German financial watchdog Bafin in cooperation with the Bundesbank is probing allegations of former Deutsche Bank AG (DBK) employees that the firm hid losses during the financial crisis, three people familiar with the matter said.
Bafin, which is heading the probe, enlisted the help of the Bundesbank and employees of the central bank will travel to New York to interview witnesses, according to two of the people, who asked not to be identified because the matter isn’t public. The inquiry is at an early stage, one of the people said.
A former risk analyst for the lender accused Deutsche Bank last year of masking paper losses and questioned the strength of the firm, which navigated the global financial crisis without direct state aid. The Bafin probe adds to investigations and litigation Deutsche Bank and its peers face after alleged wrongdoing by their bankers before and after the 2008 collapse of Lehman Brothers Holdings Inc.
The claims “have been the subject of a careful and thorough investigation, and they are wholly unfounded,” Frankfurt-based Deutsche Bank said in an e-mailed statement today. “We have and will continue to cooperate fully with our regulators on this matter.”
Deutsche Bank rose 0.1 percent to 30.81 euros at 3:50 p.m. in Frankfurt. The shares are down 6.4 percent this year, giving the company a market value of 28.7 billion euros ($36.8 billion).
Bafin is also cooperating with the U.S. Securities and Exchange Commission on the matter, one of the people said.
The former analyst, Eric Ben-Artzi, joined the bank in 2010 and is now suing Deutsche Bank for wrongful dismissal after he lost his job in 2011, according to a statement last December from Labaton Sucharow LLP, his New York-based law firm. Ben- Artzi alleges that from 2007 to 2010 Deutsche Bank misrepresented a portfolio with a notional value of as much as $130 billion, Labaton Sucharow said.
Ben-Artzi is among the people Bundesbank investigators are seeking to interview, according to one of the people.
The portfolio of collateralized insurance agreements, known as leveraged super senior credit derivatives, was held in Deutsche Bank’s so-called correlation book and protected against the risk of corporate defaults.
“The probe looks to be a formal process the regulator has to undertake,” said Christian Hamann, a Hamburg-based analyst with Hamburger Sparkasse who recommends investors sell the stock. “The impact on the stock is minimal as investors already place their own discount on bank shares based on the volume of such hard-to-value assets that they hold.”
Deutsche Bank reduced the notional value of the correlation book to 60 billion euros at the end of September from 200 billion euros at the end of 2009, according to slides published on its website in December. The portfolio “substantially rolls off within three years” and generated “no material losses,” the company said at the time.
Deutsche Bank hired law firm Fried Frank Harris Shriver & Jacobson LLP in March 2010 to conduct an internal probe after a trader alleged the lender masked losses, Chief Financial Officer Stefan Krause, 50, told analysts and investors on a conference call in December. The bank reported the claims to the SEC, the CFO said. The SEC hasn’t brought an enforcement action.
The world’s biggest banks are facing a series of regulatory probes and lawsuits linked to the alleged manipulation of benchmark interest rates as well as the mis-selling of products such as interest-rate derivatives.
Deutsche Bank increased its reserves for legal costs by 33 percent to 2.4 billion euros last month, lowering 2012 profit after tax by about 400 million euros to 291 million euros.
Standard & Poor’s said last month that it may cut Deutsche Bank’s credit rating because of the cost of legal risks as well as slower growth in Europe and tighter regulation.