It may be nearly a decade since the global financial system was brought to its knees, but that hasn’t stopped investors from going after the banks they blame for the collapse.
Deutsche Bank this week learned that it, too, will finally have to face angry U.S. investors in court.
A U.S. judge on Monday gave the green light to a series of class-action lawsuits against Europe’s largest investment bank.
It’s a landmark ruling in a controversial case that has already been running for more than seven years – even reaching the Supreme Court in 2015 – and a major slap in the face for a bank that has been fighting hard to put its many legal troubles behind it.
Deutsche Bank has already paid more than €10 billion ($11 billion) in legal fines and settlements with regulators for wrongdoing since the financial crisis. The high legal costs are part of the reason Germany’s largest bank is currently mired in perhaps the worst crisis of its history, with its share price continuing to reach new record lows.
John Cryan, the bank’s chief executive since July of last year, has vowed to put the bank’s legal house in order as quickly as possible. Monday’s ruling won’t make it any easier for him to meet that promise.
The case goes to the heart of what banks like Deutsche Bank knew – and what they should have told investors – as the U.S. housing market ran into trouble.
The class-action lawsuits involve $5.4 billion in securities that Deutsche Bank sold in the run-up to the 2008 financial crisis – securities that investors argue the bank knew were a risky bet and should have warned of the dangers.
For seven years, Deutsche Bank has fought tooth-and-nail for the class-action lawsuits – five of them in total – to be dismissed. Two courts had agreed with the bank that the lawsuits had no merit, but the Supreme Court in 2015 ordered the lower appeals courts to reconsider their ruling.
Now, Judge Deborah Batts of the southern district court of New York has ruled that two of the five lawsuits can be heard in court after all.
The case goes to the heart of what banks like Deutsche Bank knew – and what they should have told investors – as the U.S. housing market began running into trouble in 2007 and early 2008.
Investors accuse the bank of selling them the billions of securities in 2007 and 2008 while failing to disclose the risks that it was exposed to on the U.S. subprime mortgage market – or alerting them to the fact that it was already losing money on its investments.
Subprime mortgages – risky loans given to home buyers with poor credit – were at the heart of the U.S. housing collapse that by the autumn of 2008 would bring Wall Street to its knees.
The investors say that if they had been warned by the bank, they would not have taken on the preferred securities, whose value fell by two-thirds as the United States became engulfed in one of the worst financial crises of its history.
“The securities were sold pursuant to materially false and misleading offering materials which misrepresented or omitted material facts,” according to a 100-page opinion by the Southern District of New York.
The lawsuit is led by Belmont Holdings Corp along with two individuals who blame the bank for deceiving them by concealing risks that should have already become clear.
Deutsche Bank was exposed to the subprime market in the form of residential mortgage-backed securities and collateralized debt obligations – complex and opaque investment products that became extremely popular in the run-up to the 2008 collapse.
Christopher Cermak is an editor covering finance for Handelsblatt Global Edition in Berlin. Allison Williams of Handelsblatt Global Edition also contributed to this story. To contact the author: [email protected]