Bloomberg News

Deutsche Bank Accused of Improper Swap Sales in Unitech Lawsuit

May 28, 2012

Deutsche Bank “knew, or must have appreciated, that it was likely to make significant amounts of money” from the contract at Unitech’s expense, the Indian company said in its lawsuit. Photographer: Hannelore Foerster/Bloomberg

Deutsche Bank “knew, or must have appreciated, that it was likely to make significant amounts of money” from the contract at Unitech’s expense, the Indian company said in its lawsuit. Photographer: Hannelore Foerster/Bloomberg

Unitech Ltd. (UT), an Indian property developer, accused Deutsche Bank AG of selling it an interest- rate swap that wasn’t suitable and wasn’t properly explained, according to a London lawsuit over a $150 million loan deal.

Unitech filed a counterclaim in May arguing Deutsche Bank was negligent to sell an unsuitable hedging agreement, and owed damages that canceled out its debt, according to court documents. Germany’s biggest bank had earlier sued Unitech saying a unit of the company owes $11 million under the swap contract and has missed payments.

Deutsche Bank “knew, or must have appreciated, that it was likely to make significant amounts of money” from the contract at Unitech’s expense, the Indian company said in its lawsuit.

Interest-rate swaps that turned out to be costly for customers and profitable for banks have led to hundreds of lawsuits and an investigation by the U.K. Financial Services Authority into how they were sold. Unitech’s suit is one of the largest to reach the U.K. courts. The issue has affected bank customers from British seaside cafes to municipal governments including Milan in Italy and Jefferson County, Alabama.

“There is a large spectrum of misselling claims in terms of amounts and sophistication of customers,” said Max Hotham, an attorney at Enyo Law LLP in London, who isn’t involved in the Unitech case. His largest U.K. case involves a 1 billion-euro ($1.26 billion) swap, he said in a phone interview. “The scale of this thing is enormous.”

Unitech’s lawyer Paul Friedman and Libby Young, a Deutsche Bank spokeswoman, both declined to comment.

Spiraling Costs

The swaps are supposed to protect borrowers from a rise in interest rates by converting floating-rate debt to fixed-rate debt. Customers can face spiraling costs if rates drop or move more than expected.

Unitech said in the lawsuit its managers didn’t have any experience with interest-rate swaps and Deutsche Bank hadn’t explained the risks.

Total payments under the agreement were at least $23.5 million between 2007, when it was signed, and 2010, Unitech said. That sum showed “the transaction was not a suitable hedge.”

The case is: Deutsche Bank AG (DBK) v. Unitech Limited, High Court of Justice, Queen’s Bench Division, 12-464

To contact the reporter on this story: Kit Chellel in London at cchellel@bloomberg.net

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


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