December 6, 2012 9:24 pm

Regulator sat in on Deutsche audits

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German regulators were briefed about Deutsche Bank’s valuation of a clutch of complex derivatives now under investigation by the Securities and Exchange Commission. The revelation potentially sets up a transatlantic regulatory conflict with US investigators.

People familiar with the valuation process said BaFin, the German banks supervisor that is Deutsche’s principal regulator, routinely sat in on audit committee meetings during the 2008-09 period, when the bank failed to recognise up to $12bn of paper losses, according to allegations made to the SEC by three former bank employees.

The Financial Times reported on Thursday that, according to three separate complainants, Deutsche failed to mark down the falling value of so-called leveraged supersenior trades. If the assets – worth a notional $130bn – had been properly accounted for, Deutsche could have required a government bailout, the allegations say.

Senior management and some members of the supervisory board were also aware of the valuations, which one person involved said were lowered by a “few hundred million euros” after KPMG, the bank’s auditors, were consulted. The extent of their scrutiny is unclear.

News that BaFin was aware of the valuations could lead to tensions with the US regulator, which has been looking at the allegations for more than two years. Experts also said the German regulator’s stance might complicate the SEC’s efforts to bring a case, because the bank would be able to argue it did
not intend to break any rules.

Deutsche reiterated a statement that the allegations were “wholly unfounded”. The bank’s supervisory board and BaFin both declined to comment.

The revelations have alarmed some of Deutsche’s supervisory board members, who are planning to study the affair at meetings of the audit and risk committees next week. “This could become a huge issue and there will be a lot of questions asked,” one board member said.

Deutsche shares closed on Thursday at €34.92, down 0.1 per cent.

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