Eric Ben-Artzi, a former quantitative risk analyst for Deutsche Bank AG, alleged that Europe's biggest lender engaged in a multibillion-dollar securities violation. Deutsche Bank denied the allegation.
Ben-Artzi, who is suing the company for wrongful dismissal, told the U.S. Securities and Exchange Commission that from 2007 to 2010 the bank misrepresented the value of a portfolio with a notional value of as much as $130 billion, Labaton Sucharow LLP, the New York-based law firm representing Ben-Artzi, said on its website yesterday.
"The valuations and financial reporting were proper, and a significant portion of these positions were subsequently unwound in an orderly sale," Renee Calabro, a spokeswoman for Deutsche Bank in New York, said in a statement. The claims were false, and the bank will continue to cooperate with the SEC's investigation, she said.
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Deutsche Bank may have lost $12 billion from the collateralized insurance agreements, known as leveraged super senior (LSS) credit derivatives, should they have been valued properly, the Financial Times reported earlier. It cited estimates derived from comments by three former employees who testified to the SEC, including Ben-Artzi. Formerly of Goldman Sachs Group Inc, he joined the bank in 2010, the FT said.
John Nester, an SEC spokesman, declined to comment on the investigation, as did Ben Fischer, a spokesman for German financial markets regulator BaFin.
Deutsche Bank dropped as much as 2.2 percent in Frankfurt. The share fell 0.8 percent to 34.7 euros at 1:20 p.m., valuing the firm at 32.2 billion euros ($42 billion). The 28-company Euro Stoxx Bank Index rose 0.2 percent.
Deutsche Bank failed to properly value a "gap option component" in the LSS portfolio between mid-2007 and 2010, Ben-Artzi said. The lender would have "substantially missed" earnings estimates even if it used conservative assumptions to properly value the instruments, according to the law firm.
"Deutsche Bank was the largest holder of LSS trades in the marketplace and by not correctly valuing it the bank was able to maintain its carefully crafted public image that it was weathering the financial crisis better than its peers," the law firm said.
Deutsche Bank has navigated the financial crisis sparked by the 2007 meltdown of the U.S. housing market without direct state aid.
Ben-Artzi, who has a doctorate in mathematics from New York University, sought to resolve his concerns internally before seeking legal representation and reporting the possible violations to the SEC whistle-blower program, Labaton Sucharow said. He "was subject to severe hostility, denied access to records" and was fired in November 2011 despite favorable performance reviews, it said.
'Wholly Unfounded'
"The allegations of financial misstatements, which are more than 2 1/2 years-old and were publicly reported in June 2011, have been the subject of a careful and thorough investigation, and they are wholly unfounded," Calabro, the Deutsche Bank spokeswoman, said. "Moreover, the investigation revealed that these allegations stem from people without personal knowledge of, or responsibility for, key facts and information."
In June 2011, Reuters news wire reported that a whistleblower action had been filed against Deutsche Bank for improper valuation of the derivatives. The SEC opened an inquiry, and Deutsche Bank settled the case with trader Matthew Simpson in January of that year, it said.
Deutsche Bank wound down and allowed its high-risk credit portfolio to mature at an "insignificant" cost, it said in a presentation posted on its website in June last year. The portfolio was reduced to 39 percent of its 2009 level in May last year and will amount to zero in 2018, the bank said.
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