On May 26, 2015, the US Securities and Exchange Commission announced a settlement with Deutsche Bank AG in connection with the filing by Deutsche Bank of misstated financial reports during the financial crisis that failed to take into account a material risk for potential losses estimated to be in the billions of dollars. The investigation found that Deutsche Bank overvalued a derivatives portfolio consisting of Leveraged Super Senior trades through which the bank purchased protection against credit default losses. Because these positions were leveraged, the collateral posted for such positions by the sellers was only a fraction of the total in purchased protection. This leverage created a “gap risk” that the market value of Deutsche Bank’s protection could at some point exceed the available collateral, and the sellers could decide to unwind the trade rather than post additional collateral in that scenario. Thus, Deutsche Bank was not protected for the full market value of its credit protection. In connection with the settlement, and in addition to the SEC cease and desist order, Deutsche Bank agreed to pay a $55 million penalty.

The SEC order and press release are available at: http://www.sec.gov/news/pressrelease/2015-99.html; and http://www.sec.gov/litigation/admin/2015/34-75040.pdf.