Deutsche Bank AG, JPMorgan Chase & Co., UBS AG and Hypo Real Estate Holding AG’s Depfa Bank Plc unit were charged with fraud

Deutsche Bank AG, JPMorgan Chase & Co., UBS AG and Hypo Real Estate Holding AG’s Depfa Bank Plc unit were charged with fraud linked to the sale of derivatives to the City of Milan.
Judge Simone Luerti scheduled the trial of the four firms, 11 bankers and two former city officials for May 6, Prosecutor Alfredo Robledo said after a hearing in Milan today. The banks allegedly misled the city on swaps that adjusted interest payments on 1.7 billion euros ($2.3 billion) of borrowings.
Prosecutors across Italy are probing banks as local and national government agencies face potential losses of 2.5 billion euros on derivatives, lawyers say. The Milan probe may also affect cases as far away as the U.S., where securities firms have faced charges for price-fixing and bid-rigging in the sale of derivatives to municipalities, though not for fraud, according to former regulator Christopher “Kit” Taylor.
“This case could have repercussions over here if the trial showed deliberate intent,” said Taylor, a former executive director of the Municipal Securities Rulemaking Board, the national regulator of the municipal-bond market. “What happened in Europe was the continuation of a pattern in the U.S.”
UBS, JPMorgan and Deutsche Bank officials didn’t have an immediate comment. Officials at Depfa couldn’t immediately be reached.
Economic Advantage
Robledo alleges the London units of the four banks misled Milan on the economic advantage of a financing package that included the swaps and earned 101 million euros in hidden fees.
He also claims the banks violated U.K. securities rules by failing to inform Milan in writing that for the swap deal the city was a counterparty to the lenders rather than a customer. Banks abiding by the rules of the Financial Services Authority are required to shield customers from conflicts of interest and provide them with clear and fair information that isn’t misleading.
The prosecutor, who seized assets from the banks equal to their share of the alleged profit, is claiming JPMorgan charged about 45 million euros in commissions that were hidden from the municipality, while Deutsche Bank made about 25 million euros, Depfa Bank earned 21 million euros and UBS made 10 million euros, court documents show.
“The thesis brought forward by the prosecutor was particularly innovative and aggressive,” said Giampiero Biancolella, an attorney specializing in financial crime who isn’t involved in the case. “The indictments prove the allegations are legitimate, though the charges don’t yet prove the banks are guilty.”
Apulia Probe
In another Italian investigation, magistrates in the region of Apulia are probing Bank of America Corp. and last month requested the company be stopped from doing business with the country’s municipalities for two years amid allegations it misled the municipality on derivatives linked to 870 million euros of bonds. A unit of Dexia SA is also under investigation in the same case.
Separately, Nomura Holdings Inc. bankers are under investigation for alleged fraud relating to derivatives contracts sold to the Italian region of Liguria in 2004, people familiar with the case said last month.
Derivatives are unregulated financial instruments linked to stocks, bonds, loans, currencies and commodities, or related to specific events such as changes in interest rates or the weather.
The allegations have prompted Italian lawmakers to propose new rules restricting the use of derivatives among municipalities by boosting oversight and banning upfront payments. Italy’s Senate Finance Committee on March 11 unanimously approved a proposal on tighter rules that will be used by the finance ministry to shape regulation.
Through swaps, “banks found a way to sell something that is debt without making it look like debt,” said Taylor, who advises a law firm that has sued banks on behalf of residents of Jefferson County, Alabama, which was on the brink of bankruptcy after swaps backfired.