Deutsche Bank Lawsuit Costs $32.5M

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Deutsche Bank Ag (DB) has resolved a lawsuit related to the mortgage backed securities that were sold to investors prior to the U.S. Housing market crisis, according to a Reuters report. The company is said to have misled investors regarding the risk profile of these securities. Deutsche Bank will pay $32.5 million for settling the lawsuit.

The settlement now awaits the approval of the U.S. District Judge. Preliminary papers were filed in a federal court in New York, yesterday. Notably, Massachusetts Bricklayers and Masons Trust Funds is a lead plaintiff in this case.

The Accusation

Deutsche Bank is accused of making misstatements and omissions in the offer document of these securities in 2006. These were made with respect to the mortgage loans’ underwriting and appraisal practices. The mortgage loans were clubbed into securities and retained in two trusts.

Investors were misled about the risk profile of the loans and sold the securities as highly rated one. When the loans defaulted and the securities lost value, the company made profit by using credit-default swaps.

Our Take

We believe that though the lawsuit settlement is a dent on Deutsche Bank’s financials and its reputation, it also lessens the company’s litigation overhang.

Besides Deutsche Bank, a number of Wall Street majors such as Bank of America Corp. (BAC), Citigroup Inc. (C) and Wells Fargo & Co. (WFC) have faced lawsuits for their roles in mortgage-backed securities offering. These companies have similarly gone through settlements and paid millions for such act of misleading and misrepresentation to investors.

Deutsche Bank currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.

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