Paschi Probe Seeks Nomura Funds in Citigroup, BofA Accounts

Prosecutors probing Banca Monte dei Paschi di Siena SpA’s use of derivatives to hide losses are seeking to seize as much as 1.95 billion euros ($2.6 billion) of assets held by Nomura Holdings Inc. (8604) in accounts across Europe.

Magistrates are trying to sequester money held on behalf of the Tokyo-based lender in accounts at Citigroup Inc. (C) and Bank of America Corp. in the U.K., according to an April 15 decree signed by four prosecutors in Siena, Italy, and obtained by Bloomberg News. They are also trying to seize funds Nomura holds at other banks through Target2, Europe’s cross-border payment system, the document shows.

Prosecutors allege Nomura colluded with Monte Paschi’s former managers to devise one of two derivatives in 2008 and 2009 that hid total losses of much as 557 million euros. Nomura took advantage of Monte Paschi’s strained finances and knew of management’s intention to falsify accounts with the so-called long-term repo it arranged, dubbed Alexandria, prosecutors said in their order. Japan’s biggest brokerage reaped 88 million euros from the deal, a transaction so biased in Nomura’s favor, it equates to usury, the magistrates wrote.

Shares Drop

Nomura, which isn’t under investigation itself, said yesterday it will “vigorously” contest any suggestion of wrongdoing in the case. A Citigroup spokeswoman in Milan didn’t have an immediate comment, while spokesmen for Bank of America and Nomura in London declined to comment. Neither Citigroup nor Bank of America are part of the probe, which is focused on former managers of Monte Paschi and Nomura executives.

Photographer: Simon Dawson/Bloomberg

Magistrates are seeking to freeze the funds held on behalf of Nomura in accounts with Citigroup Inc. and Bank of America Corp. in the U.K., according to the prosecutors’ order, dated April 15, and obtained by Bloomberg News. Close

Magistrates are seeking to freeze the funds held on behalf of Nomura in accounts with... Read More

Close
Open
Photographer: Simon Dawson/Bloomberg

Magistrates are seeking to freeze the funds held on behalf of Nomura in accounts with Citigroup Inc. and Bank of America Corp. in the U.K., according to the prosecutors’ order, dated April 15, and obtained by Bloomberg News.

Nomura tumbled 2.3 percent to 754 yen at the close on the Tokyo Stock Exchange, the steepest decline since April 1. The Nikkei 225 Stock Average rose 1.2 percent. Monte Paschi, which sought a 4.1 billion-euro rescue in February, has lost 35 percent of its market value since Jan. 17, when Bloomberg News first reported the lender’s use of derivatives.

Prosecutors and the finance police are working with the Bank of Italy to sequester the funds held outside Italy, two people with knowledge of the investigation who asked not to be identified said yesterday. Because Monte Paschi deposits its margin in an account used by Nomura in Germany, the Bank of Italy may ask the Bundesbank to seize the contents of that account, the people said.

Alexandria Deal

As part of the Alexandria deal, Monte Paschi bought Italian government bonds using a loan from the Japanese bank. It swapped the fixed-rate interest payments on the bonds with a floating rate and guaranteed the credit risk on the bonds, effectively making a bet on the future value of Italian government bonds. As those securities tumbled during Europe’s fiscal crisis, Monte Paschi was forced to post more margin.

In total, the Italians pledged about 1.87 billion euros to Nomura as margin on about 3.05 billion euros of borrowings arranged by Nomura, according to the prosecutors’ order. They are also seeking Nomura’s alleged profit on the transactions. The magistrates’ order to seize assets must be ratified by a judge in Siena within 10 days of issue, a police official said.

As part of the seizure request carried out yesterday, prosecutors have frozen contracts between Monte Paschi and Nomura, halting payments on the agreements, the document shows. The transactions continue to create “imposing” financial difficulties for Monte Paschi (BMPS) and could cause further damages as a result of the alleged usury, according to the magistrates.

The prosecutors are also examining a separate trade put together by Deutsche Bank AG, dubbed Santorini, which the magistrates described as a “twin-like” deal, according to the asset seizure document.

Deutsche Bank, based in Frankfurt, said the transaction was subject “to our rigorous internal approval processes and also received the requisite approvals of the client who was independently advised.”

To contact the reporter on this story: Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net

To contact the editors responsible for this story: Edward Evans at eevans3@bloomberg.net; Dan Liefgreen at dliefgreen@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.