LBBW Managers Tried on Subprime ABS Accounting Charges

Germany’s third criminal case over failed investments at bailed-out state lenders started today in Stuttgart as current and former managers of Landesbank Baden-Wuerttemberg went on trial.

Seven serving or former management board members and two external auditors from PricewaterhouseCoopers LLP face charges that subprime risks were hidden from the lender’s 2005 and 2006 accounts. The Stuttgart-based bank invested in asset-backed securities through off-balance-sheet vehicles that should have been accounted for, prosecutors said.

The board members “purposely veiled that LBBW in fact controlled the special-purpose vehicles, which had assets and liabilities of more than 6 billion euros ($8 billion),” prosecutors said in the indictment.

Government bailouts of banks that lost money on risky investments during the financial crisis have prompted criminal investigations across Germany. Former executives of HSH Nordbank, a Hamburg-based lender, are being tried over a collateralized-debt obligation transaction. Another trial started in Munich last week against seven former Bayerische Landesbank executives over a deal that led to 3.7 billion euros of losses.

LBBW’s owners, which include the state of Baden-Wuerttemberg, the city of Stuttgart and regional savings banks, injected 5 billion euros of capital and provided a 12 billion-euro lifeline after the lender reported a loss of 2.1 billion euros in 2008 due to writedowns on the value of securities and credit derivatives.

No Requirement

Only one of the suspects, Michael Horn, is still a member of the lender’s management board. LBBW, Germany’s biggest state-run lender, said in November that Horn would be released of his duties until further notice. The defendants also include LBBW’s former chief executive officer, Siegfried Jaschinski, and former management board member Hans-Joachim Strueder.

The management board members deny the allegations, their lawyers said in a joint statement today sent by one of the attorneys, Thomas Knierim.

There was no requirement to include the investments on the balance sheet under accounting rules at the time, the lawyers said. LBBW had as much as 430 billion euros on its balance sheet, so 6 billion euros wasn’t material, they said.

‘Widely Used’

“These vehicles were widely used by banks and the financial regulator knew about it,” they said. “The complete portfolio of these securities, until today, didn’t display any reporting-relevant risks, showing the high validity of the investments even at the height if the financial crisis.”

LBBW’s headquarters and 10 homes were raided in 2009 in the criminal probe. Prosecutors dropped part of the case, into allegations the managers violated their duties by approving some of the ABS transactions, in 2012 and indicted the men for accounting violations.

The auditors were charged for signing off on the lender’s accounts. LBBW was audited by PwC in 2005 and 2006.

The allegations are unfounded in fact and law, Oliver Heieck, a spokesman for the accounting firm, said in a statement.

Christian Potthoff, a spokesman for LBBW, declined to comment because the lender isn’t a party in the case.

The case is: LG Stuttgart, 14 KLs 151 Js 97163/08.

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