Milan Swaps Prosecutor Seeks Ban and Fines for UBS, JPMorgan

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Milan Prosecutor Alfredo Robledo asked a court to ban Deutsche Bank AG, Depfa Bank Plc, UBS AG and JPMorgan Chase & Co. from doing business with Italian local governments for a year for mis-selling swaps to the city.

The prosecutor today asked a Milan court to fine the banks

1.5 million euros ($1.8 million) each and asked they return their 72.5 million euros of illicit profit from the contracts.

The four banks that arranged the swaps have been on trial since May 2010, accused of defrauding Milan by hiding their fees. The companies, which have denied the charges, settled with the city government in March and agreed to unwind the interest-rate swaps, which adjusted payments on 1.7 billion euros of bonds sold by the city in 2005. Opaque derivatives fashioned by securities firms are costing Italian taxpayers more than $1.5 billion, according to March data by the country’s central bank.

“The evidence doesn’t support the sentences and sanctions requested by the prosecutor,” UBS said in an e-mailed statement today. JPMorgan and Deutsche Bank said they acted properly in their dealings with the city. Officials at Depfa didn’t have an immediate comment.

Robledo today asked to absolve two city officials who had been accused of colluding with the banks and two bankers because of insufficient evidence, he said. He requested nine other bankers serve jail terms of as long as 12 months.

Swaps used by the city of Milan may have breached rules on how municipalities use derivatives to manage their debt, partly because they were used to raise funds, a judicially-appointed witness said at the trial in May. The swaps were far from being hedges on the municipality’s interest-rate risk after being restructured multiple times, he said.

Hidden Fees

The banks said in court that firms don’t typically disclose the fees they charge to arrange swaps, tailored trades that lack comparable market prices. Former Milan Mayor Gabriele Albertini told the court in November he knew banks would charge the city for arranging the 2005 financing package that included swaps, though he didn’t know the amount of the commissions.

His successor, Letizia Moratti, said she had relied on the banks as advisers on subsequent transactions. The securities firms thus had a “clear” conflict of interest, she said.

David Dobell, a former official at Britain’s Securities and Futures Authority, testified earlier that the banks had violated U.K. rules by failing to tell city officials they had lost the protection typically given to clients under rules set by the Financial Services Authority. The banks’ advice and execution didn’t observe FSA rules, he said.

Lawyers for the banks will make their final arguments in September.

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