Client Sues Deutsche Bank For Selling Loss-Making Derivatives It Could “Neither Value Or Understand”

Deutsche Bank appears to finally be shaking off its image as “the sick man of Europe”. For more than a decade, that image was informed by the recidivist behavior that elicited more than $20 billion in fines, and a series of trading blowups that shook confidence in the acumen of DB’s trading desks.

And while DB has notably side-stepped the big market blowups of the last year, most notably the Archegos blowup that saddled Credit Suisse with $5 billion in losses (and that’s not counting the losses of Nomura and other prime brokers that had made the mistake of taking on Archegos as a client), the bank finds itself Tuesday morning embroiled in a $500 million court battle with a Spanish hotel chain that’s insisting DB misled it about the risks of “complex” derivatives trades.

According to Bloomberg, which cited documents from the European court where the legal battle is being waged, Spanish hotel chain owner Palladium Group claimed DB had taken advantage of its ignorance to sell the firm currency derivatives that ultimately soured.

Ibiza-based Palladium Group alleged in the lawsuit that it entered into hundreds of “highly complex” transactions with the German lender, that were “impossible” for Palladium to “price, value or understand.” But Deutsche Bank’s lawyers said that the family behind the group were “sophisticated and experienced market participants” with the ability and experience to understand the transactions.

But DB’s lawyers insisted that Palladium’s depiction of events was a fabrication, and that in actuality the company’s finance people had insisted on the trade, ignoring Deutsche Bank’s official “advice”.

“Palladium’s claim is without foundation and we will be vigorously defending ourselves against it,” a Deutsche Bank spokesperson said. “Palladium well understood both the potential benefits and risks involved.”

Court documents explained that Palladium had “benefited” from its hedging trades with DB until 2016, then started losing money on them from 2017 on, with the biggest losses piling up in 2018. DB said it had recommended in 2017 and 2018 that Palladium bet on a stronger dollar instead of a stronger euro, but the company insisted on trading based on its strategy, or so said one of the DB traders who has been named in the dispute.

Palladium “caused or contributed to its loss by being at fault in the care of its own affairs” including its trading decisions and failing to understand the “clear terms” of the transactions. While Deutsche Bank expressed its own views on the trading strategy from time to time, their relationship wasn’t advisory, its lawyers said.

Palladium is insisting that DB and its star salesman Amedeo Ferri-Ricchi, who was the company’s “point of contact” at DB, had a “duty of care” to steer the Ibiza-based company in the right direction. Of course, that would seemingly be null and void if the firm truly did reject the bank’s trading advice (not that we blame them for being skeptical).

If nothing else, the lawsuit once again demonstrates the risks of taking the “other side” of the trade being pushed by one’s banker.