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Legal Morass Deepens at Deutsche Bank

Der ehemalige Banker Matthias Graf von Krockow kommt am 02.07.2015 am Landgericht in Köln (Nordrhein-Westfalen) an. Die Angeklagten halten am selben Tag ihre Schlussworte. Für den 9. Juli 2015 wird ein Urteil im Sal. Oppenheim Prozess erwartet. Foto: Rolf Vennenbernd/dpa +++(c) dpa - Bildfunk+++
Former banker Matthias Graf von Krockow.
  • Why it matters

    Why it matters

    If Deutsche Bank’s legal problems continue, the costs will keep weighing on profits, hindering its turnaround and pressuring the bank’s managers, including CEO John Cryan.

  • Facts

    Facts

    • Deutsche Bank has paid more than €12 billion in legal expenses since 2012. Last year, the bank was fined $2.5 billion after managers were found to have manipulated Libor interest rate benchmarks.
    • Sal. Oppenheim, once Europe’s largest private bank, went bankrupt in 2009 and was taken over by Deutsche Bank in 2010.
    • Four managers at Sal. Oppenheim were found guilt by a court in Cologne of aggravated fraud that led to the bank’s collapse.
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    Audio

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Last week’s shareholders meeting at Deutsche Bank saw Chief Executive John Cryan condemn the €5.4 billion spent on legal disputes in 2015 as “unacceptable.”

Germany’s largest bank wants to put these courtroom battles behind it. Mr. Cryan sought to assure that the bank was nearing “finish line” when it comes to settling the largest of its nearly 8,000 legal cases still outstanding. But fresh problems seem to keep sprouting up.

The latest is a dispute over damages. Deutsche is taking up proceedings against the former head of Sal. Oppenheim, a German private bank acquired in 2010. Deutsche Bank is suing Matthias von Krockow, the former chief, for €120 million for his role in driving what was once Europe’s largest private bank into ruin.

But that’s only one of Deutsche Bank’s legal headaches. Another is a potentially even more costly one emerging in its investment banking arm.

According to financial circles, Deutsche Bank is also investigating the role of seven traders in deals where there may have been a conflict of interest. The managers apparently invested $4.5 million of their own money in a trade and made profits roughly eight times their investment, according to estimates by internal investigators.

One was Colin Fan, who was co-head of the Deutsche’s investment banking unit until Mr. Cryan was hired last year. For now, the bank has suspended bonus payments to the managers who are still at the bank as it looks into the deal, which first raised suspicions in 2014.

Legal risk is perhaps the biggest investment risk at Deutsche Bank, which is defending itself against hundreds of legal disputes and last year was fined $2.5 billion for the actions of a group of traders who were in a global ring that manipulated Libor interest rate benchmarks to generate illegal profits.

Mr. Cryan recently warned of more litigation costs to come in the year ahead. At the same time, he told shareholders the bank is heading back on track.

But the two new legal problems may take time to resolve.

Legal risk is perhaps the biggest investment risk at Deutsche Bank, which is defending itself against hundreds of legal disputes.

The Sal. Oppenheim case concerns four managers who were found last year by a court in Cologne of having driven the bank into the ground.

Following the court’s decision, Deutsche Bank, which bought Sal. Oppenheim in 2010 for a reported €1 billion, is obliged to sue the managers concerned to recoup assets for shareholders.

The former chief executive, Mr. von Krockow, was found guilty of aggravated fraud that brought down one of Germany’s most prestigious financial institutions. He was convicted along with three former senior managers, Christopher von Oppenheim, Friedrich Carl Janssen and Dieter Pfundt.

Mr. von Krockow and Mr. von Oppenheim cooperated with prosecutors. Mr. Janssen and Mr. Pfundt disputed the charges, saying they were only tangentially involved in the fraud, which involved a triple-digit-million credit and a questionable real-estate deal involving retail chain Arcandor, which declared bankruptcy.

Sal. Oppenheim and Madeleine Schickedanz were together the majority shareholers in Arcandor, a retail and tourism chain based in Essen, which filed for bankruptcy in 2009. The retailer’s bankruptcy in effect brought down Sal. Oppenheim.

The conviction of Sal. Oppenheim’s top management by the Cologne court was a rarity in Germany. Like in many countries, prosecutors have struggled to hold individual bankers to task for the failures that led to the 2008 financial crisis.

All four men have appealed the judgement. In the meantime, Deutsche Bank’s policy-setting supervisory board is already seeking to recover money lost through the actions of the former Sal. Oppenheim bankers.

“After a finding of disloyalty (the convictions), the bank has to demand damages of those responsible,” said a lawyer close to the proceedings who declined to be named. Otherwise, the bank’s supervisory board would open itself to accusations of failing to fulfill its fiduciary responsiblity to protect shareholders.

Deutsche Bank has filed suit in Cologne against Mr. von Krockow, demanding €120 million in damages, according to sources. Deutsche Bank refused to comment on the new case.

Mr. von Krockow has responded by hiring a law firm, Bub, Gauweiler & Partner, to defend himself.

Mention of the law firm may send shivers down the spine of some Deutsche Bank managers. The firm knows Deutsche well, having beaten the bank in the Leo Kirch case, in which it was accused of destroying the entrepreneur’s media empire – a ten-year wrangle that eventually cost the bank more than €900 million.

Mr. von Krockow has the means and the motive to drag out the case to defend his reputation.

He is married to Baroness Ilona von Ullmann, whose family was once majority owner of Sal. Oppenheim. He became one of its senior managers and spokespeople, thrust into a world of polo tournaments, pheasant hunts and horse racing. The decline and fall of Sal. Oppenheim led to losses for him and his wife and, if Deutsche Bank’s lawsuit succeeds, it could bankrupt Mr. von Krockow.

According to insiders, Deutsche Bank’s original plan was to reach a settlement. Talks are already underway with Mr. Janssen and Mr. Pfundt, his colleagues at Sal. Oppenheim, a spokesperson said.

But the problems are more extensive with Mr. von Krockow. He once borrowed money from Sal. Oppenheim but apparently canceled the contract and stopped repaying the loan. The bank sued and won, forcing Mr. von Krockow to keep repaying the loan. He responded by hiring Franz Enderle, a lawyer from Bub, Gauweiler, who found formal errors in how the loan was issued and criticized the damages being called for.

Mr. von Krockow holds other potential aces. He is threatening to prevent Deutsche Bank from reaching settlements with his former colleagues. Mr. Enderle, Mr. von Krockow’s lawyer, said the bank wasn’t going to get away with suing just one of the people responsible and said his client hadn’t made the decisions alone.

According to Handelsblatt’s information, last Thursday, Mr. von Krockow’s lawyer submitted a filing to take the fight further.

 

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Handelsblatt’s Volker Votsmeier is a member of the newspaper’s investigative reporting team, as is Massmimo Bognanni. Daniel Schäfer, who heads Handelsbaltt’s fianncial coverage, and Katarina Slodczyk, a U.K. correspondent, contributed to this article. To contact the authors: votsmeier@handelsblatt.com, bognanni@handelsblatt.com

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