Deutsche Bank Examines Trades That May Have Cost It $60M

Deutsche Bank AG (DE:DBKGn) (NYSE:DB) is conducting an internal probe into certain trades commenced in 2009 that may have benefited a group of current and former employees with substantial profits, some of it at the bank’s expense. The news was first reported by The Wall Street Journal citing people familiar with the matter.

A spokesman for the German banking giant stated, “We are reviewing a transaction that may have involved unacceptable conflicts of interest when structured in 2009.”

Internal auditors suspects Colin Fan, the then global head of credit trading, among the employees that have profited from the trades. Fan, who had joined the bank in 1998, was the co-head of the investment bank wing of Deutsche Bank when he left the bank as part of management restructuring in October.

Fan has made $9 million on about a $1 million investment, per the estimates of the auditors. Overall, the auditors believe six current and former employees of Deutsche Bank have made about $37 million on the trades.

The internal investigation relates to trades, some which are to continue until next year, originated from a $750 million agreement with the French insurer AXA SA (PA:AXAF) in 2009. Through this deal, Deutsche Bank would arrange derivatives trades using AXA’s money. Deutsche Bank intended to seek profit through index arbitrage, a strategy that calls for betting on the pricing differences between credit indexes and the underlying debts that build them.

Fan’s team tapped a Monaco-based hedge fund – Greengate SAM – to transfer most of the risk part of the bank’s deal. However, the hedge fund did not make full investment, rather, Fan and five other employees invested some amount of money personally.

The internal auditors are looking into whether these employees established a structure that made Deutsche Bank pay higher share of profits and fees to them and the hedge fund. The auditors are also looking into the compliance review of the structure.

The ongoing probe by the auditors hasn’t determined whether the bank lost money related to the trades. However, per preliminary assessment by the auditors, the 2009 deal might have cost Deutsche Bank more than $60 million.

Deutsche Bank said in a statement, “Based on our findings to date, we believe that no client was disadvantaged by this transaction." The bank further added, “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.”

A spokesperson for Fan stated that he had “fulfilled all appropriate compliance procedures, been entirely transparent at all times, and denied any wrongdoing.”

Deutsche Bank notified the European and U.S. regulators regarding the trades. The senior management is expected to receive the final results from the internal auditors within the next few weeks.

Deutsche Bank currently carries a Zack Rank #5 (Strong Sell). Some favorably ranked stocks in the foreign banks space include Australia & New Zealand Banking Group Limited (OTC:ANZBY) , Canadian Imperial Bank of Commerce (TO:CM) and Shinhan Financial Group Company Limited (NYSE:SHG) , each sporting a Zacks Rank #1 (Strong Buy).