Deutsche Bank is investigating a series of trades that may have improperly generated millions of dollars in personal profits for a handful of current and former employees.
One of those named in the scheme is Colin Fan, former co-head of Deutsche Bank's investment bank who left as part of a shake-up last October (allegedly due to his role in the transaction). Auditors estimate that Fan made $9 million on a roughly $1 million investment according to the WSJ.
As the bank was making an effort to unload some risk that stemmed from a deal with a large insurance company client in 2009, Fan and his team "found" a hedge fund willing to take the trade. The hedge fund however, was also partly funded by Fan and five other Deutsche Bank employees.
Auditors allege that Fan set up the deal structure to allow for Fan and his cohorts to receive an inflated share of the profits and fees to themselves and the hedge fund.
Deutsche Bank said they are reviewing the transaction, and will take "disciplinary measures where appropriate".
“We are reviewing a transaction that may have involved unacceptable conflicts of interest when structured in 2009,” a Deutsche Bank spokesman said. Following its internal investigation, he said, the bank “will take disciplinary measures where appropriate and review further our controls to minimize the chance of a reoccurrence.”
The final results of the investigation are set to be reported to senior management in the coming weeks, but thus far the transaction on its own is estimated to have cost Deutsche Bank more than $60 million. Whether the bank lost money overall hasn't been determined due to the fact that there were many ancillary trades that took place as well.
Fan, who in 2009 was global head of credit trading, is the person alleged to have profit the most from the scheme. Auditors estimate the six employees made an estimated $37 million on the trades, which will close off next year, on an investment of about $4.5 million. Greengate SAM, based in Monaco also invested in the deal alongside Fan and his colleagues.
The 2009 trade originated in a $750 million deal between French insurer AXA SA and Deutsche Bank, through which the bank would arrange derivatives trades in part using AXA's money. Deutsche Bank sought to profit through an index arbitrage strategy but didn't want the price swings on its own books, which is where the need for a hedge fund came into the picture.
Two more known identities that put invested in the deal along with Fan are John Pipilis, currently co-head of global credit trading, and Andre Muschallik, a senior salesman.
Henry Ritchotte, who was operations chief of the trading unit in 2009 approved the general structure of the transaction declined to comment, but it is alleged that the approval was based on certain conditions, such as the bank would market the offering to clients and the bank would earn its fair share of the profits.
As the WSJ reports, one person briefed on the internal audit said other employees were told the offer was oversubcribed, however another person close to the matter said the investment was too small and complicated for big clients, and other hedge funds didn't want to take part in a deal in which they wouldn't be in control of investment strategy.
Senior executives became aware of the situation in 2014 when employees raised the issues with auditors about Mr. Fan and his colleague's positions.
A spokesman for Mr. Fan said that he had "fulfilled all appropriate compliance procedures, been entirely transparent at all times, and denied any wrongdoing."
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It seems everyone is taking advantage of the massive German banks and as Deutsche Bank's already massive derivatives book appears entirely out of control given the above debacle, one can't help but feel an ugly sense of deja vu…
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