Most of a class-action lawsuit that charges Deutsche Bank and four of its former executives with misleading investors may proceed, a federal judge in Manhattan has ruled.
The decision means the company must prepare to defend itself against allegations by the International Brotherhood of Electrical Workers and other investors of wrongdoing in the sale securities backed by residential mortgages.
U.S. District Judge Katherine Forrest of the southern district of New York made the ruling, which was first reported by Reuters, on Wednesday.
The union, which filed the lawsuit in in 2011 on behalf of investors who purchased stock in Deutsche Bank over a two-year period starting in January 2007, charges the bank and four of its former executives misled investors by combining mortgages of substandard quality into securities that were sold to investors as part of a scheme to boost the company's stock price.
The plaintiffs allege that a former subsidiary of Deutsche Bank originated mortgages while disregarding borrowers' ability to repay the loans. The plaintiffs also charge Deutsche Bank with being sufficiently certain the securities would lose value that the bank authorized one of its traders to bet millions of dollars against them, a calculation that made sense only if the bank expected the value of the shares to decline, according to the plaintiffs.
Deutsche Bank's shares plunged 87% between May 2007 and January 2009, and plaintiffs attribute the drop to the billions of dollars the bank lost on mortgage-backed securities.
In its motion to dismiss the case, Deutsche Bank contended that statements it made concerning its ability to absorb more exposure to the subprime market and the strength of its risk-management practices reflected hopefulness about business rather than an intent to mislead investors. Deutsche Bank also charged the union with presenting insufficient evidence of intent by the bank to wrong investors.
Forrest disagreed. "Plaintiffs have certainly set forth sufficient plausible allegations to support a claim for a fraudulent scheme against Deutsche Bank," Forrest wrote in her opinion, which dismissed the charges against one of the former executives.
A Deutsche Bank spokesman declined to comment. A lawyer for the plaintiffs did not respond immediately to a request for comment.
The court has set an initial pre-trial conference for April 16.
Separately, Deutsche Bank is among 18 financial firms facing a lawsuit by the Federal Housing Finance Agency that charges some of the nation's biggest sponsors of mortgage-backed securities with wrongdoing. In May 2012, Deutsche Bank paid $202 million to settle similar charges by the Department of Justice.