Sal. Oppenheim fraud Another thorn in Deutsche Bank's side

The German giant is facing yet more huge legal costs after former executives of its troubled private banking subsidiary Sal. Oppenheim were convicted of fraud.
Sal Oppenheim, one of many legal problems still facing Deutsche Bank.

Sabine Rau is still hoping to get her family's €30 million fortune back. Fortunately for her, a court ruling last week has made this much more likely.

Ms. Rau is one of hundreds that have sued the storied German private bank Sal. Oppenheim, which has been part of Deutsche Bank since 2010, for mismanaging funds in the heady days of the financial crisis.

While she said she recognized the risks of investing, she had asked the bank to invest her family's funds conservatively, and had a promise to always get the principle returned at the very least. Instead, she had lost some €20 million by 2011 and has been fighting to get the money returned ever since.

"Business hazard and organized fraud are two very different things," Ms. Rau, a professor at the Otto Beisheim School of Management near Koblenz, said in an interview with Handelsblatt Global Edition.

Four former executives of Sal. Oppenheim, founded in 1789 and once the bank of choice for Germany's wealthy, were found guilty last Thursday of breach of trust for their role in a series of reckless investments that left it teetering on the brink of bankruptcy before Deutsche Bank came to the rescue.

The landmark decision followed one of the costliest and most complicated cases ever brought by German prosecutors, and marked the most high-profile ruling on financial mismanagement in the aftermath of the 2008 crisis.

The four executives were not found guilty of enriching themselves in the process, but two of them could still face jail time for their crimes.

The case is just one of the many legal troubles still outstanding for Deutsche Bank, which has struggled to turn the page ever since 2008 and now could be on the hook for any legal settlements stemming from the Sal. Oppenheim case.

I wouldn't accept the same settlement today that I might have accepted three years ago. Sabine Rau, Sal. Oppenheim investor

In its annual report last week, Deutsche Bank reported some €3.2 billion ($3.6 billion) in pending litigation costs and warned that more could be on the way in 2015. These have weighed heavily on earnings, though the bank did manage to surprise investors by reporting a €441 million net profit in the fourth quarter of last year.

While the legal costs are still a major concern, Germany’s largest bank has had some recent victories that suggest the worst could be behind it.

Germany's financial regulator last week told Handelsblatt that the bank is not likely to face charges over gold fixing. Deutsche Bank likely also played a more limited role in a global scandal involving the rigging of benchmark market gauges for currencies and interest rates - its penalties could therefore be lower here, too.

“Probably the worst is over. The big question is if it will happen again, and the answer is it will happen again unless the banks are allowed to make a profit in other parts of their business," said Emilious Avgouleas, the chair of international banking law and finance at Edinburgh University.

Mr. Avgouleas said that the key will be to change the culture and financial incentives that prevailed before the crisis, which encouraged traders at banks to engage in reckless behavior, even if it was not always explicitly condoned by the bosses upstairs. He argued that continental Europe had lagged behind here compared to Britain.

Probably the worst is over for Deutsche Bank. The big question is if it will happen again. Emilious Avgouleas, Chair of international banking law and finance, Edinburgh University

Aside from the legal costs, there is also the reputational damage for Deutsche Bank’s private banking business, run by Rainer Neske.

Deutsche Bank has promised a change in culture ever since its new co-CEOs, Anshu Jain and Jürgen Fitschen, took over in 2012. But Ms. Rau said the failure to quickly settle cases such as Sal. Oppenheim's should make others think twice about investing in the bank.

"I ask myself whether Mr. Neske has taken into account the dangers of the Oppenheim disaster for the reputation of Deutsche Bank among businesses," Ms. Rau said.

For Deutsche Bank's part, executives have complained that the failure of regulators and the courts to settle cases more quickly has prevented the bank from drawing a line under the past.

Sal. Oppenheim is an example of this. For two years, the bank's former management team has been the focus of an embezzlement case, with 104 days of trial testimony and arguments.

In the dock were once illustrious names in Germany’s financial aristocracy: Matthias, Count of Krockow, Christopher, Baron of Oppenheim, Friedrich Carl Janssen and Dieter Pfundt, along with their close business partner in the real-estate business, Josef Esch.

The case could have taken even longer to settle. But it was the decision of Judge Sabine Grobecker in the Cologne regional court to put an offer on the table, after months of holding her cards close to her chest, that prompted last week's breakthrough. She offered an end to the trial and minimal sentences in exchange for confessions.

The four men settled two charges against them. At the height of the financial crisis, a cash loan was extended to the floundering department store Arcandor, the collapse of which precipitated the downfall of Sal. Oppenheim itself. Judge Grobecker noted the loan was extended “without collateral” and said the executives were "negligent in the exercising of necessary controls.”

Another charge concerned a deal involving an office complex in Frankfurt, which a real estate company purchased for €51 million and then sold to Sal. Oppenheim for €123.4 million after renovations. Mr. Esch, Baron Oppenheim and the Count of Krockow were partners in the real estate company - meaning they conducted a sweet little business deal with themselves.

The judge decided the sales price was considerably above market value, noting that “financial damage resulted for the bank.”

In total, the convicted embezzled bank assets amounting to “two, if not low three digit millions,” the judge said. But the fact that they were cleared of seeking personal gain means the punishment proposed by the judge is comparatively mild.

The Count of Krockow could be sentenced to two to three years in prison. Mr. von Oppenheim could get a sentence of 22 to 34 months while Mr. Pfundt could be imprisoned for 20 to 32 months. These are far lighter than the sentences originally demanded by the public prosecutor's office.

The fourth of the former general managing partners, Mr. Janssen, said from the start that he didn’t want to make the deals, but the judge left no doubt that based on a preliminary assessment of the evidence, she also considers him guilty.

It is clear that the now retired bank executives - who have become used to a life of expensive race horses, large yachts and luxurious mansion - could see their sentences suspended if they cooperate with the ongoing investigation. Their lack of previous convictions, advanced age and the fact that they also suffered massive losses through the dubious deals are seen as mitigating factors.

The accused apparently can live with the proposal. The public prosecutor’s office is insisting on prison sentences only for Count of Krockow and Baron of Oppenheim. “A suspended sentence would be wrong,” public prosecutor Gunnar Greier said.

For Ms. Rau, the conviction of the former Sal. Oppenheim executives bodes well for her own lawsuit, which she filed at the end of 2013 after being stonewalled by Deutsche Bank – in her opinion - for the better part of three years. Where she once sought a quick settlement, she is now happy to wait and let the courts decide.

"We're going through this court process entirely by the book," she said. "I wouldn't accept the same settlement today that I might have accepted three years ago."


Christopher Cermak covers the German banking and finance sector and is an editor with the Handelsblatt Global Edition in Berlin. Massimo Bognanni is a member of Handelsblatt’s investigative team. To contact the authors: [email protected] and [email protected]