Two Deutsche Bank traders arrested in Hong Kong

FRANKFURT/HONG KONG Fri Apr 15, 2011 8:13am EDT

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FRANKFURT/HONG KONG (Reuters) - Deutsche Bank AG (DBKGn.DE) said two of its traders were arrested in a Hong Kong bribery probe, yet more bad news for the bank which has come under increased scrutiny from regulators across the globe.

The case marks the bank's third major brush with regulators in the Asia region, where Deutsche wants to almost double revenues to around 4 billion euros ($5.78 billion) this year compared with 2008 levels.

"Deutsche Bank was advised by the Independent Commission Against Corruption of the arrest of two employees, both warrants traders in Hong Kong. The two traders were immediately placed on leave from the bank until the matter is resolved," a bank spokesman said on Friday.

The bank said it was not under investigation itself and that it was fully assisting with the probe.

On Thursday Hong Kong's commission against corruption (ICAC) said it had arrested 11 people "for alleged bribery in relation to fraudulent trading of derivative warrants issued by a bank."

The ICAC did not identify any of the people detained or the bank involved.

Deutsche Bank shares were trading 0.9 percent lower at 1143 GMT on Friday, underperforming the German blue-chip DAX index which was up 0.4 percent.

ASIAN CRACKDOWN

Regulators in Asia have acted aggressively against Western investment banks and private equity firms.

In February South Korean regulators imposed a six month trading suspension on Deutsche Bank's local brokerage unit after ruling the bank had manipulated the stock market.

As part of that probe, Korean authorities took five Deutsche employees to prosecutors for investigation, alleging they made 45 billion won ($40.1 million) of improper profit by manipulating the stock market to make their derivatives positions profitable.

Last year, a 16.7 trillion yen ($182 billion) mistrade by Deutsche Bank roiled Japanese markets, prompting Japan's Osaka Securities Exchange 8697.OJ to review its monitoring system.

Deutsche Bank's admission of arrests on Friday follows increased scrutiny by Hong Kong regulators of the market for warrants, which can make up almost 20 percent of the daily turnover of the entire stock market.

Warrants are popular with retail investors as these financial instruments enable them to bet on price fluctuations in an underlying asset without having to pay the full market price for that asset.

In 2010, two former traders for Macquarie (MQG.AX) were found guilty of manipulating the market between 2004 and 2005 by trading certain warrants between each other to make the market volume appear significantly higher than it actually was.

Earlier this week, the U.S. Senate report on the financial crisis criticized banks including Deutsche and Goldman Sachs (GS.N) for contributing to the "mortgage mess," referring to the contamination of the financial system with toxic mortgages.

In March Germany's top appeals court ruled against Deutsche Bank in a 540,000 euro ($766,000) damages claim over interest rate swaps, dealing a blow to the flagship lender's reputation. The court said the bank had consciously tailored the risk profile of the product "to the detriment of the investor.

(Additional reporting by Rachel Armstrong in Singapore, Editing by Mark Potter)

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