Breach of trust due to inadequate risk management.
The entire former management board of northern German bank HSH Nordbank is on trial in Hamburg for approving a deal in 2007 allegedly without sufficiently informing themselves first (“bullwhipping it through in only three days right before Christmas” on the basis of a memo that did not contain the data required by due diligence, so the prosecutors). This is the first time an entire bank board has been put on trial in Germany, but it presumably won’t be the last.
In 2007, to avoid receiving a lower rating from the Wall Street ratings agencies one year before the bank’s scheduled stock market launch, prosecutors said, HSH Nordbank moved a collateralized debt obligation package that included risky real estate and commodities paper “away” into an entity called Omega 55, for which the French bank BNP Paribas guaranteed. In return, HSH guaranteed when BNP Paribas moved risky paper, valued at 2.4 billion euros and including Iceland government bonds from Lehman Brothers, into the Omega 55 entity [Zweckgesellschaft, “special-purpose vehicle” according to Bloomberg.com]. HSH’s guarantees for BNP Paribas securities ended up costing HSH >150 million euros in 2008; ultimately in the course of the global financial crisis the bank had to be bailed out by 30 billion euros that included taxpayer money from its majority owners, the German states of Schleswig-Holstein and Hamburg, and taxpayer money from the German bank bailout funds BaFin and SoFFin. Omega 55’s losses were in part kept off the bank’s books, which is why two of the six former HSH board members are further going to be tried for balance sheet falsification [Bilanzfälschung, “false accounting” according to Bloomberg.com]. Guilty verdicts in the breach of trust trial could also result in a civil lawsuit from HSH against its former managers.
Update on 23 Jul 2013: Bloomberg.com reported that charges were also brought against managers from Bayerische Landesbank (BayernLB), Sachsen LB and Landesbank Baden-Württemberg, but these cases have not yet gone to trial.
Update on 28 May 2014: Hamburg prosecutors are asking for probation and fines of up to 150,000 euros, after they reduced their estimate of damage done to the bank from ~150 million euros to ˜50 million. This is in the breach of trust trial, for signing off on what was a “circular transaction” in 2007, without questioning inconsistencies in the information presented to them.
Update on 09 Jul 2014: The entire former management board of HSH Nordbank was found innocent. Dubious deeds and dereliction of duty, said the judge from the Economic Crimes Court [Wirtschaftsstrafkammer], but he didn’t think there was enough evidence to prove serious dereliction of duty. Also there’s no evidence that the HSH Nordbankers profited financially from the damage they caused. Trials against managers from IKB and the Baden-Württemberg Landesbank for their risk management before the global financial crisis have also been canceled, said Spiegel.de. At the time, what those bankers did was neither illegal nor unusual.
The states of Hamburg and Schleswig-Holstein had to pump 13 billion euros into HSH Nordbank to bail it out.
Update on 10 Jul 2014: The judge gave the prosecutors the option of appealing this decision, and they will appeal it to the supreme court in Karlsruhe.
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