Deutsche Bank AG, JPMorgan Chase & Co., UBS AG and Depfa Bank Plc were convicted by a Milan judge for their role in overseeing fraud by their bankers in the sale of derivatives to the city of Milan.
Judge Oscar Magi in Milan yesterday ordered that about 90 million euros ($119.6 million) of assets be seized from the banks, the amount of their profit, and that the firms pay sanctions of 1 million euros each. He also convicted nine bankers of fraud, and suspended their sentences.
The convictions come as global authorities investigate claims that more than a dozen banks altered submissions used to set benchmarks such as Euribor and Libor to profit from bets on interest-rate derivatives, such as the ones used by Milan. UBS said yesterday it was fined $1.5 billion by U.S., U.K. and Swiss regulators for trying to rig global interest rates. In Italy, opaque derivatives fashioned by securities firms are costing taxpayers more than 1.3 billion euros, according to June data by the country’s central bank.
“This marks the beginning of the setting of new standards of proper behavior by banks,” said Gustavo Piga, a professor at University of Rome Tor Vergata and former adviser to the Italian Treasury.
In separate statements, the banks said they disagree with the verdict and plan to appeal. They had been on trial since May 2010, accused of defrauding Milan by hiding how much they made on the derivatives. The companies had denied the charges and settled with the city government in March, agreeing to unwind interest-rate swaps, which adjusted payments on 1.7 billion euros of bonds sold by the city in 2005.
Prosecutor Alfredo Robledo argued the banks earned about
72.5 million euros in hidden fees when they agreed to the swaps and tricked Milan by telling the city it would save on its borrowings with the bond sale and derivatives.
The judgment “recognizes that a negative mark-to-market is money out the door in the future,” said Michael Dempster, founder of the University of Cambridge’s Centre for Financial Research.
Swaps used by the city of Milan likely 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.
The banks argued in court that firms don’t typically disclose what they charge to arrange swaps, tailored trades that lack comparable market prices.
Milan’s city council offered to pay the four banks a fee of just 0.01 percent to arrange its bond sale, or one-seventh of what JPMorgan had originally asked to be paid. JPMorgan was asked to lower the fee to bring in it line with Depfa’s winning bid, the court heard.
As part of the deal, the same four banks were hired by the city to advise it on how to use the new bonds to restructure its existing debt in a way that was intended to cut costs. The banks later proposed to add swaps and argued that the banks best place to sell them those swaps were the same four lenders.
“It’s a historic judgment,” Robledo said. It’s the first time “that the lack of transparency by banks in dealing with government entities is a crime.”
David Dobell, a former official at Britain’s Securities and Futures Authority, testified that the banks had also 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 bankers didn’t observe FSA rules, he said in court.
Joseph Eyre, an FSA spokesman in London, couldn’t be immediately reached for comment on the ruling.
The judge gave the nine bankers suspended jail sentences of as long as eight months and 15 days. He also barred them from dealing with government entities for a year. The nine bankers are JPMorgan’s Antonia Creanza and former banker Fulvio Molvetti; Deutsche Bank’s Carlo Arosio and Tommaso Zibordi; Depfa’s Marco Santarcangelo and former banker William Marrone; UBS’s Gaetano Bassolino, Matteo Stassano and former banker Alessandro Foti.
JPMorgan’s Francesco Rossi Ferrini and former employee Simone Rondelli were acquitted of all charges, as were two former city officials.
Under Italian law, companies can be convicted if they fail to demonstrate they had adequate mechanisms to prevent the crimes for which its employees are found guilty of from being committed. The judge will publish the reasoning for his ruling within 90 days and parties are able to appeal the judgment.
“This is part of a pattern that indicates there was no section of the financial system that was free of illegality,” Christopher “Kit” Taylor, a former executive director of the Municipal Securities Rulemaking Board in the U.S.