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Deutsche Bank May Punish Staff for Personal Trade With Firm

Updated on
  • Bank: ‘transaction may have involved unacceptable conflicts’
  • Auditors estimate staff gained about $37 million, person says

Deutsche Bank AG halted bonus payments to a group of employees while examining whether they improperly traded with the firm.

“We are reviewing a transaction that may have involved unacceptable conflicts of interest,” the Frankfurt-based company said in an e-mailed statement, without identifying past or present staff involved. “We will take disciplinary measures where appropriate and review further our controls to minimize the chance of a re-occurrence.”

Deutsche Bank is reviewing a 2009 deal that sought to profit from differences in prices of credit indexes and the underlying debts that compose them, according to a person with knowledge of the situation. Six employees participated with personal investments alongside a hedge fund, the person said, asking not to be identified because the review is confidential. Colin Fan, co-head of the investment banking and trading unit when he left the firm last year, may stand to reap $9 million on a roughly $1 million investment, another person said.

A spokesman for Fan said he had “fulfilled all appropriate compliance procedures, been entirely transparent at all times and denied any wrongdoing.” Fan didn’t return calls and a message left by Bloomberg on his mobile phone.

Deutsche Bank Chief Executive Officer John Cryan, who succeeded Anshu Jain in July, is seeking to restore confidence in the bank’s management and staff conduct after legal bills cost the lender more than $9 billion since the financial crisis. Unresolved probes and claims have compounded investor concerns that the lender will be forced to sell stock should further fines erode capital.

‘Stop Misbehavior’

“For the last three or four years, on a regular basis, there’s been misbehavior at Deutsche Bank,” said Dieter Hein, an analyst at Fairesearch-Alphavalue. “Deutsche Bank obviously needs a cultural change to fulfill their focus, to stop misbehavior and all these litigation charges that have burdened the bank over the past few years.”

Internal auditors estimate the current and former employees made about $37 million on the transactions, with John Pipilis, the current co-head of credit , and Andre Muschallik, a senior salesman, also investing in the deal, one person said.

Muschallik didn’t answer a call to his mobile phone and didn’t immediately respond to an e-mail seeking comment, while Pipilis didn’t return a message left on his mobile phone.

Henry Ritchotte, operating chief of trading at the time, had granted permission for the transaction, contingent on the bank marketing the offering to clients and earning a fair share of profits, one person said. The Wall Street Journal on Thursday reported that people close to the matter disagreed over whether outside clients showed interest.

Ritchotte, who stepped down from the board last year and is setting up a digital bank for the lender, didn’t immediately respond to an e-mailed request for comment.

Auditors haven’t determined whether Deutsche Bank lost money once related transactions are considered, the Journal cited an unidentified person briefed on the matter as saying. But excluding such ancillary revenue, a preliminary assessment shows the deal may have cost the firm more than $60 million, the publication said.

To tap outside capital, the transaction featured a special-purpose vehicle that sold senior and junior notes, the person said. Senior notes went to an insurer, which received a fixed return for taking on credit risk. Junior notes went to a hedge fund and the Deutsche Bank workers, a person said. The junior group got a fixed return, as well as the opportunity to benefit from various fees and trading in price differences in the credit market, a person said.

The bank’s investigation also examines the original rationale and approval process for the transaction, as well as how the deal was supervised, the person said.

The bank has notified European and U.S. regulators, according to the Journal.

Bafin is aware of the audit and the European Central Bank, the chief supervisor for region’s banks, could also review the matter, according to a person familiar with the case.

“Based on our findings to date, we believe that no client was disadvantaged by this transaction,” Deutsche Bank said in a statement. “In accordance with our usual practice, we have suspended the payment of variable and deferred compensation to certain individuals pending the outcome of our ongoing review.”

— With assistance by Nicholas Comfort

(Updates with details of investors starting in seventh paragraph.)
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