Deutsche Bank AG lost a bid Wednesday to end a shareholder lawsuit accusing it of misrepresenting the risk of packaging home loans into complex financial products.
U.S. District Judge Katherine Forrest in Manhattan denied a motion by the German bank to dismiss the lawsuit, which seeks class action status on behalf of investors accusing Deutsche Bank of scheming to maximize profits at their expense.
"Plaintiffs have certainly set forth sufficient plausible allegations to support a claim for a fraudulent scheme against Deutsche Bank," Forrest wrote.
Duncan King, a Deutsche Bank spokesman, said the bank will continue to defend vigorously against the lawsuit.
The 2011 lawsuit accused Deutsche Bank of issuing false and misleading statements about its health preceding and during the global financial crisis.
Shareholders said Deutsche Bank created and sold mortgage-backed securities that it knew were toxic, overstated its ability to manage risk and was too slow to write down securities whose values had collapsed.
They said that as a result the bank's stock plunged 87 percent in less than two years, falling to $21.27 in January 2009 from $159.59 in May 2007, with much of the decline occurring after the bank began announcing billions of dollars of losses in 2008.
Some of the case focuses on a Deutsche Bank trader named Greg Lippmann. Starting in 2005, according to the complaint, Lippmann was allowed to short the same securities that the bank was selling investors, eventually taking a $2 billion short position.
Forrest said the shareholders had adequately alleged that while Deutsche Bank publicly touted its conservative lending standards, executives "had been provided information indicating the opposite".
"At the very least, the fact that information existed and was presented disproving the validity of the public statements made by Deutsche Bank supports plausible allegations of recklessness," Forrest wrote.
Forrest also allowed securities claims to proceed against several executives, including former CEO Josef Ackermann.
She dismissed claims against Clemens B��rsig, the former chairman of the bank's supervisory board.
The plaintiffs are led by the Building Trades United Pension Fund, the Steward Global Equity Income Fund, and the Steward International Enhanced Index Fund.
The plaintiffs have been seeking to represent investors who bought Deutsche stock from January 2007 to January 2009. Forrest cited a 2010 U.S. Supreme Court decision in dismissing claims by investors who bought shares outside the United States.
John Grant, a lawyer at Robbins Geller Rudman & Dowd who represented the plaintiffs, did not respond to requests for comment.
The U.S.-traded shares closed 2.95 percent lower at $39.07 on the New York Stock Exchange on Wednesday.
The case is IBEW Local 90 Pension Fund v. Deutsche Bank AG, et al, U.S. District Court, Southern District of New York, No. 11-04209.
(Reporting by Nate Raymond; Editing by Lisa Von Ahn,; Peter Galloway and Cynthia Osterman)