Deutsche Bank Denies SEC Probe

Includes: DB, GS, JPM, UBS
by: John Lounsbury

According to Tracy Alloway at, an "unusually explicit" statement by Deutsche Bank (NYSE:DB) has denied that it knows of any SEC (Securities and Exchange Commission) actions for potential charges of the sort that led to a civil complaint filed recently against Goldman Sachs (NYSE:GS).

An article Monday, by Teri Buhl and John Carney, in The Atlantic had stated that Deutsche Bank had also sold IKB Bank CDO securities of the same variety that resulted in the complaint of fraud against Goldman. Just as in the Goldman case, the reference MBS (mortgage backed securities) selected in consultation with hedge fund manager John Paulson. IKB bought the synthetic CDO products offered by both DB and GS.

Buhl and Carney say that Deutsche Bank did not disclose to IKB the role played by Paulson. This was also the true in the Goldman case. However, a central issue on the SEC action hinges on whether or not there was a material omission with respect to a third party, ACA Management.

ACA is the Key Difference Between DB and GS Situations

ACA was the ultimate selector of reference MBSs from a list submitted by Paulson upon which CDSs (credit default swaps) were written. CDSs are bets that a security will lose value: One party writes a guarantee of value and receives a premium. The counter party buys the guarantee and pays the premium. These are customarily renewed annually with continued premium payments each year.

The issue in the Goldman case is the question of whether ACA was misled by Goldman and Paulson about the Paulson interest in the Abacus 2009 AC-1 securities involved. This point may turn on the disclosure by Paulson executive Paolo Pellegrini to an ACA representative that Paulson "wanted to hedge" the MBSs on the list submitted to ACA.

What Does "Hedge" Mean?

If nothing further was said, the use of the term "hedge" usually implies doing something to offset a position. If ACA interpreted this to mean that Paulson had long positions and Goldman did nothing to disabuse ACA of that conclusion, this could be a pivotal point in the SEC claim of material omission.

ACA ended up buying most of the Abacus issuance. This may be the critical transaction in the SEC case. The IKB Bank transaction (which was much smaller) may end up a peripheral factor.

Thus, there are substantial differences between the Deutsche Bank and Goldman Sachs deals. It seems quite logical that Goldman has been investigated and Deutsche Bank has not.

Additional Note: Deutsche Bank is not without legal difficulties. Last month they were charged by Italian authorities with fraudulent sales of $2.3 billion in derivative securities linked to bonds issued by the City of Milan. UBS AG (NYSE:UBS), JP Morgan Chase (NYSE:JPM) and Depfa Bank PLC were also charged. See the March 18th article by Alessandro Mocenni and Gilles Castonguay in the Wall Street Journal.

Disclosure: No positions