Deutsche Bank Silver Rigging Proof Engulfs New Defendants

Legal battles for the major global banks continue to haunt them. A class action lawsuit has been initiated, engulfing five new major banks, of conspiring to rig silver prices. The new defendants are being sought after, based on the documents unveiled by Deutsche Bank AG (DE:DBKGn) (NYSE:DB) , as part of the accord to provide “smoking gun” proof that UBS Group AG (NYSE:UBS) , HSBC Holdings (LON:HSBA) plc (NYSE:HSBC) , The Bank of Nova Scotia (TO:BNS) and other firms rigged the silver market.

The allegation came in a Manhattan federal court lawsuit filed in 2014 by individuals and entities that bought or sold futures contracts. Per this lawsuit, plaintiffs had alleged that beginning 1999, banks had manipulated prices through secret meetings. The judge, in her ruling, stated that investors satisfactorily, "albeit barely," alleged that banks violated the U.S. antitrust law by conspiring opportunistically to lower the Silver Fix from Jan 2007 to Dec 2013.

According to the plaintiffs, records disclosed by Deutsche Bank captured traders and submitters coordinating trades in advance of a daily phone call, manipulating the spot market for silver, conspiring to fix the spread on silver offered to customers, and using illegal strategies to rig prices.

The evidence was provided by Deutsche bank, after it reached a $38-million settlement agreement regarding this case in Oct 2016. The plaintiffs claim that the latest evidence is critical as it provides more than 350,000 pages of documents and 75 audio tapes, along with electronic chats that show the new defendants’ involvement in collusive price manipulation.

As a result, the lawyers for investors are seeking to revive the previously dismissed claims against UBS Group and file a new complaint with the additional allegations against Barclays (LON:BARC) Plc, BNP Paribas (PA:BNPP) SA, Standard Chartered (LON:STAN) Plc and Bank of America Corporation (NYSE:BAC). This will broaden the case beyond the four banks initially sued.

Notably, in Oct 2016, the U.S. District Judge – Valerie Caproni – dismissed the case against UBS Group on grounds of lack of material evidences, showing that it manipulated prices, even if the bank gained from the distortions. Nonetheless, she allowed the plaintiffs to file a new complaint against the bank.

Conversely, the plaintiffs argue that the disclosed proof highlights UBS Group as the major participant in the price rigging, as two of its traders communicated directly with two traders of Deutsche Bank. In addition, the plaintiffs allege that since UBS group was the third largest market maker in the silver spot market, its involvement with the other similar large players made it more powerful to influence the silver commodity market.

Bottom Line

Banks’ physical commodity businesses have already been under scrutiny for quite a long time. Several banks have been penalized for manipulating financial benchmarks and foreign exchange markets.

Consequently, several banks are moving away from physical commodity businesses owing to heightened regulatory attention and lower profitability. At present, companies, which still conduct physical commodity businesses, are required to adopt automation in a bid to improve transparency and prevent manipulation.

Deutsche bank’s shares declined nearly 21% on the NYSE year to date, underperforming the 8.1% growth for the Zacks categorized Foreign Banks industry. This reflects investors' concern amid a challenging operating environment, with low sometimes even negative rate scenario, and global economic slowdown. Recently, the German lender agreed to settle charges of manipulating gold prices by paying $60 million. Further, the bank also confirmed the proposed $14-billion settlement by the U.S. Department of Justice, tied with mortgage practices.

Investors are likely to remain apprehensive about the stock’s performance due to such frequent legal hassles and also the consequent costs to settle the charges that may weigh heavily on the company’s financials, going forward.

Deutsche Bank currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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