The German central bank, the Bundesbank, has launched an investigation into Deutsche Bank following claims that it lost billions on credit derivatives during the financial crisis. Investigators from the Bundesbank are scheduled to fly to New York next week as part of an inquiry into allegations that misvaluing credit derivatives allowed Deutsche to hide up to $12 billion in losses, which helped it avoid a government bailout. The investigators will interview people, including former employees, who have knowledge of Deutsche’s credit derivatives dealings between 2006 and 2009. It is alleged that had the proper valuations been made on the positions during the relevant period, the losses for the whole portfolio would have exceeded $4 billion and could have risen to $12 billion.
Deutsche Bank has denied the allegations and stated that the allegations were “more than two and a half years old,” and had been the subject of a thorough investigation, which found them “wholly unfounded.”
On April 2, the National Credit Union Administration (NCUA), an independent federal agency that supervises and charters federal credit unions, reached a $165 million settlement with Bank of America, stemming from BofA’s sale of RMBS to failed credit unions. Bank of America did not admit any fault in the agreement. NCUA previously reached similar settlements with Citigroup, Deutsche Bank and HSBC. NCUA did not file a lawsuit against Bank of America, although litigation is pending between NCUA and several other financial institutions. Press Release.
On March 15, Judge Eileen Bransten of the Supreme Court of the State of New York granted in part and denied in part motions to dismiss brought by Merrill Lynch, Deutsche Bank and Morgan Stanley entities (together Defendants) in respective lawsuits brought against them by certain Allstate entities related to Allstate’s purchases of RMBS. The court dismissed Allstate’s negligent misrepresentation claim against all Defendants, concluding that Allstate had not alleged either that Defendants had the required specialized knowledge or that Defendants had a special or privity-like relationship with Allstate. The court also dismissed all claims as to two of the Deutsche Bank certificates and federal securities claims against Merrill Lynch as untimely, but rejected Defendants’ arguments that other claims were untimely. The court denied Defendants’ motions to dismiss as to Allstate’s fraud claims. The court also concluded that Defendants can face liability for distributing statements they allegedly knew to be false, even if the statements were originally made by third parties, such as originators or rating agencies. Deutsche Bank Order; Merrill Order; Morgan Stanley Order.
On March 13, the Massachusetts Securities Division (Division) and Deutsche Bank Securities Inc. (DBSI) entered into a Consent Order following an investigation into the issuance of collateralized debt obligations. DBSI consented to the Division’s characterization of the facts underlying the matter, and did not admit or deny the Division’s legal findings. According to the stipulated facts, DBSI helped design, build, and market a CDO (Carina CDO Ltd.) in 2006 while simultaneously buying protection against losses on similar CDOs. The Division found that DBSI violated Section 204(a)(2)(G) and (J) of the Massachusetts Uniform Securities Act by failing to disclose its conflict of interests in structuring and selling the Carina CDO while purchasing CDS protection referencing other CDOs with similar expected performance. DBSI agreed to cease and desist any violations of Massachusetts securities law, accept formal censure by the Division, and pay a $17.5 million civil penalty. Consent Order.
On January 28, HSBC Bank USA, acting in its capacity as Trustee for a single home equity loan trust, filed a complaint in the Supreme Court for the State of New York against DB Structured Products Inc., an affiliate of Deutsche Bank AG. The Trustee alleges that Deutsche Bank breached representations and warranties regarding originator underwriting standards applied to the loans underlying the RMBS, no misrepresentation or fraud in the origination of the loans, and no material defects in the loans. The Trustee asserts causes of action for breach of contract/specific performance, fundamental breach, and declaratory judgment for reimbursable expenses, and seeks rescissory or compensatory damages of $89 million. Complaint.
On January 4, Judge Jed S. Rakoff of the Southern District of New York issued a memorandum order explaining the bases for his February 6, 2012 decision that RMBS claims brought by several investor plaintiffs against several Deutsche Bank affiliates would be dismissed, with prejudice in part and without prejudice in part. Plaintiffs allege that Deutsche Bank made misrepresentations concerning the quality of the loans underlying 43 RMBS that they purchased. Plaintiffs also allege that Deutsche Bank concealed from plaintiffs that it had taken a short position against its own RMBS, including some of the securities it sold to plaintiffs. Plaintiffs asserted claims for common law fraud, fraudulent inducement, aiding and abetting fraud, and negligent misrepresentation. Judge Rakoff held that plaintiffs failed to plead their claims with particularity, as required by Rule 9(b), in a number of ways. For instance, they failed to state with particularity the alleged misstatements in the offering documents for each of the 43 securities or who made each of those statemens. Plaintiffs also failed to allege the dates on which they purchased the securities and whether they relied on draft or final versions of the offering documents at the time of purchase. Judge Rakoff granted plaintiffs leave to amend their claims involving RMBS sponsored by Deutsche Bank. The claims related to RMBS not sponsored by Deutsche Bank, however, were dismissed with prejudice because Deutsche Bank had only a limited and attenuated role in the offerings. Order.
