A billionaire investor’s business was “destroyed by a tsunami” created by “sexy, crazy trades” booked by Deutsche Bank (Xetra: 514000 - news) that the lender could not understand and never should have accepted, the High Court was told on Tuesday.
In one of Britain’s biggest ever commercial legal battles, Alexander Vik’s investment firm, Sebastian Holdings, is suing Deutsche Bank for $8bn (£5.3bn) relating to “nightmare” losses sustained during the financial crisis.
Sebastian, which is based in the Turk and Caicos islands, employed Deutsche as its prime brokerage for the trades.
But the Norwegian entrepreneur claims that Deutsche accepted complex currency trades made by Sebastian trader Klaus Said despite not having the ability to properly book, price or keep track of the transactions, or even judge the risk they posed.
When the positions were unravelled, Deutsche made massive margin calls demands for more collateral on Sebastian, which Vik claims forced him to close down various profitable positions.
Calls between senior Deutsche executives disclosed in court documents reveal agreement within the lender that the trades should not have been accepted, Sebastian claimed.
Mel Gunewardena, then the Bank’s global head of fixed-income and foreign exchange prime brokerage told Alan Cloete, then Deutsche’s head of global finance, that these “sexy, crazy trades” should “never have been taken in”.
Mr Cleote asked Mr Gunewardena: “How are you comfortable running your business when people book things in your system that you know guys don’t even know what most of this stuff is [sic]?”
Alessandro Cummunale, a trader at Deutsche Bank, had described the trades as “like buying 19 nuclear warheads with the fuse ready to go off”.
David Railton QC, representing Sebastian Holdings, claimed the bank “spun a story” to Mr Vik by failing to disclose the full scale of the “disaster” once it realised the problems with the trades.
An internal audit of the issue at Deutsche Bank described the acceptance and monitoring of the trades as an example of “multi organ failure” at the lender.
Deutsche Bank has admitted its systems were “not up to the job” of valuing the positions and that it made mistakes. However, it insists it acted properly.
The lender started the legal action with a claim that Sebastian owes it $250m in unpaid collateral and that its client should have been aware of the risks it was taking.
Mr Said, now head of foreign exchange at CRT Capital Group in New York, took responsibility for the losses, Deutsche said.
“The mistakes were mine errors of judgment and lack of foresight, but not maliciousness or carelessness,” Mr Said wrote in an email to Mr Vik’s wife by way of apology for the trades, Deutsche said.
A spokesman for Deutsche Bank said: “This is about a margin call that was missed and remains unpaid. We will defend vigorously against the other party’s claims which are without merit.”