The Puerto Rico based firm filed the lawsuit at the Southern District Court in New York and charged the bank for carrying out transactions worth $1bn, "as a repository for poorly-underwritten, toxic or distressed lending assets."
Arco Capital claimed that the bank committed fraud and breach of contract over an instrument issued in 2006, which combined interest payments and default risks for loans allowed by the German lender to emerging market companies.
The bank also changed the definition of reference obligations so that a number of derivatives including interest rate and currency swaps could be included into "poorly underwritten" and "highly risky" loans.
The court filing stated, "Deutsche Bank took advantage of the upsize to dump ineligible lending transactions into the reference portfolio, and used its control over the transaction to disguise its misconduct and frustrate the protections that existed for noteholders."
Arco further alleged that by including such derivatives and risky loans, Deutsche Bank has deprived and deceived the CLO’s noteholders, leading to the specified losses.
Commenting on the charges leveled by the investment firm, Deutsche Bank told the Financial Times, "We believe these allegations are without merit and will defend against them vigorously."
