Deutsche Bank Investors Defeat Motion to Dismiss

March 27, 2013

On March 27, 2013, Judge Katherine B. Forrest issued an order upholding a complaint against Deutsche Bank AG in the United States District Court for the Southern District of New York. Agreeing with plaintiffs, the court found that Deutsche Bank and senior bank management could be held responsible for not only making false statements, but also for engaging in “a fraudulent scheme designed to mislead investors.” The court ruled that plaintiffs adequately alleged that “defendants effectuated their scheme by originating or acquiring residential mortgages and by packaging them into residential mortgage-backed securities (‘RMBS’) and collateralized debt obligations (‘CDOs’), which they knew presented far greater risk than they told the market.”

Although most litigation involving the residential mortgage crisis in the United States has been brought on behalf of investors in the securities that were backed or collateralized by faulty mortgages, Robbins Geller filed this action on June 21, 2011, on behalf of investors in Deutsche Bank itself, one of the banks accused of originating the faulty mortgages and misrepresenting the quality of the mortgage-backed securities that the bank created and marketed. Robbins Geller represents the lead plaintiffs appointed by the court to oversee the case, Building Trade United Pensivon Trust Fund, the Steward Global Equity Income Fund and the Steward International Enhanced Index Fund.

As summarized by Judge Forrest, the case alleges that defendants knew the market had an appetite for such securities, that the bank benefitted by having the revenues associated with sales of such securities prop up its stock price, and that defendants knew the RMBS and CDOs were increasingly risky and approaching junk status. Indeed, the bank was sufficiently certain that such securities would lose value that they allowed a trader to take a multi-billion dollar short position on (that is, a bet against) RMBS and CDOs, some of which the bank itself had structured and marketed.

The complaint, as cited by the court, read like a Hollywood script. Greg Lippmann, a senior Deutsche Bank trader, warned officers and employees that the RMBS Deutsche Bank was marketing were “crap,” and described the process of structuring and selling CDOs as a “ponzi scheme.” The complaint also details how Deutsche Bank, on Lippmann’s advice and with the knowledge of senior bank executives, bet against mortgage-related securities by taking a short position in the billions of dollars. Lippmann described the very assets that Deutsche Bank was marketing as already risky and “generally horrible,” stating that they “stink[].”

During this same period, however, bank management was assuring investors that Deutsche Bank was “not exposed to further deterioration in the US sub-prime mortgages across its books,” that “exposure to US mortgage originators [is] tightly managed and largely hedged,” and assured investors of “the quality of our risk management.”

In a detailed opinion summarizing current law and plaintiffs’ allegations, Judge Forrest found that plaintiffs had satisfied the high pleading standards required by the Private Securities Litigation Reform Act of 1995, both with respect to specific misleading statements and an overall scheme to deceive. Importantly, the court found that the complaint had succeeded in identifying communications and meetings between Lippmann and senior bank management demonstrating a high-level awareness of the bank’s problems, and rejected defendants’ arguments that the alleged misrepresentations consisted only of inactionable opinions.

Judge Forrest explained, “[P]laintiffs allege that, at [the] very time the market was beginning to experience the early effects of the sub-prime implosion, Deutsche Bank made statements that it had acted conservatively with respect to risk and that it had adhered to conservative lending standards. Plaintiffs allege that at the time of these statements, the same individuals who had made the statements had been provided information indicating the opposite. These allegations present different facts from those in City of Omaha or Fait — and present facts supportive of both objective and subjective falsity.”

“Given the damage caused both to investors and to the country as a whole, it is astounding how little accountability there has been,” said John K. Grant, the partner heading the case. “The decision is really an important advance in litigation arising from the financial crisis.”

IBEW Local 90 Pension Fund v. Deutsche Bank AG, No. 11 Civ. 4209 (KBF), 2013 U.S. Dist. LEXIS 43774 (S.D.N.Y. Mar. 27, 2013).

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