Bloomberg News

Deutsche Bank Told to Pay $19.7 Million Over Currency Option

February 03, 2012

(Adds background of transaction starting in eighth paragraph.)

Feb. 2 (Bloomberg) -- Deutsche Bank AG, Germany’s biggest bank, was ordered to pay 15 million euros ($19.7 million) in a lawsuit over a currency option product it sold to a client.

The Frankfurt Regional Court today ruled partly in favor of German travel company Schauinsland-Reisen GmbH, which had sought 30 million euros. The judges ruled the company was experienced in using options to hedge currency risks, so it was partly responsible for its losses, court spokesman Arne Hasse said.

“When Deutsche Bank first sold the product it didn’t have to warn about risks, as the structure of the option could be easily understood,” Hasse said. “But when additional options were bought after first losses and the risks increased, the bank at some point should have warned its customer about the risk accumulation.”

Germany’s highest civil court last year said the Frankfurt- based lender had to cover losses caused by a product it called a “CMS Spread Ladder Swap” because the bank didn’t disclose the product had an initial negative market value. The judges today didn’t adopt the top court’s reasoning because the currency derivatives weren’t as complicated as the CMS swaps, Hasse said.

Deutsche Bank failed to prove that it properly warned Schauinsland-Reisen as the risks increased, Hasse said. About 60 follow-up derivatives were sold, he said.

Currency Hedge

Deutsche Bank spokesman Christian Streckert said the lender will only comment when it’s received the written judgment. It will then decide whether to appeal, he said.

As a company active in the travel business, Schauinsland has used options to hedge currency risk for a long time and must be considered as experienced in these kinds of financial transactions, said Hasse. That’s why the judges decided the company was partly responsible and needs to shoulder half of the losses, he said.

The product, which Schauinsland started to buy in June 2005, bet the dollar would fall against the euro. When the dollar rose, the product turned negative for Schauinsland, which was facing constantly rising liability risks under the terms.

The options “went phenomenally bad for a phenomenally long time,” Presiding Judge Bruno Menhofer said at a hearing in September. The travel company’s currency risks were about $20 million a year, a Schauinsland manager had told the court.

Repeatedly Restructured

To counter the rising risks Schauinsland faced, the deal was repeatedly restructured. Because of the number of options bought and the changing terms in each restructuring effort, the liability risks accumulated over time.

At a peak in 2007, Schauinsland faced the risk of having to buy 204 million U.S. dollars under the terms. Deutsche Bank and Schauinsland agreed to dissolve the deal in 2008, leaving Schauinsland with losses of 30 million euros.

Separately, Deutsche Bank today reported that fourth- quarter profit fell 76 percent, more than analysts estimated, as Europe’s debt crisis curbed trading and the company wrote down holdings.

The bank fell as much as 3.1 percent in Frankfurt trading after reporting net income of 147 million euros, below the 556 million-euro average estimate of 12 analysts surveyed by Bloomberg. The investment bank posted a 422 million-euro pretax loss.

Today’s case is LG Frankfurt am Main, 3-04 O 50/10.

--Editors: Anthony Aarons, Frank Connelly

To contact the reporter on this story: Karin Matussek in Frankfurt at kmatussek@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@Bloomberg.net.


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