Ex-Deutsche Bank Executive Denies Index Rigging in Paschi Case

(Bloomberg) -- Former Deutsche Bank AG executive Michele Foresti, in key court testimony, denied he manipulated the firm’s indexes as part of an allegedly fraudulent scheme to help Banca Monte dei Paschi di Siena SpA conceal losses.

Foresti, who has been charged with colluding with Paschi to falsify accounts and manipulate Paschi’s securities, blamed his former employer for a series of "startling" errors in its assessment of the 2008 transaction, including the allegation of potential rigging.

Italian prosecutors have accused Deutsche Bank of running an international criminal association. While index manipulation was the subject of some of the testimony, it is not among the charges faced by defendants at the Milan trial.

Foresti, 49, said he was the victim of mistaken identity when a colleague named him as the banker who allegedly leaned on traders to move an index. Foresti also said a London trader’s "well done!" email to him -- sent two minutes after that index hit a level that favored Deutsche Bank in the Paschi deal -- had nothing to do with the Italian bank’s transaction.

"We have a series of errors that start here, and I could stay up all night" to see where these mistakes end, Foresti testified last week. He told the court he earned more than 1.2 million pounds ($1.6 million) the year of the ill-fated trade.

Foresti, a managing director and head of structured trading at the time of the deal, denies the charges. He’s one of six Deutsche Bank suspects to testify in the Milan trial. Michele Faissola, Foresti’s senior manager at the time of the transaction, is scheduled to testify Thursday.

“After having read documents related to this trial, my degree of knowledge of this matter, which ruined my life, is higher and I understand it more now than what I understood at the time,” said Foresti, who used analogies to bets on soccer matches to explain part of the transaction. Foresti said he currently invests in real estate and is an executive board member of the Sloan School of Management at MIT in Boston.

Market Bet

Deutsche Bank, which is accused of failing to oversee its bankers, has said it will defend itself in court.

During six hours of questioning by the prosecutor last week, Foresti told the court repeatedly that he never discussed the deal directly with the client, that he had didn’t know how Monte Paschi accounted for the transactions and that it wasn’t his job to question why a deposit-taking bank such as Paschi would make bets on markets. Foresti spoke quickly, prompting a defense lawyer to frequently ask him to slow down. He twisted his torso to look straight at the judges rather than the prosecutor during the excanges.

Asked by the prosecutor if Monte Paschi would represent the transaction in full on its books, Foresti said "the accounting aspect is not my subject and I don’t know."

The Monte Paschi deal was so large it exceeded the risk limits of both Foresti and his superior Faissola, who had to seek backing from "the entire bank" to get the transaction done, Foresti told the court.

Monte Paschi obscured hundreds of millions of euros of losses by making sure-to-win/sure-to-lose trades. Each prong of the bet wagered on an index that was the inverse of the other. The German firm reaped about 60 million euros ($70 million) in profit from a deal known as Santorini in the first two weeks of December 2008.

On one half of the deal, Paschi would make a certain, moneymaking bet with Deutsche Bank and use those winnings to extinguish its 2008 trading losses. For the second half, the Italians would make a losing bet of at least 429 million euros, to neutralize the derivative losses, a deal whose impact would play out over many years.

‘Enormous’ Business

Prosecutors have relied on the findings of an internal Deutsche Bank probe completed in April 2014 which highlighted “abnormalities” in the values of proprietary indexes used to set the price for the Monte Paschi deal in December 2008.

Banks use benchmarks to set terms for transactions. Some are linked to formulas developed internally in proprietary indexes, a business that Foresti described as "enormous" for the firm. Deutsche Bank favored recommending its own indexes over market proxies to keep clients captive, he told the court last week.

Deutsche Bank may have relied on the indexes tied to interest rates needed to hit certain levels when the deal was struck on Dec. 5, 2008. The former banker disputed data collected by Deutsche Bank for its review, including the volume of trades and the benchmark used to set the value.

Foresti joined Deutsche Bank in 1996 at its over-the-counter derivatives desk and oversaw rates and European credit flow trading at the top of his career. He left the firm for Bank of America Corp. in March 2014 and left months later after failing to get regulatory approvals needed for the position.

Prosecutors relied on Deutsche Bank’s internal probe, which cited a colleague who accused Foresti of walking over to a futures trader, "instructing him to buy the contract and keep buying until he said stop."

Foresti said he didn’t order anyone to buy and that the witness’s reference to “one of the tall Italians” is probably a case of mistaken identity. He told the court that the desk that ordered the actual transactions was led at the time by another Italian.

Outside auditors which reviewed the Deutsche Bank analysis said they had nothing substantial to add to the bank’s findings regarding the index movements and that they couldn’t “unequivocally” link that to manipulation or the deal’s outcome. Italian prosecutors submitted both documents to the judge in the Milan court case in 2016.

A Deutsche Bank risk assessment committee signed off on Santorini in Dec. 2008, after first securing a concession that Paschi would sign a “representation letter” pledging it understood the terms of the transaction.

Italy’s markets watchdog Consob last month imposed combined fines of 2.3 million euros against the two banks and Nomura, which signed with Monte Paschi another controversial derivative dubbed Alexandria. Nomura and its bankers are also on trial. The regulator said the banks’ managers colluded to misrepresent Paschi’s accounts and give false information through Alexandria and Santorini.

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