Italy Seizes Millions in Assets From Four Banks
By CLAUDIO GATTI
Published: April 27, 2009
With municipal bond investigations spreading to Europe from the United States, Italian authorities have seized about $300 million in assets of four global banks — JPMorgan Chase, Deutsche Bank, UBS and Depfa — whose officials have been accused of fraud.
The Guardia di Finanza in Milan, the financial police of Italy, took over real estate properties, bank accounts and stock holdings on Monday to assure it could collect from the banks if their officials were found guilty and the banks were held responsible.
The seizures stem from the banks’ handling of a $2.2 billion municipal bond issue and related financial contracts known as swaps that Milan undertook to retire other debt in June 2005. The lead prosecutor accused the bankers of misleading the city and falsely claiming that the deal would generate savings. If all the costs had been properly included, the prosecutor said, the entire deal would have been illegal under a national law that allows restructuring of debt only if it produces a savings.
Alfredo Robledo, the prosecutor in Milan, suspects the banks made $130 million in illicit profits, according to information obtained in a joint investigation by the Italian business newspaper Il Sole 24 Ore and The International Herald Tribune. He is also investigating transactions by the banks with other local Italian governments and the possibility that public officials received kickbacks.
About 35 billion euros ($46 billion) in bonds were issued by local Italian governments over the last decade, mostly by the London units of large banks based in the United States and Europe. A former executive from one of the banks being investigated in Milan said that all of these could be subject to challenge.
Representatives of each of the four banks declined to comment. JPMorgan is based in New York, Deutsche Bank in Frankfurt, UBS in Zurich and Depfa is a unit of Hypo Real Estate in Munich.
Three of the banks are also being investigated over their municipal bond practices in the United States. Officials or former officials of JPMorgan Chase, Deutsche Bank and UBS, along with the institutions themselves, are the subjects of investigations, company filings and documents filed in civil cases show.
In its annual report released last month, JPMorgan Chase acknowledged parallel investigations in the United States by the Justice Department and the Securities and Exchange Commission into possible antitrust and securities violations involving derivatives sold to local governments. JPMorgan said it was cooperating with the investigations and had provided documents.
On both sides of the Atlantic, the banks and their executives have been accused of misleading local governments and selling officials exotic financial products known as derivatives that they did not fully understand.
These derivatives, when combined with bond offerings, were presented as ways to raise cash and reduce the long-term cost of debt, but officials claim now that many of the contracts, in the form of swaps, were packed with millions of dollars in fees that were not disclosed.
In his filings to a judge in Italy seeking the asset seizure, Mr. Robledo asserted that the bankers falsely claimed that the deal would save 57.3 million euros.
While charging only nominal fees to show the refinancing would be beneficial, he said, the bank then hid their profits in the spread between what the city paid to the banks and what the banks gave in return on swaps contracts that accompanied the bond issue — a difference of 52.7 million euros.
The original deal was rescheduled five times until October 2007 and produced an additional 48 million euros of profit for the banks.
In total, the banks earned about 101 million euros in such payments over a two-year period. The largest share went to JPMorgan Chase, which the prosecutor said took in almost 45 million euros.
It is too soon to tell whether the long-term cost of the deal and the swaps contracts, which carry more risk than a plain-vanilla bond offering, will be even higher.
The jurisdiction of this case is in dispute. Last January, days after Milan announced that it was suing the banks in civil court, JPMorgan filed a countersuit in the High Court in London to have the claim heard there instead.
In their presentations, the banks noted that they were regulated by the Financial Securities Authority in Britain, an agency similar to the S.E.C., and that their contracts were subject to British laws.
But the Italian investigators argue that they have authority to investigate any fraud. British law “would be applicable to civil proceedings, not a criminal one, such as this,” said an investigator involved in the case who said he was not authorized to speak about a continuing investigation. According to the Italian magistrate, British rules may have been violated as well. Citing the opinion of David Dobell, a former British financial regulator who is now a partner in CCL, a compliance consultancy, the prosecutor claimed that the banks breached their fiduciary duties as defined by the F.S.A. when dealing with a nonprofessional customer like Milan.
These and other similar transactions could be invalidated if the banks breached those duties, requiring the banks to disgorge their profits from the deals and pay damages.
Beside the 10 bankers, Giorgio Porta, Milan’s general manager at the time of the deal, and Mario Mauri, then a financial adviser to the mayor, are also under investigation. The Italian prosecutor could soon request help from the British regulator in determining whether intermediary or consultant fees were paid by the banks and to whom.
Claudio Gatti is an investigative reporter for Il Sole 24 Ore. He is based in New York.