Deutsche FX mis-selling investigation finds employees have acted “in bad faith” for years

A Deutsche Bank investigation into the mis-selling of risky foreign exchange derivatives in Spain has found that employees acted dishonestly, exploited flaws in the bank’s controls and breached EU regulations, according to people familiar with the report.

One of the people said employees had acted “in bad faith” for years, urging small and medium-sized Spanish companies to buy highly complex currency derivatives. The products, which are advertised as safe and cheap, are intended to hedge against currency risks. They generated huge profits for Deutsche, but in some cases exposed clients to extensive risk and crippling losses.

A second person familiar with the study described some of the Germans’ behavior as “very unfortunate”.

Fewer than 12 people have been formally sanctioned by the bank for the wrongdoing, the people said.

The investigation into the mis-sale – codenamed “Project Teal” – was first reported by the Financial Times two years ago and is nearing completion. The bank paid affected customers severance payments in the tens of millions, it said. It has also tightened internal controls and stopped offering some foreign exchange products to certain client groups.

The bank is still fighting a €500m lawsuit brought by one of Spain’s largest hotel groups in the High Court in London over the trades, arguing that this case is structurally different from others it has settled.

The misconduct, involving a London office of Deutsche Bank’s investment bank, as well as Spanish operations of its international private entity, spanned several years to 2019. The investigation, conducted by a major London-based law firm, was launched in the second mid-2019 , after an internal whistleblower raised allegations shortly after a managing director responsible for structured products left.

The investigation failed to substantiate the whistleblower’s claims that Deutsche Bank employees colluded with some of their clients’ finance directors and may have illegally shared the proceeds of such deals, some of the people said.

However, the investigation found several red flags of problematic behavior that had not previously been followed up. For example, between 2011 and 2014, Deutsche lost a series of court cases against a Spanish electronic components wholesaler who had bought a range of FX hedging products and was nearly forced into bankruptcy when deals went awry.

One of those familiar with the investigation’s findings told the FT that the previous lack of awareness of potential wrongdoing was at odds with the culture the current leadership is trying to foster.

Since then, the bank has taken “decisive action,” according to another person briefed on the findings, replacing much of its senior management in Spain and some senior investment bankers in London, while others have had to cut their bonuses. She also shared the findings with regulators, who have not imposed any fines so far.

After the bank found weaknesses in its internal controls that people familiar with the investigation said were being deliberately exploited by employees of one of its trading divisions, the bank expanded the Teal investigation to other divisions, regions and products. While elsewhere it uncovered weaknesses in its controls, it found no evidence of similar wrongdoing.

Deutsche Bank told the FT in a statement that it had taken “appropriate action” after reviewing “parts of our sales activity in structured FX derivatives,” adding that it was “enhancing our processes and strengthening our controls.”

Arranging the trades was highly profitable for Deutsche, but exposed many of the buyers to significant losses and brought some smaller companies to the brink of bankruptcy.

The products in question were types of currency swaps known as Targeted Accrual Redemption Notes and Forwards. They have been touted by Deutsche Bank as a cheaper way to hedge currency risk.

Small businesses have been told the products are “zero premium” with no upfront cost and could even make money, according to people familiar with the details.

In a stable foreign exchange market, the derivatives sometimes benefited clients. However, if volatility increases and the exchange rate exceeds a predetermined level, the losses could quickly multiply.

After the start of the Teal project, Deutsche began offering out-of-court settlements to some of those affected. J García-Carrión, Europe’s largest wine exporter, received more than €10 million from the bank. In 2021, Spain’s largest hotel group, Palladium, took its case to the High Court in London, demanding €500m in damages.

The outstanding notional amount of derivatives positions Palladium had with Deutsche at its peak in 2017 was €5.6 billion, eight times the hotel group’s annual revenue and larger than its entire balance sheet.

Palladium’s U.S. attorney Quinn Emanuel has claimed in court documents that Deutsche took advantage of a “close personal relationship” between the company’s founder’s brother and Amedeo Ferri-Ricchi, Deutsche Bank’s then foreign exchange head in Europe.

The German denies wrongdoing in the Palladium case and argues that her client is an “experienced investor with extensive experience in the use of derivatives”.

Ferri-Ricchi, who is not a defendant in the case and is not involved in the trial, left the German before the Teal investigation began. He denies the allegations against him in the lawsuit.

The ECB and German regulator BaFin declined to comment. Spanish regulator CNMV said it had carried out some supervisory reviews on the matter but could not comment further.

Additional reporting by Barney Jopson