Three whistleblowers have alleged—and the Securities and Exchange Commission is investigating—that Deutsche Bank AG hid billions of dollars in paper losses in securities portfolios during the 2008 financial crisis. And at least one accuser is going public with details.
The bank denied the charges in a statement sent to CorpCounsel.com, saying, “The allegations of financial misstatements, which are more than two and one-half years old and were publicly reported in June 2011, have been the subject of a careful and thorough investigation, and they are wholly unfounded.”
The statement, from Deutsche Bank media relations director Renee Calabro in New York, went on to say, “We have and will continue to cooperate fully with the SEC's investigation of this matter."
It is true that the bank disclosed in its second quarter financial report on June 30, 2011, that it had “received subpoenas and requests for information from certain regulators and government entities concerning . . . asset backed securities, asset backed commercial paper, and credit derivatives.”
But at the time it offered no substantive details about the allegations, the amount of money involved, or findings from its own internal review.
On Thursday, Labaton Sucharow and the Government Accountability Project announced their representation of one of the whistleblowers and issued a rare press release quoting him.
The former employee, Eric Ben-Artzi, was a risk analyst at the bank. He is believed to be one of, if not the first, SEC whistleblower to share his story publicly.
Both Ben-Artzi and Labaton Sucharow attorney Jordan Thomas spoke with CorpCounsel.com as well.
“When Ben-Artzi first consulted with me, I was shocked by the size and scope of the alleged misconduct,” said Thomas, a former SEC assistant director and chair of the firm’s whistleblower representation practice “This is exactly the type of significant and unreported securities violations that the SEC Whistleblower Program was intended to address. It is one of many high-profile matters in the pipeline.”
Ben-Artzi said he first reported his suspicions internally at Deutsche Bank in the fall of 2010, but after repeated reports, nothing happened. He said he finally went to the SEC in the spring of 2011.
“As the problem was not acknowledged or corrected,” he said, “I felt compelled to inform the proper law enforcement authorities. Unfortunately my family and I are paying a heavy price for doing the right thing.”
He said when he pressed his concerns further, he was subjected to hostility at work, denied access to records, and was stripped of many responsibilities. In November 2011, one day back from paternity leave, he said he was laid him off without warning.
Ben-Artzi has filed a retaliation complaint with the U.S. Department of Labor.
Thomas said the bank’s claim that these were old allegations is bogus. “The SEC regularly investigates allegations that are up to five years old,” he said. “This is current.”
Tom Devine, legal director at the Government Accountability Project and author of the Corporate Whistleblower’s Survival Guide, commented in a statement about the alleged retaliation against Ben-Artzi: “This is a classic illustration of what whistleblowers risk when trying to work within the system . . . The retaliation was crude, and not camouflaged.
“Quite clearly, the point was to scare other would-be whistleblowers into silence,” Devine continued. “The lesson learned is that working within Deutsche Bank’s corporate compliance and reporting system is an act of professional suicide.”
More details of the Deutsche Bank probe also appeared Wednesday in the Financial Times in London.
The bank allegedly misvalued a “giant” position in derivatives structures known as “leveraged super senior trades,” according to FT, and failed to recognize up to $12 billion in paper losses.
The article goes on to report that three whistleblowers allege “that if Deutsche had accounted properly for its positions . . . its capital would have fallen to dangerous levels during the financial crisis and it might have required a government bailout to survive.”
The newspaper said the three leveled their complaints at different times. Two of them, including Ben-Artzi, said they were pushed out of the bank after reporting their concerns internally. The third, also an ex-employee, declined comment.
The FT report said two whistleblowers also allege that Deutsche mismarked the value of insurance provided in 2009 by Warren Buffett’s Berkshire Hathaway on some of the positions.
In its statement, the bank tried to discredit the whistleblowers. It said, “The investigation revealed that these allegations stem from people without personal knowledge of, or responsibility for, key facts and information.”
Thomas and Ben-Artzi also disputed that claim. “Ben-Artzi was a risk analyst specifically assigned and well situated to look exactly at that issue,” according to Thomas. “He was in a position to have personal knowledge and see evidence of misconduct.”
The bank also insisted that its “valuations and financial reporting were proper, and a significant portion of these positions were subsequently unwound in an orderly sale."
But again, Thomas and Ben-Artzi objected. The former analyst said at the time he was working, “it was still the biggest risk on the books.”
And Thomas argued it didn’t matter if some of the trades were unwound. “It doesn’t mean you didn’t have a problem in prior years. You don’t have to be at a crime scene when the crime was committed to have evidence relevant to the crime,” he said.
At the SEC, Robert Khuzami, the agency’s enforcement chief, has recused himself from any Deutsche Bank investigations because he was Deutsche’s general counsel for the Americas from 2004 to 2009.
Richard Walker, Deutsche’s global general counsel, is also a former head of enforcement at the SEC, which declined comment on any ongoing investigation.
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