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Deutsche Bank lapses provided environment for rate rigging- court

Thursday, 7 Nov 2013 | 12:12 PM ET

FRANKFURT, Nov 7 (Reuters) - Organisational lapses by Deutsche Bank provided a working environment that could have led to the rigging of interest rates, a German labour court said in a written judgement released this week.

The document stems from the court's ruling in September when four traders won a case for wrongful dismissal against the bank. The court ordered Germany's flagship lender to reinstate the traders, which the bank had accused of violating company policy by inappropriately communicating with other traders at the bank over the setting of interbank lending rates.

In the judgement, the Frankfurt labour court said Deutsche Bank had itself contributed to the problems which it had blamed the traders for when dismissing them.

"It (Deutsche Bank) accuses (traders) of communicating with (other) traders, but has encouraged a close integration of its traders and the people who submit the rates," the court said. "It criticises a behaviour that it made possible in the first place."

Deutsche Bank said on Thursday that it regretted the court's decision and was considering whether to appeal.

The judgement also pointed out that staff responsible for submitting information about inter-bank lending rates had also been responsible for trades.

"These functions are incompatible. Traders responsible for taking risks can hardly completely ignore the positions of the bank. They are in a constant conflict of interest, brought about by the bank."

German financial watchdog Bafin has in the past also criticised banks' organisational flaws. It has said that a key question was whether banks reacted quickly enough once the Libor problems became known, and whether they reached the right conclusions.

The four Deutsche Bank traders were responsible for setting Euribor and Libor interbank rates and their dismissal in February came during a broader investigation into a possible rigging of these interbank rates.

The London inter-bank offered rate (Libor) and its European cousin (Euribor) are used to price hundreds of trillions of dollars in assets, from mortgages to derivatives.

Regulators around the world are investigating the role of Deutsche Bank and other banks and brokers in the global rate rigging scandal. Authorities in the United States, Britain and elsewhere have so far fined UBS, Royal Bank of Scotland, Barclays, Rabobank and broker ICAP $3.7 billion for manipulating rates. Deutsche Bank is one of the banks expected to face heavy fines from European Union antitrust regulators.

Germany's largest bank, set aside an extra 1.2 billion euros to cover potential litigation costs, almost wiping out its third quarter profit.

Deutsche Bank had dismissed the traders following an internal investigation into possible manipulation of the interbank rates.

But according to the Frankfurt labour court judgement, Deutsche Bank had not implemented any written rules regarding the communication of traders involved in determining rates.

"Deutsche Bank had neither defined which factors to take into account in the setting of reference interest rates, nor if and what kind of communication would be allowed between traders and the people determining the rates," it said.

The court judgement, however, did point out that the traders might have inappropriately communicated in some cases.

In one example, dated September 9, 2008, one of the traders told another trader that he should let him know 'if he wanted a lower figure,' according to the ruling.

In another communication between traders, dated February 20, 2008, a trader asked a colleague if she could have a 'high 6- month Euribor', and they said 'yes', according to the judgement.

Deutsche Bank changed its rules about Libor submissions in March 2012, and its rules on Euribor in July 2012.