Italian court to rule in landmark derivatives case

Tue Dec 18, 2012 7:07am EST
 
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By Silvia Aloisi

MILAN (Reuters) - An Italian court is expected to rule on Wednesday on whether four foreign banks missold derivatives to the city of Milan in a case seen as a litmus test for hundreds of local governments facing big losses from complex financial contracts.

Deutsche Bank DBKGn.DE, JP Morgan JPM.N, UBS UBSN.VX and Depfa Bank have been charged with aggravated fraud and accused of making 100 million euros ($132 million) in illicit profits from the sale of an interest-rate swap on a bond issued by the city of Milan.

Prosecutor Alfredo Robledo, who has requested jail terms of up to 12 months for nine bankers, also says the lenders lied about the risks linked to the swap and falsely represented the deal as a way to reduce Milan's debt. The banks deny any wrongdoing and say they were transparent in their dealings.

The case comes as banks face increased scrutiny, particularly in Britain, over alleged misselling of interest-rate hedging products to small businesses. British banks have set aside hundreds of millions of pounds for possible compensation.

Derivatives misselling is one of a number of banking scandals that authorities are investigating following the global financial crisis.

Switzerland's UBS will pay around $1.5 billion to settle charges that a group of traders at its Japanese unit rigged Libor interest rates, a source familiar with the matter said on Monday, while Deutsche Bank is the subject of a number of probes including suspected tax evasion over trade in carbon permits.

The Milan case is the first criminal trial of this kind in Italy, where about 600 local governments bought derivative products worth 36 billion euros, many of which turned sour when the financial crisis started to bite.

"A guilty verdict would set a rather dangerous precedent for the banks," said Tommaso Iaquinta, a lawyer involved in several cases pitting local authorities against banks over derivatives.   Continued...

 
Police officers stand inside the lobby of the headquarters of Germany's largest business bank, Deutsche Bank AG in Frankfurt December 12, 2012. REUTERS/Kai Pfaffenbach