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Deutsche Bank AG is investigating a series of trades that may have improperly generated millions of dollars in personal profits, some at the bank's expense, for a handful of current and former employees, according to people familiar with the matter.

Among those who internal auditors believe profited from the trades is Colin Fan, these people said. Mr. Fan was co-head of Deutsche Bank's investment bank when he left as part of a shake-up in October. The auditors estimate Mr. Fan has made $9 million on a roughly $1 million investment.

The trades, which started in 2009, were meant to remove some of the risk that Deutsche Bank had taken when it made a deal with a large insurance-company client, the people said. Some of the trades continue.

Led by Mr. Fan's team, Deutsche Bank found a hedge fund to take over the bulk of the risk-offloading part of the deal, according to the people. But the fund didn't put up all the cash: Mr. Fan and five other Deutsche Bank employees chipped in some of their own money.

Internal bank auditors are examining whether Mr. Fan and other employees set up the structure to make Deutsche Bank pay an inflated share of profits and fees to themselves and the hedge fund, while locking the bank into high fixed costs, the people said. The internal auditors are also probing whether the compliance review of the structure was adequate, they said.

"We are reviewing a transaction that may have involved unacceptable conflicts of interest when structured in 2009," a Deutsche Bank spokesman said. Following its internal investigation, he said, the bank "will take disciplinary measures where appropriate and review further our controls to minimize the chance of a reoccurrence."

Executives don't believe any clients involved were disadvantaged by the transaction, the spokesman said. The bank has suspended bonuses or other pay to the individuals involved.

A spokesman for Mr. Fan said he had "fulfilled all appropriate compliance procedures, been entirely transparent at all times, and denied any wrongdoing."

The probe hasn't been previously reported. Details of the trades also have been referred to European and U.S. regulators, people familiar with the matter said. The probe's final results are expected to be delivered to senior management in coming weeks.

A person briefed on the continuing internal investigation said auditors haven't determined whether the bank lost money overall, in part because the trades begot other trades that generated commissions and fees.

On its own—without accounting for the ancillary revenue—the 2009 arrangement might have cost Deutsche Bank more than $60 million, according to a preliminary auditors' assessment, the person said.

Mr. Fan left Deutsche Bank in a management overhaul under new Chief Executive Officer John Cryan. Mr. Fan's role in the transaction factored into Mr. Cryan's decision to appoint a different executive to take over his role, according to people close to the matter.

Mr. Fan, who in 2009 was global head of credit trading, was the most senior of the six then-employees to invest in the trades under review and was the one who profited the most, the people said.

The 43-year-old credit trader joined Deutsche Bank in 1998 and later rose under former co-CEO Anshu Jain, who promoted him in 2012 to oversee all of global securities trading. Mr. Jain left the bank last year.

Altogether, internal auditors estimate that the six current and former Deutsche Bank employees have made about $37 million on the trades, which will close off next year, according to the person briefed on the audit. The individuals invested about $4.5 million combined, alongside a small hedge fund based in Monaco, Greengate SAM, that has made roughly $80 million, at a roughly equal rate of return, the people said.

Greengate didn't respond to requests to comment.

In years past, employees at Deutsche Bank and other lenders had more leeway to invest in trades controlled by their employees or alongside bank clients, compliance specialists and bank executives said. Those rules have been tightened apace with other restrictions on behavior.

But banks have long policed their own employees' personal trading and required disclosure to avoid conflict. Such rules widely require that employees detail any personal investments that run counter to clients' or shareholders' interests.

The 2009 trade originated in a roughly $750 million deal between French insurer AXA SA and Deutsche Bank, through which the bank would arrange derivatives trades in part using AXA's money, according to people familiar with the transaction.

Deutsche Bank sought to profit through a strategy known as index arbitrage—essentially betting on the pricing differences between credit indexes and the companies that make them up, which will ultimately come together. But it didn't want the price swings on its own books, the people said.

Mr. Fan's team and Deutsche Bank salespeople signed up Greengate to manage the derivative-trading portfolio and to take on the risk of those swings, the people said. Another former Deutsche Bank deal-structuring specialist who worked on the arrangement also invested, one of the people said.

Another participant was Antoine Cornut, who worked for Mr. Fan at the time, the people said. Mr. Cornut left the bank in 2012. He didn't respond to requests to comment.

John Pipilis, currently Deutsche Bank's co-head of global credit trading, and André Muschallik, a senior salesman, also invested, the people said. Messrs. Pipilis and Muschallik declined to comment through a bank spokesman.

The index-arbitrage trades were viewed as "free money" for investors who could stomach the price swings and wait out the trades.

To amplify what would have been a thin profit margin, Deutsche Bank lent the investors roughly $30 for every $1 invested, the people said. The trades generated steady returns.

A senior bank official who in 2009 was operations chief of the trading unit, Henry Ritchotte, approved the general structure of the transaction but with certain conditions, including that the bank would market the offering to clients and that the bank would earn its fair share of the profits, according to a person familiar with the matter.

Mr. Ritchotte declined to comment through a bank spokesman.

It is unclear how extensively Deutsche Bank tried to market the deal. One person briefed on the internal audit said other employees were told that the offering was oversubscribed. Another person close to the matter said the investment was too small and complicated for big clients, and other hedge funds didn't want to take part in a deal in which they wouldn't be in control of investment strategy.

Other senior executives became aware of the situation in 2014, when employees raised issues with auditors about Mr. Fan's and his colleagues' positions, the people said.

Write to Jenny Strasburg at jenny.strasburg@wsj.com

(END) Dow Jones Newswires

May 19, 2016 16:45 ET (20:45 GMT)

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