The city of Pforzheim’s deal to buy swaps from JPMorgan Chase & Co. resulted in breach of trust charges against the German municipality’s former mayor and two ex-financial officers.
The three bought speculative swaps between 2006 and 2008 from JPMorgan in an effort to make up losses of about 20 million euros ($26.8 million) on derivatives transaction with Deutsche Bank AG, Peter Lintz, a spokesman for Mannheim prosecutors, said in an e-mailed statement today. Lintz didn’t identify the suspects.
“The city council and supervising authorities weren’t correctly informed” about the transaction, said Lintz. “The goal of the deals, the amount of losses and the risks were concealed.”
Pforzheim is among several European municipalities that lost millions of euros on derivative transactions that went sour. After Deutsche Bank, Germany’s biggest bank, lost a case over interest-rate swaps at the country’s highest civil court last year, cities and small companies have sought to recover their losses through lawsuits. The city of Pforzheim has sued JPMorgan in a Frankfurt court over the issue.
Buying the swaps violated laws barring municipalities from speculation, Lintz said. The city took a loss of more than 14 million euros, the sum it had to pay to JPMorgan to end the transactions, according to the statement.
Pforzheim bought the swap to mirror a derivative it had acquired from Deutsche Bank that accumulated 20 million euros of losses. Over time, that transaction turned positive, while the swap from JPMorgan incurred about 57 million euros of losses.
Five JPMorgan and Deutsche Bank employees are still being investigated for aiding the crime, Lintz said.
Interest-rate swaps are contracts that convert floating- rate debt into fixed-rate debt, or vice versa. They became unprofitable for many customers when rates fell to record lows after the 2008 financial crisis.
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