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JPMorgan, UBS Convictions Overturned in Milan Swaps Case

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The Duomo di Milano, or Milan Cathedral, is reflected in the window display of a store selling Italian branded goods in Milan. Photographer: Gianluca Colla/Bloomberg
The Duomo di Milano, or Milan Cathedral, is reflected in the window display of a store selling Italian branded goods in Milan. Photographer: Gianluca Colla/Bloomberg

JPMorgan Chase & Co., Deutsche Bank AG, UBS AG and Depfa Bank Plc won a bid to overturn a conviction for overseeing fraud by their bankers in the sale of derivatives to the city of Milan.

An appeals court in Milan cleared the banks and individuals at the firms because “the alleged crimes didn’t take place,” Judge Luigi Martino said as he read out the verdict today.

In the appeals trial, prosecutor Piero de Petris had argued that the banks, in their roles as advisers to the municipality, should have disclosed how much the derivatives were costing the borrower. Defense lawyers cited testimony by municipal officials during the lower-court trial as proof the city was aware the four banks were making money on the trades and of the magnitude of those commissions.

“Deutsche Bank welcomes today’s verdict in the Appeals Court of Milan, which has confirmed that Deutsche Bank and its employees acted properly and in compliance with all laws and regulation,” the German bank said in a statement.

Recoup Losses

Municipalities from Detroit to Naples have lost money on derivatives that were meant to lower borrowing costs and instead backfired. Italian local governments, including the city of Florence and the region of Piedmont, have sought to recoup their losses through legal action at home and in the U.K.

JPMorgan “consistently maintained that the charges were completely without merit,” the bank said in a statement. “We are pleased that this has now been recognized by the Court of Appeal.” Elisa Scaroina, a lawyer for Depfa and UBS, also said the banks were pleased with the ruling.

Andrea Castaldo, a criminal lawyer and professor at the University of Salerno, Italy, who isn’t involved in the Milan case, said these types of claims are difficult to win. “It’s tough to argue that a large administration was misled.”

Unwind Swaps

The companies in the Milan case settled with the city government in March 2012, agreeing to unwind interest-rate swaps, which adjusted payments on 1.7 billion euros ($2.3 billion) of bonds sold by the city in 2005.

The lower-court judge in February 2013 said the banks tricked the municipality into agreeing to a financing deal that didn’t meet its objective of cutting borrowing costs.

The banks and the city negotiated prices on the derivatives contracts and the banks provided terms on the trades that enabled the city to work out how much the banks were earning, defense lawyers argued in the appeal.

Industry Practice

It’s industry practice not to give clients a statement indicating how much banks stand to earn on swaps, the lawyers said. Milan, they argued, is a municipality that’s equipped to manage such transactions, unlike smaller cities that may lack expertise in finance.

“There’s a difference between an accounting loss and a truly bad deal, in which there’s deception or dishonest dealings by the banks,” said Peter Shapiro, managing director with Swap Financial Group LLC in South Orange, New Jersey. “Milan, as a large municipality, should have known it needed independent advice as it approached an opaque part of the market.”

Milan’s city council offered to pay the four banks a fee of just 0.01 percent to arrange its bond sale. 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.

Prosecutors can appeal the ruling at Italy’s highest court for a final judgment.

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