July 14, 2010 / 8:11 AM / 9 years ago

RPT-UPDATE 2-Former CEO of German bank IKB fined, avoids jail

(Repeats to additional subscriber service)

* Ex-CEO found guilty of market manipulation

* Former IKB executive gets 100,000 euros fine

* Receives 10 months suspended jail sentence

(Adds more details, background)

By Anneli Palmen

DUESSELDORF, Germany, July 14 (Reuters) - Stefan Ortseifen, the former chief executive of German bank IKB IKBG.DE, was convicted of market manipulation on Wednesday but avoided going to jail in one of the few criminal cases to be prosecuted in the aftermath of the global banking crisis.

IKB, one of the highest-profile casualties of the collapse in the U.S. subprime mortgage market, required billions of euros in bailout money and is involved in a current case in the United States brought against Goldman Sachs (GS.N) over a complicated subprime-related financial product which it sold to IKB in 2007.

Ortseifen was fined 100,000 euros ($127,100) and received a 10-month suspended jail sentence for market manipulation, with the court ruling that investors were misled about the parlous state of IKB’s finances two years ago. At the time Ortseifen was earning around 1.6 million euros a year, according to IKB’s annual report for 2006/07.

On July 20, 2007, only days before its near implosion, IKB sent out a release to investors saying the bank saw “limited” impact from the subprime lending crisis — which was ballooning on worries that U.S. borrowers would default on risky mortgages.

Duesseldorf prosecutors said the statement constituted a wilful misleading of the markets as it encouraged investors to continue buying shares. [ID:nLDE62E25O]

“Rather than facing the force of the market, the accused decided on a calming press statement,” Judge Brigitte Koppenhoefer told the Duesseldorf court.

Ortseifen, who remained stony faced as Koppenhoefer read out the verdict and then left the courtroom without saying a word, plans to appeal, his lawyer said.

“This verdict is crassly wrong,” he said.

A number of bankers in Europe and the United States have been brought to court in the aftermath of the credit crisis as investors seek to recoup billions in losses.

In November a U.S. jury acquitted two former Bear Stearns hedge fund managers accused of fraud connected with two funds crammed with subprime mortgage-backed securities that lost investors a total of $1.6 billion when the funds collapsed in mid-2007. [ID:nN09282246]

Koppenhoefer also presided over the criminal trial of Deutsche Bank’s (DBKGn.DE) chief executive Josef Ackermann concerning his role in awarding big bonuses to Mannesmann executives when he was a director of that company. [ID:nLDE63J1M3]

During the IKB trial Ortseifen had told the court that a decision by Deutsche Bank to cut credit lines on July 27, 2007 caused “immeasurable reputational damage” for IKB, crimping its ability to function normally in nervous markets. [ID:nLDE62E25O]

IKB, known before the crisis mainly as a lender to mid-sized German companies, required several bailouts from development bank KfW [KFW.UL] and the German state after its off-balance sheet investment vehicles ran into funding problems.

Following the rescues, IKB was taken over by KfW, which sold it to U.S. investor Lone Star [LS.UL].


Meanwhile IKB’s dealings with Goldman Sachs in subprime-related products are still under review by U.S. regulators as part of a separate investigation.

The U.S. Securities and Exchange Commission has accused Goldman of fraud for the way it sold a subprime mortgage-related debt product to clients including IKB in 2007. IKB lost nearly all its $150 million investment. [ID:nN16122333] [ID:nLDE63H0AA

Goldman Sachs has said it provided IKB with extensive information about the underlying mortgage securities and that IKB knew about the risks associated with them. [ID:nN27251669]

No Goldman Sachs executives were called as witnesses in the trial of Ortseifen. ($1=.7869 euros) (Writing by Edward Taylor; Editing by Greg Mahlich)

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