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Deutsche Bank fined for misstating value of derivatives

By on May 27, 2015

The Securities and Exchange Commission said on Tuesday that Deutsche Bank made material misstatements about a giant derivatives portfolio, inflating its value at the height of the finanical crisis.

Financial Times reported that the bank failed to account for a “material risk for potential losses estimated to be in the billions of dollars”, the SEC said.

An outside expert hired by the SEC said the positions were misstated by at least $1.5bn. Deutsche’s internal estimates put the gap at $1.5bn-$3.3bn, the SEC found.

“At the height of the financial crisis, Deutsche Bank’s financial statements did not reflect the significant risk in these large, complex illiquid positions,” said Andrew Ceresney, director of the SEC’s enforcement division. “Deutsche Bank failed to make reasonable judgments when valuing its positions and lacked robust internal controls over financial reporting.”
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Deutsche agreed to pay $55m to resolve the allegations. Deutsche said: “The SEC acknowledged the bank’s co-operation throughout the investigation, and did not bring any charges against individuals in this matter. The bank does not admit or deny the charges outlined in the order.”

The Financial Times reported in 2012 that three ex-Deutsche employees had independently approached the SEC, alleging that the bank had hid billions of dollars of losses.

All three former employees, Matthew Simpson, Eric Ben-Artzi and a third who has requested anonymity, alleged that if Deutsche had accounted properly for its positions, its capital would have fallen to dangerous levels during the financial crisis and it might have required a government bailout to survive. The highest estimate for the accounted loss was $12bn.

One of the ex-employees said on Tuesday that he was satisfied with the result, which has come five years after complaints were made to the securities regulator that Deutsche was not correctly accounting for mark-to-market losses. Another expressed disappointment at the size of the settlement.

 

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