Suspicious Sale

German financial markets regulator BaFin has uncovered sufficient evidence indicating possible insider trading at lender IKB, a subsidiary of Germany's giant Deutsche Bank, to warrant a broader investigation, the watchdog said on Wednesday, April 23. The case has been referred to criminal prosecutors in Frankfurt.

The allegations, which involve one bank employee, focus on sales of IKB shares made just before the bank announced last July that was suffering from the collapse of the US subprime mortgage market.

In the week following the July 27, 2007 announcement, IKB's stock dropped from 21.97 euros to 12.65 euros a share. The Deutsche Bank subsidiary specializes in loans to small and medium-sized companies.

Germany's state development bank KfW, also a major shareholder in IKB, has since bailed out the lender several times with a total of 6 billion euros ($9.5 billion) in aid packages. Other banks contributed additional funds to keep the flailing lender afloat.

Lender's losses lower than expected

According to reports, however, IKB is not fairing quite as badly as expected, with a deficit of 200 million euros for the 2007-2008 fiscal year instead of the 800 million that had been predicted.

"If it's true that a trader from the Deutsche Bank group speculated on the drop in IKB stock prices shortly before [Deutsche Bank CEO Joseph] Ackermann sounded an alarm at BaFin that things were heading downhill, then that's at least a strange coincidence, if not more," Ekkehardt Wenger, a banking law professor, told German public broadcaster ARD.

If proven, insider trading can be punished with a fine or a jail sentence of up to five years, according to the prosecutor's office.