Exchange rates around the world are constantly in flux, and it's an incredibly exact science. Currencies are traded to the fourth decimal point. No wonder investors will get angry if they believe a bank is delaying – even by a second – their trades in the market.
Deutsche Bank faces class action lawsuits in New York and London over allegations that it did just that: Delaying currency deals to profit from better exchange rates at the expense of its customers, Handelsblatt has learned. The story was first reported by Germany's Spiegel magazine.
It is one of thousands of lawsuits and regulatory investigations facing Germany's largest bank in the United States and Europe. Like many global banks around the world, Deutsche Bank has been dogged by allegations of wrongdoing by its traders ever since the 2008 financial crisis.
Axiom Investment Advisors and the law firm Hausfeld claim their clients lost more than $5 billion (€5.4 billion) through Deutsche Bank's exploitation of a currency trading practice called "last look."
New York's Department of Financial Services has been investigating the controversial practice at a number of banks since 2014, including Deutsche Bank and even fined British bank Barclays over the practice last year.
For Deutsche Bank, the class action lawsuit is only the latest chapter in a long history of legal trouble since the financial crisis.
Last look works as follows: A bank sets a bid for a currency trade and finds a customer. If the exchange rate drops below the bid price by a certain margin, however, the bank can program its own software to take a "last look" at whether to move ahead with the deal, delaying and even rejecting the deal to avoid losing money. Even if it does decide to go ahead with the trade, a delay of milliseconds can cost traders a bunch of cash.
Axiom filed a class action lawsuit in New York federal court on behalf of its 100 U.S. clients in December. Hausfeld will file suit in London on behalf of European and Asian clients - including banks, central banks and companies - who don't have standing in U.S. courts.
What is noticeable is that the claimants have not presented any proof to substantiate their allegations. Under U.S. law, the claimants aren't required to present evidence. Instead, they're hoping to convince the federal court in New York to force Deutsche Bank to open its trading books to scrutiny. Deutsche Bank has rejected the allegations.
The British bank Barclays was slapped with a $150-million fine by the Department of Financial Services last year over its use of "last look." Barclays claimed it used the system to guard against electronic traders who can detect movement in foreign exchange markets first and exploit the price difference at the expense of the bank.
U.S. regulators, however, found the British bank was employing "last look" to profit at the expense of its customers. Internal emails from Barclays said the purpose was to "ensure profitability of a trade for Barclays" and the bank "generally does not share this info with the client."
The law firm Hausfeld also took on Barclays and won damages for its clients over the use of "last look." The southern district of New York is currently in the process of authorizing a settlement.
For Deutsche Bank, the class action lawsuit is only the latest chapter in a long history of legal trouble since the financial crisis. Germany's largest financial institution has paid upwards of €10 billion ($11 billion) to settle cases in the last five years, including $2.5 billion in fines for manipulating global benchmark interest rates.
In November, Deutsche Bank was slapped with $258 million in penalties for violating U.S. sanctions against Iran and Syria. The bank is currently investigating $10 billion in dubious deals with Russian clients suspected of laundering money to avoid Western sanctions.
Deutsche Bank's share price has fallen 20 percent over the last three months and by a staggering 50 percent over the past five years. Last week, the financial institution's share price dipped below €20 for the first time since March of 2009.
Laura De La Motte is an editor at the Handelsblatt finance desk in Frankfurt and a specialist banking correspondent. To contact the author: [email protected]