Police Investigating Danske Bank Rule Out Systemic Misdeeds

Jul 22, 2014 7:58 am ET

(Updates Danske Bank share price in seventh paragraph.)

July 22 (Bloomberg) -- Police investigating Danske Bank A/S on allegations of bond price manipulation said the evidence so far pointed to isolated cases of individual misconduct rather than a broader series of breaches across the bank.

Denmark’s biggest lender said yesterday it found evidence to suggest an employee had passed on insider information, adding a new layer to an investigation that was first made public in February.

“There’s nothing here that suggests this was something systemic in the bank that was steered from high up within the organization,” Henrik Helmer Steen, deputy public prosecutor, said in a phone interview yesterday. “We’re talking about individual traders.”

Danske said it is cooperating with police in their efforts to find out whether the bank, its mortgage unit and four employees manipulated mortgage bond prices in early 2009. The alleged cases of price rigging were designed to drive prices higher, making client redemptions more costly, public prosecutor Hans Fogtdal said at the time.

The trades in question were made during the darkest hours of the financial crisis, after the 2008 failure of Lehman Brothers Holding Inc. drained markets of liquidity. The bonds at the center of the probe were relatively illiquid notes based on the Copenhagen interbank offered rate, police said in February.

Bond Liquidity

A 2010 study by the Danish central bank that found mortgage bonds to be as liquid as government debt during the crisis excluded 190 smaller mortgage bonds from its analysis.

Danske’s shares have returned 26 percent this year, making it the best performer among the Nordic region’s six biggest banks, according to data compiled by Bloomberg. The stock gained as much as 1.2 percent today in Copenhagen trading. It traded 0.9 percent higher as of 1:53 p.m. local time.

The bank, which publishes second-quarter earnings on July 24, will deliver its best results since 2007, Ricky Rasmussen, a senior analyst at Nykredit Markets, said today in a note. He sees net income climbing 67 percent as revenue rises and costs decline. Danske also will book a 1 billion-krone ($180 million) gain from the sale of its stake in payment services provider Nets Holding A/S, Rasmussen said.

Whistle-Blower

Danske said it came across evidence of possible insider information being passed on by an employee at its Realkredit Danmark A/S unit to an employee at Danske Markets. The person in question revealed details by phone about a future bond listing “even though this disclosure of inside information was not made within the normal course of the exercise” of the employee’s duties, according to a stock exchange announcement.

“We asked for more information, which was what prompted Danske Bank and Realkredit Danmark to do another internal investigation,” Helmer Steen said. “That investigation led to the latest revelations of what might have been insider trading.”

Denmark has established new whistle-blower rules to make it easier for bank employees to report potential wrongdoing at work. The Financial Supervisory Authority has given lenders a Sept. 1 deadline to establish anonymous reporting procedures and created a website for direct reporting to the Copenhagen-based agency.

The maximum prison sentence for the cases being investigated at Danske is six years, Helmer Steen said.

“But we’re not necessarily looking at anything like that,” he said. “We still need to find out whether this will lead to an actual criminal charge being made.”