SIENA/MILAN (Reuters) - Italian police arrested on Thursday the former head of Monte dei Paschi’s finance department, who is at the center of a probe into alleged fraud and bribery at Italy’s third largest bank, prosecutors said.
Gianluca Baldassarri is the first person to be arrested in a widening scandal that has rocked the world’s oldest bank and triggered a financial and political storm ahead of Feb 24-25 national elections.
Prosecutors in the Tuscan city of Siena, where the 540-year-old bank is based, said Baldassarri was accused of helping mislead regulators over the true nature of a secret derivative contract that was found in a safe by the bank’s new management in October 2012.
In a statement, the prosecutors said Baldassarri was detained in Italy’s financial capital Milan because they feared he might leave the country. His home in Milan was being searched, the statement added.
Contacted by Reuters, Baldassarri’s lawyer, Filippo Dinacci, declined to comment.
Baldassari left Monte dei Paschi shortly after the arrival of new chief executive Fabrizio Viola in January 2012.
Prosecutors in Siena are investigating accusations of corruption in Monte dei Paschi’s costly acquisition of smaller rival Antonveneta in 2007, as well as a series of loss-making derivative and structured finance trades dating back to 2006-09, which the bank says it discovered only last October.
The bank’s former managers, who are being questioned by magistrates, have declined to comment. Current managers who took office last year have said they have found no evidence of wrongdoing in the Antonveneta deal, but believe the loss-making derivatives trades were wrongly hidden.
Italian prosecutors seized some 40 million euros ($54 million) last week as part of their investigation. The prosecution seizure order, seen by Reuters, said the funds belonged to Baldassarri and four other people suspected of criminal conspiracy to commit fraud.
Baldassarri has never commented publicly on the allegations and his lawyers, repeatedly contacted by Reuters, have said he did not want to comment.
The scandal has raised questions over the future of the bank, which last month won final approval for a 3.9 billion euro state bailout.
The finance department headed by Baldassarri, who worked at Monte dei Paschi from 2001-2012, is at the heart of the probe.
Internal documents obtained by Reuters show an audit of the department in August and September 2009 had uncovered a “systematic overshooting of risk limits” in the management of the group’s 24-billion euro proprietary portfolio.
Last week, the lender put losses stemming from three derivatives trades at 730 million euros and said it may have to restate previous accounts.
One of the structured finance transactions under scrutiny is a complex 2009 trade between Monte dei Paschi and Japanese bank Nomura, known as “Alexandria”.
The bank’s new management says Monte dei Paschi’s board never reviewed the trade for approval, and its true nature only came to light in October last year after a secret contract was found in a safe.
Nomura has said the transaction was approved at the highest level by Monte dei Paschi’s then management.
“Nomura acted fairly and responsibly with the client at all times, and strongly refutes any suggestion to the contrary,” the Japanese bank said in a January 22 statement. It has declined to comment further since that statement.
In their statement on Thursday, the Siena prosecutors said they had feared Baldassarri may be seeking to leave the country because they had evidence he was trying to cash in securities worth more than 1 million euros after the February 7 fund seizure.
Prosecutors accuse former Monte Paschi executives of using the derivatives trades to massage accounts and conceal losses following the 9-billion-euro Antonveneta deal, which left the bank badly weakened just before the 2008 financial crisis.
The bank’s new chiefs and the Bank of Italy say the former management concealed details of derivatives operations linked to Italian government bond prices, which left Monte Paschi badly exposed when many European bond markets collapsed in 2011.
The Bank of Italy has faced increasing questions over its supervision, and Mario Draghi, who was governor of the Italian central bank before becoming president of the European Central Bank in November 2011, has also been drawn into the criticism. ($1 = 0.7442 euros)
Writing by Silvia Aloisi; Editing by Keith Weir and Peter Graff