Unitech Ltd, a realty major, has accused Deutsche Bank of selling it an interest-rate swap that wasn’t suitable and wasn’t properly explained, according to a London lawsuit over a $150-million loan deal.
Unitech filed a counterclaim in May, arguing Deutsche Bank was negligent to sell an unsuitable hedging agreement, and owed damages that cancelled out its debt, according to court documents. Germany’s biggest bank had earlier sued Unitech, saying a unit of the company owed $11 million under the swap contract and had missed payments.
Deutsche Bank “knew, or must have appreciated, that it was likely to make significant amounts of money” from the contract at Unitech’s expense, the Indian company said in its lawsuit.
Interest-rate swaps that turned out to be costly for customers and profitable for banks have led to hundreds of lawsuits and an investigation by the UK Financial Services Authority into how they were sold. Unitech’s suit is one of the largest to reach the UK courts. The issue has affected bank customers from British seaside cafes to municipal governments, including Milan in Italy and Jefferson County, Alabama.
“There is a large spectrum of mis-selling claims in terms of amounts and sophistication of customers,” said Max Hotham, an attorney at Enyo Law LLP in London, who isn’t involved in the Unitech case. His largest UK case involves a euro 1 billion ($1.26 billion) swap, he said in a phone interview. “The scale of this thing is enormous.” Unitech’s lawyer, Paul Friedman, and Libby Young, a Deutsche Bank spokeswoman, both declined to comment.
The swaps are supposed to protect borrowers from a rise in interest rates by converting floating-rate debt to fixed-rate debt. Customers can face spiralling costs if rates drop or move more than expected.
Unitech said in the lawsuit its managers didn’t have any experience with interest-rate swaps and Deutsche Bank hadn’t explained the risks.
Total payments under the agreement were at least $23.5 million between 2007, when it was signed, and 2010, Unit-ech said. That sum showed “the transaction was not a suitable hedge.”
