Deutsche Bank AG will pay $55 million to settle U.S. Securities and Exchange Commission claims that it misrepresented the value of derivatives during the financial crisis, materially misstating its accounts.
“Deutsche Bank’s financial statements did not reflect the significant risk in these large, complex illiquid positions,” Andrew Ceresney, director of the SEC’s Division of Enforcement said in a statement. “Deutsche Bank failed to make reasonable judgments when valuing its positions and lacked robust internal controls over financial reporting.”
The transactions came under scrutiny in 2012 after a former employee alleged Deutsche Bank had misrepresented the value of derivatives on a $130 billion portfolio to mask paper losses during the financial crisis, helping it avoid state aid. The company previously denied the allegations, which related to a group of collateralized insurance agreements that protected against the risk of corporate defaults.
Deutsche Bank, which didn’t admit or deny any charges in the settlement announced Tuesday, is fully reserved for the penalty.
Germany’s biggest lender said it has been exiting the positions at issue over the past several years and has reduced the notional value by almost 95 percent. The bank has also bolstered its internal controls over how it values illiquid assets, the company said in a statement.
The SEC said Deutsche Bank was not covered by collateral on the full market value of credit protection, but only on about 9 percent of the $98 billion of such positions. The bank steadily altered its methodologies for measuring the so-called gap risk on the positions and eventually stopped adjusting for the positions altogether, the SEC said.
That led to misstatements on its financial data for 2008 and the first quarter of 2009, the SEC said.
The bank failed U.S. stress tests this year and its capital plan for the U.S. unit was rejected over deficiencies across risk-identification and measurement.
Deutsche Bank still faces potential fines related to foreign exchange, mortgage- and asset-backed securities and precious metals dealings, and is also under investigation for alleged U.S. sanctions violations, according to the company’s 2014 annual report. Deutsche Bank last month was fined $2.5 billion for manipulating interest-rate benchmarks by four regulators in the U.S. and the U.K.
The settlement announced today “isn’t relevant for Deutsche Bank and it’s for a very old issue,” said Kilian Maier, an analyst at Mainfrist Schweiz AG in Zurich.