Unstructured Finance

Deutsche’s he said/she said derivatives mystery

June 25, 2011

By Matthew Goldstein

Valuing derivatives–especially complex ones tied to esoteric assets–is always a tough proposition. And maybe that’s what a previously unknown whistleblower action involving Deutsche Bank is all about.

The other day I wrote about a big settlement Deutsche reached in that matter with a former trader, who claims some of the bank’s most esoteric derivatives were improperly valued to hide trading losses. Deutsche denies the allegation and says an internal investigation found no substance to the trader’s charge.

Then again, the bank did find some substance to Matt Simpson’s allegation that another former top trader based in London, Alex Bernand, may have done some improper trading in one of his personal accounts. As I reported, the bank in October 2009 quickly dismissed Bernand–its former global head of credit correlation–after a quick internal investigation substantiated much of what Simpson alleged on that point.

In end, this simply may be a case of Simpson being right about some of the facts but not all of them. It’s possible Simpson simply wasn’t in a position to have all the facts and came to an erroneous conclusion–albeit a conclusion made in good faith.

The SEC, which opened an investigation into Simpson’s allegations last summer, hasn’t offered much clarity on the matter. As is its policy, the agency doesn’t comment on investigations. In fact, it won’t even confirm an investigation exists–even when the settlement agreement between Deutsche and Simpson clearly says the agency opened an inquiry into the matter. (And yes, I pointed that out to the SEC).

There is obvious logic for the SEC not commenting on active investigations. The agency needs to be fair to the parties involved and doesn’t want to prejudge a matter.

But if Simpson’s allegation that some within the bank improperly valued derivatives is wrong, it would be nice for the SEC to find some mechanism for saying so. Otherwise, for the time being, we’re left with a he said/she said situation.

 

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