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On Thursday, a former quantitative analyst blew the whistle on what could be a multi-billion-dollar securities violation at Deutsche Bank (NYSE:DB), prompting the Securities and Exchange Commission to open an investigation and the bank’s supervisory board to raise its eyebrows.
Reuters reports that the “general nature of the allegations about disagreements over valuation of credit derivatives were known,” but that the the news reports raised “some new questions about the magnitude,” according to a source familiar with the board’s thinking.
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The board is scheduled to discuss the topic at the next supervisory meeting.
Eric Ben-Artzi, the analyst who blew the whistle, claims that Deutsche Bank misrepresented the value of a portfolio of leveraged super-senior derivatives with a notional value between $120 billion and $130 billion and as a result was able to hide as much as $12 billion in losses during the financial crisis.
The law firm Labaton Sucharow said in a statement that “even using conservative assumptions, if the LSS portfolio had been properly valued, the bank would have substantially missed its earnings estimates. Due to these material misrepresentations, countless investors may have been harmed.”
Deutsche Bank is cooperating with the SEC. Spokeswoman Renee Calabro says that “The allegations of financial misstatements, which are more than 2 1/2 years-old and were publicly reported in June 2011, have been the subject of a careful and thorough investigation, and they are wholly unfounded.”
Deutsche Bank is joining a long list of major banks that have been investigated for dubious behavior during the financial crisis, including Goldman Sachs (NYSE:GS), Citibank (NYSE:C), and Bank of America (NYSE:BAC).
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