FRANKFURT Feb 6 (Reuters) - Former managers at bailed-out German bank LBBW failed to disclose risks and played down the severity of the situation at the country's largest public-sector lender in the run-up to the financial crisis, the judge leading their trial said.
The judge at the regional court in the southern city of Stuttgart, where LBBW is based, said his preliminary assessment showed that the managers unlawfully failed to disclose risks in off-balance sheet special-purpose vehicles (SPVs) in 2005 and 2006.
In doing so, they disguised the bank's real financial position, Judge Hartmut Schnelle said.
According to the public prosecutor, they also minimized the drama of the situation in the bank's 2008 annual report.
The trial is a rare case of a European bank's entire executive board being held accountable for actions in the run-up to the 2008/9 global financial crisis.
The prosecutor has charged former LBBW Chief Executive Siegfried Jaschinski and six other managers, who sat on LBBW's board from 2006-2008 with accounting fraud.
The defendants, which also include LBBW's current deputy chief executive Michael Horn and Hans-Joachim Strueder, now a manager at peer HSH Nordbank, said on Thursday the allegations are unfounded.
They said that neither the German Financial Reporting Enforcement Panel nor financial watchdog Bafin had objected to the use of SPVs at the time.
"(Special purpose vehicles) are not an LBBW-specific issue but one of the whole banking industry," Jaschinski said in court, adding that the SPVs were not the reason for the near-collapse of the bank in 2008.
LBBW, along with other regional state-owned lenders known as landesbanks, lost tens of billions of euros on risky investments in the financial crisis, forcing its owners to prop it up with 5 billion euros of taxpayers' money in 2009 and 12.7 billion euros in loan guarantees.
While policymakers have reacted to the crisis with new banking rules aimed at preventing taxpayers from having to foot bailout bills in the future, few bank executives have faced criminal or civil cases.
In Germany, where the second-biggest lender, Commerzbank, and four landesbanks were among those taking state aid, only the former CEO of corporate lender IKB has been convicted of wrongdoing. He received a 10-month suspended sentence, after being found guilty of market manipulation.
The entire former board of landesbank peer HSH Nordbank is also on trial. The six men are charged with breaching fiduciary trust and two of them face additional charges of accounting fraud.
The LBBW managers charged in Stuttgart could face up to three years in jail, although sources familiar with the situation have said the most likely outcome was fines.
The German regional state of Baden-Wuerttemberg and the municipally-owned savings banks of Baden-Wuerttemberg both own stakes of around 40 percent in the LBBW, while the state's capital, the city of Stuttgart, owns just under 19 percent. (Reporting by Andreas Kröner; Writing by Arno Schuetze; Editing by Thomas Atkins and Erica Billingham)