On November 30, Deutsche Bank National Trust Company (Deutsche Bank), acting as trustee for the Securitized Asset Backed Receivables L.L.C. Trust 2006-WM3 (the “Trust”), filed a complaint against General Electric Capital Corporation (GE Capital) and WMC Mortgage L.L.C., (WMC), GE’s subprime lending subsidiary, in the United States District Court for the District of Connecticut. The complaint alleges that WMC has breached its obligations to repurchase loans it originated that were in breach of representations and warranties WMC made when it sold the loans into the Trust. The Trustee alleges that subsequent forensic testing of the underlying collateral shows that the loans were not originated in compliance with stated underwriting guidelines. Due to the alleged poor quality of the loans, the Trustee alleges that WMC must have known that the loans were in breach of the representations and warranties at the time the loans were sold to the Trust. The Trustee asserts four causes of action for breach of contract – (1) breach of the representations and warranties about the mortgage loans; (2) breach of WMC’s obligation to repurchase breaching loans; (3) breach of WMC’s obligations to notify the Trustee when a loan breaches a representation and warranty; and (4) breach of WMC’s obligations to indemnify the Trustee for expenses incurred resulting from a representation and warranty breach. Complaint.
In two separate orders issued on November 12, Judge Cote of the Southern District of New York granted in part and denied in part motions to dismiss claims brought by the FHFA against Goldman Sachs & Co. and Deutsche Bank AG. FHFA’s claims are based on alleged purchases by Fannie Mae and Freddie Mac of residential mortgage-backed securities from these banks. The court dismissed FHFA’s common-law fraud claims against both banks based on owner-occupancy and LTV ratio allegations for failure to sufficiently allege scienter. The court rejected the remaining arguments to dismiss other aspects of the claims. Judge Cote denied Deutsche Bank’s motion as to the FHFA’s pleading of reasonable reliance and held that New York’s Martin Act did not preclude FHFA from raising claims based on other states’ securities laws. The court also rejected Goldman’s argument that as an underwriter it lacked “ultimate authority” over the contents of certain offering documents. In both actions, FHFA asserts claims for violations of Sections 11, 12, and 15 of the Securities Act of 1933, for violations of the Virginia and District of Columbia securities laws, and for fraud.
Goldman Sachs Decision. Deutsche Bank Decision.
On September 27, HSBC Bank USA, National Association, in its capacity as trustee of ACE Securities Corp. Home Equity Loan Trust, Series 2006-HE4, filed a summons with notice of claims against Deutsche Bank Structured Products, Inc. in the Supreme Court for the State of New York, New York County. The complaint alleges Deutsche Bank securitized $183 million in mortgage loans that did not conform to the applicable representations and warranties in its mortgage loan purchase agreement and purchase and sale agreement. HSBC’s claims are for breach of contract and it seeks specific performance of repurchase obligations and/or damages. Summons with Notice.
On August 24, two summonses with notice were filed in New York state court against DB Structured Products, Inc. (DBSP). Both lawsuits allege that DB breached certain representations and warranties concerning the characteristics of a pool of mortgages which backed the ACE 2006-FM1 securitization (the “Trust”). The first suit, filed by the Federal Housing Finance Agency as conservator for the Federal Home Loan Mortgage Corporation, seeks to enforce DBSP’s alleged contractual obligation to repurchase loans from the Trust where representations and warranties have been breached. The FHFA alleges that the representations that were breached relate to compliance with loan underwriting standards, the absence of error or fraud in the origination of a loan, the accuracy of data provided to rating agencies, the practices followed during the servicing of the loans, the absence of high cost loans, and the appraisals of the properties underlying the loans. The second suit, filed by Freedom Trust 2011-12, an investor purporting to sue on behalf of the Trust, seeks an order demanding the repurchase of the loans, or in the alternative compensatory damages. Freedom Trust alleges that the representations were breached due the following categories of alleged misstatements: i) the misstatement of a borrower’s existing debt, ii) the misstatement of a borrower’s intention to occupy the property, iii) the misstatement of a borrower’s debt-to-income ratio, iv) the misstatement of a borrower’s income and/or employment, and v) the misstatement that a particular loan’s underwriting process complied with an originator’s stated underwriting guidelines. FHFA Summons. Freedom Trust Summons.