Deutsche Bank hit with £700m lawsuit in London by former executives
Four former Deutsche Bank executives have filed a £700m legal action in the High Court alleging the bank conspired to injure them by “unlawful means.”
The history of the claim stems from a decade-long saga that began with the Monte dei Paschi di Siena (MPS) scandal, which led to criminal convictions that have now been overturned in Italy.
The scandal centred on the world’s oldest bank, MPS, which used complex derivatives to hide massive losses, a scandal that rocked Italy after the bank had to ask for a near €4bn bailout.
In the case against Deutsche Bank, four former executives, Ivor Scott Dunbar, Michele Faissola, Marco Veroni, and Matteo Angelo Vaghi, are suing and seeking damages for alleged reputational harm and financial losses, which they estimate currently total over £700m.
According to allegations in a claim to the High Court, Deutsche Bank executed “enhanced repo” trades (Santorini) with MPS in 2008. By using a unique netting treatment for €3bn of Italian bonds, the bank is said to have omitted €11bn in loan exposure, artificially boosting its leverage ratio.
But under regulatory pressure in 2013, the claim states that Deutsche Bank eventually reclassified these transactions as derivatives.
The bank, according to the legal document as seen by CityAM, formally told regulators it had acquired “new knowledge” regarding bond sourcing that “forced” this reclassification. But the claimants allege this was a false justification intended to obscure Deutsche Bank’s alleged historical accounting errors.
The then-CFO, Stefan Krause, instructed Christian Sewing, then head of group audit and now CEO of Deutsche Bank, to investigate the trades.
The bank produced a report in April 2014 that was highly critical of the ‘deal team’ (the claimants), alleging they had failed to inform the bank about the bond sourcing. Deutsche Bank provided a summary of its internal audit findings to the Bank of Italy and the Italian Financial Police.
The Milan Prosecutor charged Dunbar, Faissola, Veroni, and Vaghi in February 2016 with aiding and abetting false accounting and market manipulation, and a court in 2019 convicted all four, each facing a prison sentence of 3 to 4 years.
But following “new documents” produced by the bank, their convictions were overturned in 2022.
Allegation set out in a lengthy claim form
There are several claims against Deutsche Bank, DB Group Services, Deutsche Bank Services (Jersey), and Deutsche Services (CI), including unlawful means conspiracy, breach of contract, and violations of regulatory and criminal laws.
The legal action filed in London by the bankers’ lawyer, Khaled Khatoun, a partner at Quinn Emanuel, alleges that the bank and senior management, including current CEO Sewing, conspired to injure them “by unlawful means” through a “false narrative”.
Sewing is not named as a defendant, but his work on the audit is the centre point of the banker’s allegations.
In the 69-page particulars of claim, seen by CityAM, the claimants argue that a 2013 internal audit, overseen by Sewing, which led to their initial criminal convictions, was “flawed” and “contrived”.
The claimants alleged that the ‘new documents’ produced by Deutsche Bank were “belatedly disclosed” shortly before the hearing of the claimant’s appeal in the Milan Court of Appeal.
The bankers allege that the ‘new documents’ (disclosed late in the Italian appeal) were “ultimately exculpatory”. They argue these documents proved that Deutsche Bank Finance was “perfectly aware” of bond sourcing as early as 2008 and 2009.
The four bankers also alleged that the bank applied a “unique interpretation” to the accounting for these trades, thereby allowing it to omit €11bn of exposure from its balance sheet.
At the time of their acquittal, the bankers claimed they had already “suffered considerable and irreparable reputational harm and financial losses”, which is currently estimated at over £700m.
Earlier this month, Deutsche Bank published its annual report, which mentioned this case. The report stated that “Deutsche Bank considers all such claims to be without merit and will defend itself against them robustly, including disputing the inflated, unrealistic alleged losses claimed.”
“The group has not disclosed whether it has established a provision or contingent liability with respect to these matters because it has concluded that such disclosure can be expected to prejudice seriously their outcome,” the bank added.
The bank has instructed the London office of US law firm Cahill Gordon & Reindel to defend it.
In a separate case, Deutsche Bank settled a lawsuit with Michele Foresti, a former manager who claimed he was wrongfully blamed for the Monte dei Paschi accounting scandal, last month, without disclosing the terms.