In a decision “likely to ripple across Germany’s banking sector,” a German court ruled that Deutsche Bank failed to disclose the “real and ruinous” risks and its “gross conflict of interest” in selling interest rate swaps to a business client, according to a Wall Street Journal article entitled “Deutsche Bank Loses Swaps Case” by Laura Stevens and David Crawford. The risks were stacked in Deutsche Bank’s favor, and the bank failed to disclose that the contract’s starting value was less than the purchase price, which would have signaled which way the swap’s risks were stacked, according to the German court.
Deutsche Bank sold the “spread-ladder swap” to a German bathroom supplier as a way of keeping its client’s interest payments down. In such a swap contract, the client bets that long-term interest rates will increase while the short-term interest rates will decrease, and the bank bets against it. The client pays a floating rate, while the bank pays fixed interest rates.
Deutsche Bank allegedly advised its client in two separate meetings prior to the bet that the spread would widen, which would make the bet profitable for the client. But in Las Vegas that is called betting against the House, and those palaces weren’t built by losing money.
After two years and substantial losses, the bathroom supplier paid the bank the equivalent of US$805,744 to dissolve the contract. Deutsche Bank was ordered to repay the client the equivalent of US$769,000.
According to the article, the German judge said in open court that the bank “must ensure that a client investing in such a highly complex product has essentially the same information and knowledge as its advisory bank. It was clear that the defendant has violated its obligation to give advice.” The court further explained that banks need to advise clients “not in a trivializing manner,” and make clear that the risks, dependent on interest rate developments, “may be real and ruinous.”
Page Perry has over 125 years collective experience representing institutional and individual investors in securities-related litigation and arbitration all over the country. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions.