Deutsche Bank To Pay $55M, Ending Derivatives Probe

Deutsche Bank has been fined $55 million by the US Securities and Exchange Commission (SEC) for misstating the value of a complex derivatives portfolio during the financial crisis.

According to the regulator, the banking giant neither admitted nor denied allegations of underestimating “a material risk for potential losses estimated to be in the billions of dollars.”

“Deutsche Bank failed to make reasonable judgments when valuing its positions and lacked robust internal controls over financial reporting,” said Andrew Ceresney, director of the SEC’s division of enforcement.

By incorrectly valuing its derivatives portfolio, the bank underestimated its risks by anywhere between $1.5 billion and $3.3 billion, the SEC said.

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“Deutsche Bank failed to make reasonable judgments when valuing its positions and lacked robust internal controls over financial reporting.” —SECIn a response to the SEC’s statements, Deutsche Bank said these risks “never materialized” and it never experienced any losses from the misrepresentations in the financial accounts.

Furthermore, it maintained that there was no “reliable method” for measuring risk in the portfolio following the collapse of Lehman Brothers.

Tuesday’s settlement is the latest in Deutsche Bank’s legal woes.

The bank was fined $2.5 billion last month to settle charges of manipulating interest rate benchmarks with regulators in the US and the UK. And according to the company’s 2014 annual report, it still faces fines related to foreign exchange and mortgage and asset-backed securities.

Deutsche Bank also suffered major shareholder criticism last week as UK fund manager Hermes called for an overhaul of the management board following large fines and falling profits.

“We urge the bank’s supervisory board to review the composition of the management board, taking its performance over the last three years and its new strategy into account,” Hermes said in a statement on May 20.

The firm voted against Deutsche Bank’s reshuffling plan, as a way to express “our lack of confidence in the management board.”

Hermes said the bank had wasted time and credibility by failing to recognize the need for “changes to [its] structure and business model required to sustainably create value in a changed regulatory environment.”

The firm also criticized Deutsche Bank’s recent settlement for LIBOR rigging and said the fine shone light onto the “severity of the misconduct” of the bank’s employees.

Goldman Sachs has hired the federal investigator responsible for the conviction of fraudster Bernie Madoff and inside-trader Raj Rajaratnam to its compliance team.

Patrick Carroll has joined the investment bank as a vice president in its compliance, surveillance, and strategy group, reporting to Alan Cohen, global head of compliance.

He spent nearly 25 years with the Federal Bureau of Investigation (FBI). In 2003, as supervisory special agent, Carroll oversaw “Operation Wooden Nickel”, sending an undercover agent to work in the foreign exchange markets and uncover “fraudulent activities” dating back 20 years. The investigation resulted in almost 50 arrests and at least 40 convictions, according to Bloomberg.

In December 2008, his team arrested Bernie Madoff after his $65 billion Ponzi scheme began to collapse. Last year, five former Madoff staffers were found guilty on 31 counts of fraud, while Madoff himself is serving a 150-year sentence.

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Carroll’s team also secured the conviction of Raj Rajaratnam, co-founder of hedge fund manager Galleon Group, for insider trading. He was found guilty of 14 counts of securities fraud and conspiracy in 2011 and is serving an 11-year sentence. This investigation was the first significant use of wiretaps in a securities fraud case, according to Bloomberg.

A spokesperson for Goldman Sachs declined to comment.