Deutsche Bank staff may be punished for personal trade

Auditors estimate staff gained about $37 million

David Scheer
Friday 20 May 2016 14:47
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Bank: ‘transaction may have involved unacceptable conflicts’
Bank: ‘transaction may have involved unacceptable conflicts’

Deutsche Bank 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.”

The internal review focuses on Deutsche Bank’s efforts in 2009 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 in their personal accounts alongside an external hedge fund, the person said, asking not to be identified because the review is confidential.

The bank began scrutinizing the trading last year after it was flagged amid a broad push to reduce leverage, the person said.

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 $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.

“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.”

Employee Profit

Internal auditors estimate the current and former employees made about $37 million on the transactions, the Wall Street Journal wrote in a report late Thursday.

Colin Fan, co-head of the investment banking and trading unit when he left last year, may stand to reap $9 million on a roughly $1 million investment, according to the newspaper.

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 on his mobile phone by Bloomberg.

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, the 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, the 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.

A senior Deutsche Bank official in 2009 had granted permission for the trading, contingent on the bank marketing the offering to clients and earning a fair share of profits, the Journal said. People close to the matter disagreed over whether outside clients showed interest, it said. The bank has notified European and U.S. regulators, according to the newspaper.

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.”

© 2016 Bloomberg L.P

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