfurt-based lender’s employees conspired to manipulate the market, causing the Kospi Index to plunge in the last 10 minutes of trading on Nov. 11. Deutsche Bank was banned from trading shares and derivatives for its own account for six months from April 1, the heaviest penalty imposed on any securities company in Korea.

Better Cooperation

South Korean prosecutors said they will seek better cooperation with overseas regulators and judicial officials so they can hold foreigners responsible for stock market-related crimes, according to the statement. Prosecutors began their investigation at the request of the FSC in February.

“It’s regrettable that the Seoul Central District Prosecutors’ Office has decided to charge its local Korean brokerage unit, Deutsche Securities Korea,” the bank said in the statement. “DSK denies the charges, which will be defended. DSK did not authorize or condone any breach of market regulation.”

Deutsche Bank wasn’t indicted and its operations in South Korea aren’t affected, said the lender, which didn’t elaborate on the charges against its employees and broker unit.

The bank statement didn’t identify the four indicted employees. They are either suspended or on administrative leave and aren’t now involved in bank activities, according to yesterday’s statement.

Increased Scrutiny

The Kospi Index (KOSPI) dropped 2.7 percent on Nov. 11, prompting the regulators to limit the number of equity derivative contracts investors can hold. Scrutiny of equity-market swings has heightened globally since a 20-minute drop in U.S. equities in May 2010 briefly erased $862 billion of market value.

Five Deutsche Bank employees in Hong Kong, New York and South Korea conspired to manipulate the market by selling 2.44 trillion won worth of shares in the last minutes of trading on Nov. 11 to gain from “speculative” derivatives positions built in advance, South Korean financial regulators said on Feb. 23. The actions were intended to drive down the Kospi Index and gave Deutsche Bank 45 billion won of “unfair” profit, they said.

The German lender on June 13 appealed against a court order freezing some of its assets, Gong Do Il, a spokesman for the Seoul Central District Court, said on July 14. The bank said June 9 that a preservation order on some assets was granted by a court at the request of prosecutors and without Deutsche Bank’s arguments being heard.

Six-Month Ban

The six-month ban was the first business suspension of any foreign brokerage in South Korea since the Financial Supervisory Service was set up in 1999, according to FSS data. The supervisory service is a privately funded agency that enforces policies set by government regulator FSC.

Korea Exchange Inc., the nation’s bourse operator, on Feb. 25 fined Deutsche Bank’s local brokerage a record 1 billion won for violating exchange rules.

The government will take steps on any violation of rules to ensure the financial market is transparent and trustworthy, FSC Chairman Kim Seok Dong told reporters in February.

The Financial Supervisory Service started a new system to improve monitoring on unfair trading in the capital market so it can swiftly uncover and respond to any unfair activities, the regulator said last week in a statement on its website.

Under tightened rules on South Korean derivatives holdings, announced by the Financial Services Commission on Jan. 11, institutional investors are allowed a maximum 10,000 futures and options contracts in any “speculative” transaction, starting from March 7. Previously there were no limits on options, while institutions were limited to holding 7,500 futures contracts and individuals could hold 5,000.

Deutsche Securities Korea had 115 employees as of March 31 and posted a full-year profit of 27.1 billion won in the year ended March, according to the company’s filing to the FSS on June 29. The brokerage had revenue of 120 billion won in the previous year, with sales from suspended businesses accounting for about 9 percent of the total, the company said on March 9.

To contact the reporters on this story: Seonjin Cha in Seoul at scha2@bloomberg.net; Saeromi Shin in Seoul at sshin15@bloomberg.net

To contact the editors responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net; Darren Boey at dboey@bloomberg.net

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