Deutsche Bank Slapped with Margin Call Suit by Disgruntled Counterparty

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What goes around, comes around. Deutsche Bank (NYSE:DB) may be forced to learn this the hard way with investment fund Sebastian Holdings filing a multi-billion dollar lawsuit against the largest German bank. [1] This lawsuit was filed by the Monaco-based investment firm in retaliation to the one filed by Deutsche Bank in early 2009, alleging that Sebastian Holdings owes the bank $245 million over a failed margin call. [2] In the lawsuit filed by Sebastian Holdings in London, the fund claims $2.45 billion in lost profits due to Deutsche Bank’s actions following the first lawsuit. The fund has also filed a separate lawsuit against the bank in New York seeking a $750 million penalty for “breach of fiduciary duty, unjust enrichment and negligent misrepresentation.” This “I sue you, you sue me” game could hit Deutsche Bank pretty hard if it goes the wrong way, as evidenced by recent litigation settlements by competitors such as Bank of America (NYSE:BAC).

We have a near $61 price estimate for Deutsche Bank which is a significant premium to the current market price of the stock. While we are in the process of revisiting this estimate, we believe that the current price reflects the market’s extremely negative sentiments over the growing Eurozone debt crisis.

See our full analysis for Deutsche Bank

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Contentious History

The rift between Deutsche Bank and Sebastian Holdings can be traced all the way back to October 2008, when the latter did not satisfy a $125 million margin call on foreign exchange transactions. Deutsche Bank closed the fund’s open positions, and came up with a settlement bill of $120 million. In response to this, Sebastian Holdings promptly withdrew all its money with the bank – attracting an additional $125 million penalty according to the contract. Deutsche Bank filed the first lawsuit to recover this $245 million.

More than 2 years later, Sebastian Holdings turned the heat up with the countersuit alleging that Deutsche Bank allowed a trader to breach the agreed-upon trading limits, and also let him trade in unauthorized derivatives. The fund claims that this led to the margin call failure in the first place. The fund claims that Deutsche Bank’s actions caused it a direct loss of $750 million and forced it to forgo about $700 million in profits as well as the $1 billion it parked with the bank as a capital fund.

Considering the worst-case scenario that Deutsche Bank ends up losing this legal battle on both the U.S. and U.K fronts, it could end up shelling out more than $3 billion in settlements – enough to shave off nearly 5% from our $61 price estimate for the bank.

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Notes:
  1. Deutsche Bank Sued for Billions Over Fund’s Currency Losses, Bloomberg Businessweek, Dec 5 2011 []
  2. Deutsche Bank Sues Vik’s Sebastian Holdings for $245 Million, Bloomberg, Feb 25 2008 []