(CN) – A federal judge in Manhattan ordered Deutsche Bank to pay E*Trade Financial $18 million in damages for breaching arising out of the sale of two of Deutsche subsidiaries.
In a 217-page opinion, U.S. District Judge Robert W. Sweet said Deutsche had overstated certain “deferred tax assets” of Ganis Credit Corp. and Deutsche Recreational Asset Funding Corp. E*Trade sued the bank nearly five years ago, alleging breach of contract and fraud.
E*Trade bought Ganis and DRAFCO in 2002 and 2003, respectively.
The acquisition was to take place in two stages. The first stage was Deutsche transferring Ganis to E*Trade for $10.5 million. The second stage, E*Trade’s acquisition of DRAFCO, was conditioned on the three major bond-rating agencies – Moody’s, Standard & Poors, and Fitch – confirming that the acquisition would not result in a downgrade of the notes.
At the center of the case are complicated transactions known as securitizations.
“Only persons with expertise in securitizations are able to understand the interplay between these multiple parties and the complicated tax accounting concepts arising from securitizations, including deferred tax assets,” Judge Sweet wrote.
Securitization inflates income and reduces taxes immediately payable. E*Trade argued that Deutsche’s accounting for the securitization enabled it to record a large book gain on the day the securitization closed and to defer the taxes it had to pay on that gain.
The judge said a deferred tax asset arises when an entity’s income for tax purposes is temporarily higher than its income for book purposes. E*Trade argued that Deutsche failed to consider servicing fee expenses and liquidation expenses. Judge Sweet agreed that the damage caused by not taking these tax deductions into account was “foreseeable.”
The judge found for E*Trade on all breach-of-contract claims, but rejected the plaintiff’s fraud claims.