Deutsche Bank agrees to $55M SEC penalty

Deutsche Bank (DB) agreed to pay $55 million Tuesday to settle allegations the German banking giant mis-stated paper losses of at least $1.5 billion during the global financial crisis.

The U.S. Securities and Exchange Commission said an investigation found that Deutsche Bank overvalued a derivatives portfolio of "Leveraged Super Senior" trades through which the bank had purchased protection against credit default losses.

Since the trades were leveraged, the collateral the sellers posted for the positions was approximately 9% of the $98 billion total in purchased protection, the SEC said. This leverage created a "gap risk" that the market value of Deutsche Bank's protection could exceed the available collateral, the SEC said.

As credit markets began deteriorating in 2008 amid the economic crisis, Deutsche Bank steadily altered its methodology to reduce the value assigned to the gap risk — and eventually stopped adjusting for the risk at all, an SEC settlement order showed.

Deutsche Bank essentially measured its gap risk as zero for financial reporting purposes and improperly valued its Leverage Super Senior trades as though the market value of the portfolio's protection had been fully collateralized, the SEC said.

However, internal bank calculations showed that Deutsche Bank faced a gap risk of $1.5 billion to $3.3 billion during the time period, the SEC said.

"At the height of the financial crisis, Deutsche Bank's financial statements did not reflect the significant risk in these large, complex illiquid positions," said Andrew Ceresney, director of the SEC's enforcement division. "Deutsche Bank failed to make reasonable judgments when valuing its positions and lacked robust internal controls over financial reporting."

Deutsche Bank neither admitted nor denied the SEC findings and ultimately did not incur losses related to the gap risk. "The SEC acknowledged the bank's cooperation throughout the investigation, and did not bring any charges against individuals in this matter," the bank said.

The Financial Times reported in 2012 that three former Deutsche Bank employees had approached the SEC independently and allege the bank had hidden billions of dollars in losses.

Along with the $55 million penalty, the SEC order requires Deutsche Bank to cease and desist from committing any violations or future violations of securities rules.

Deutsche Bank shares closed down 3.38% at $30.59 in Tuesday trading.