US: Deutche Bank Settles Arms-Trade Fraud Case
German financial giant Deutsche Bank has agreed to a $270 million settlement of claims that it participated in a complex securities fraud orchestrated by a fugitive Saudi arms merchant that bankrupted Minneapolis-based securities firm Stockwalk Group four years ago.
The settlement largely ends a strange tale that began just days after U.S. securities markets resumed trading following the Sept. 11, 2001, terrorist attacks and led to the largest liquidation of a securities firm in U.S. history.
A Stockwalk subsidiary found itself insolvent after losing at least $200 million in a series of risky deals that involved borrowing and lending securities. Regulators quickly took over the subsidiary - called MJK Clearing - and forced it into liquidation.
The settlement, which could be approved by a Minneapolis bankruptcy court judge Jan. 18, is the final major step toward completing the liquidation next year. Both the court-appointed trustee who oversaw the process and the Securities Investor Protection Corp. praised the liquidation as an unprecedented success.
"All customers and all creditors of any kind will have been paid in full and creditors with interest," said trustee Jim Stephenson, a partner with Minneapolis law firm Faegre & Benson. "That's also unusual in any kind of a liquidating bankruptcy case as well. This is a very good result compared to other liquidations."
Full recoveries just don't happen, said Ken Caputo, senior associate general counsel for litigation at the SIPC. "You're hard pressed to find anybody with money to provide recompense. You might get judgments, but good luck collecting on them," he said. "It's an excellent result."
Neither Deutsche Bank nor its attorney returned calls seeking comment.
The settlement also is a vindication of sorts for Stephenson and the Faegre & Benson lawyers who unraveled the complex fraud and accused Deutsche Bank of being a major participant.
The lawsuit was filed in November 2002. It alleged that the head of Deutsche Bank's stock loan department in Toronto and two acquaintances helped Saudi arms merchant Adnan Khashoggi and his associates manipulate shares of a telemarketing company that Stockwalk had borrowed and re-loaned to other securities firms.
Khashoggi is best known for playing a key role in the 1980s Iran-contra affair. The suit further alleged that Deutsche Bank knew what was going on, did nothing to prevent it and at times provided assistance.
"We didn't discover anything during the course of our discovery that was really at odds with our view of the case," Stephenson said.
The scheme unraveled when shares of the telemarketing company suddenly lost all their value and Native Nations Securities, the New Jersey brokerage that supplied the stock, defaulted on a collateral payment to Stockwalk and went out of business. Stephenson and SIPC have, to date, recovered approximately $10 billion, which has been distributed to customers.
The case also may have had broader reach. The U.S. Securities and Exchange Commission, for instance, took a closer look at stock lending (a common industry practice that generates fee income) and Caputo said that liquidation proceedings have dropped sharply since the debacle that enveloped Stockwalk. The SIPC used to handle seven or so a year, but has only had one in 2004 and one this year. "The system seems to be working a little better, and that's all good," Caputo said.
The agreement calls for Deutsche Bank to pay $147.5 million to the estate of MJK Clearing. Deutsche Bank additionally agreed to be responsible for settling with three securities firms that have approximately $120 million in claims against MJK Clearing, which no longer will be on the hook for repaying them, Stephenson said. Deutsche Bank will negotiate separately with those firms - E*Trade, Ferris Baker Watts and Nomura Securities.
The bulk of the $147.5 million will go to the SIPC, which would receive $80 million to cover money that it has paid to cover investor losses. Another $50 million would go to wealthy investors who had put up funds that MJK Clearing used as capital to meet statutory requirements. And $10 million would go to Stockwalk.
The firm reorganized under bankruptcy in 2002, but still owes various creditors about $40 million.
Robert Weinstine, an attorney representing Stockwalk, said the firm hopes to recover far more in its own pending lawsuit against Deutsche Bank and others. Weinstine said the firm suffered between $75 million and $100 million in damage to its business. Still, Weinstine said his clients aren't unhappy to find out they may be getting money from this settlement as well. "Money is money," he said.
And as for Khashoggi? Well, no one knows just where he is, Caputo said. "He's one of those elusive guys."
- 186 Financial Services, Insurance and Banking