Deutsche Bank Chief Executive Christian Sewing has become embroiled in a lawsuit of € 152 million who claims that he was involved in a decade old cover of transactions for financial crisis era.
A new civil case in Germany that is taken against Deutsche by Dario Schiraldi, a former senior banker, claims that sewing provides a lack of internal audit that was an important part of the evidence used to condemn Schiraldi in Italy in 2019.
The conviction of Schiraldi was destroyed in 2022 and he is looking for compensation for alleged damage to his career caused by the criminal proceedings and the outcome. Five other Deutsche bankers convicted and then acquitted in Italy weigh individual lawsuits in London, according to people who are familiar with the case. Deutsche is in settlement interviews with at least one of them.
Although sewing is not a party to the lawsuit, the allegations are in danger of embarrassing the Chief Executive of the largest listed lender of Germany of Germany, who has cleared the reputation of the scandal -sensitive bank.
While the Italian legal proceedings were concluded in 2023, the Supreme Court of the Land was a decision to destroy the convictions of the bankers, the importance of the internal audit for the original case – and the personal involvement of Sewing – has only recently come to light with the civil case of Schiraldi.
Deutsche said that Schiraldi’s lawsuit “includes misleading and false allegations around the audit that are clearly an attempt to generate publicity by harming the good reputation of managers. We are convinced that the court will reject the claim,” said it.
Schiraldi refused to comment. The allegations about sewing were first reported by Der Spiegel.
Documents that are seen by the Financial Times show that sewing, as head of the internal audit department, was asked in 2013 to investigate the reasons for the accounting of transactions with restless Italian lender Monte Dei Paschi di Siena from 2008.
The German bank had changed the accounting treatment and adjusted its results again.
Deutsche said it was forced to change the treatment of the deals after he learned how the bonds underlying the MPS transactions were based. People who were involved at the time claim that the source of the bonds was generally known and that the bank had to justify the change, which helped in obtaining a more favorable capital treatment.
The audit has attached the debt to a handful of individual bankers. Although it did not find criminal misconduct by the bankers, Deutsche said: “It identified material shortcomings in the way in which the transactions were treated by the deal team and other functions”, including “insufficient information for the transaction to be correctly assessed before it was executed.”
Although it might not be the original intention to involve the six employees, one person said close to them, that was the result. The audit helped when determining and confirming the idea that the purchasing of the bonds was discovered late, the person added.
The Audit of Sewing, and a summary of it that was provided to the Italian Central Bank in 2014, has unquestionably influenced the Italian public prosecutors, according to the Milan Court of Appeal. Schiraldi and five of his colleagues were convicted of helping Monte Dei Paschi hundreds of millions of euros in losses between 2008 and 2012 through the transactions.
However, when the Court of Appeal destroyed the convictions in 2022, it criticized Sewing’s audit and the dependence on the lower court thereon.
The audit was “opaque,” said the Court of Appeal, and “the court should have had more caution to give weight … Until the findings of an internal investigation carried out by a foreign bank, whose decisions were clearly not motivated by philanthropic goals.”
In particular, the Court of Appeal criticized the fact that the then financial officer of the Bank Stefan Krause had commissioned the scope of the audit and defined, which documents that were seen by the FT showed that Audit was supervised by the Bank’s chairman Paul Achleitner and then Co-CEO John Cryan.
Nevertheless, the court found: “The division that should have been subject to the audit would have been aimed instead of the outcome of it … Instead of accepting the responsibility for his earlier evaluations, the accounting division shifted the blame to colleagues.”
Krause refused to comment.
In the aftermath of the convictions, and a report by Grant Thornton on behalf of one of the bankers who revealed new evidence, Deutsche seemed to change his view of events.
In a letter of 2021 seen at the Court of Appeal by the FT, it tried to emphasize the limitations of the Audit van Sewing in the light of “new evidence”, while it claimed that the report was “impeccable”.
The reason for the reclassification of the deals, including the assumed mystery of purchasing the bonds, was taken as read in the audit process, recognized Deutsche.
The adjustment “Dereguard from general market practice”, the German lender said in the letter, and “there is no evidence that the relevant persons within the bank involved in the MPS transaction have deliberately hidden the purchasing of bonds.”
The lawyers, Freshfields, told the Court of Appeal in 2022 that the bank did not have to reformulate the transactions. The adjustment was a break from the previous practice and did not depend on the coverage of how the bonds in the MPS transactions came from, or the previous accounting treatment that were wrong, they said.
However, the change in treatment was permitted and “able, among other things able to bring bank benefits into terms of determining its regulatory capital,” noted Freshfields.
The Court of Appeal concluded that by reclassifying the transactions, Deutsche concluded to minimize the control of its accounting practices, although the bank told the FT that it has “not derived a material or accounting benefit from the reclassification”. The bank added that the reclassification “was confirmed by internal and external audits”.
The bank said it supported the judgment of the Italian Court of Appeal, but did not agree with some of her “secondary conclusions”. It said that the audit was “thoroughly, correctly and independently carried out, and the managers involved have fired their responsibilities correctly”.