Monte Paschi Says Nomura, Deutsche Bank Helped Mask Losses

Banca Monte dei Paschi di Siena SpA alleged Nomura Holdings Inc. and Deutsche Bank AG colluded with former managers to devise two derivatives that hid losses and earned them at least 180 million euros ($231 million).

The world’s oldest bank said the two firms were aware Monte Paschi’s then managers wanted to hide losses and designed with them two derivatives aimed at achieving that goal, the Italian lender said in a 74-page report to shareholders. Monte Paschi, which last month filed a lawsuit seeking damages from the two lenders and former executives Antonio Vigni and Giuseppe Mussari, said it will seek compensation if a court finds the behavior of Deutsche Bank and Nomura employees to be criminal.

Monte Paschi hid as much as 557 million euros of losses from previous years through the two transactions in 2008 and 2009, the lender said. Deutsche Bank earned at least 92 million euros from Santorini, a deal first reported by Bloomberg News in January, while Nomura reaped at least 88 million euros from its transaction, dubbed Alexandria.

Those deals “should never have been put together,” the Siena, Italy-based lender said in a report released on March 29. Nomura and Deutsche Bank “were perfectly aware of the context, the illicit objectives” of Monte Paschi’s former executives, the company said.

As part of the transactions, Monte Paschi made money-losing bets on the value of Italian government bonds which have forced the bank to post additional collateral that has cost 173 million euros, the lender said.

Shares Tumble

Monte Paschi is seeking 500 million euros of compensation from Deutsche Bank, Germany’s biggest bank, and 700 million euros from Nomura. The lender calculated Nomura’s and Deutsche Bank’s so-called hidden charges on the deals as the difference between fair value of the new deals at inception and the value of the original loss, the document shows.

“The transaction was subject to our rigorous internal approval processes and also received the requisite approvals of the client who was independently advised,” Deutsche Bank said in a statement. “We will defend ourselves vigorously against any claims for damages.”

Redzi Mangwana, a spokeswoman for Nomura, declined to comment. On March 1, Nomura filed a suit against Monte Paschi in London seeking confirmation that the agreement with which the Italian lender hired Nomura is valid. Lawyers for Mussari and Vigni didn’t return phone calls seeking comment.

Monte Paschi declined 2.8 percent to 17.98 cents in Milan today, bringing this year’s drop to 20 percent. Italy’s market watchdog banned new short sales on the stock today and tomorrow after it fell as much as 13 percent in earlier trading.

Net Loss

The bank said on March 28 its fourth-quarter net loss was 1.59 billion euros, more than double the 686.3 million-euro loss estimated by analysts in a Bloomberg survey. The lender was forced to seek a second state rescue in four years and take a 730 million-euro hit to assets after uncovering transactions that hid earlier losses.

The bank’s capital shortfall contributed to rating downgrades which have increased the company’s cost of funding, and the reputational damage includes “several” billion euros of deposits that clients pulled from the bank, Monte Paschi said.

Finance Police

Bloomberg News’s Jan. 17 story disclosing that Monte Paschi had manipulated its earnings in 2008 using derivatives showed that the lender was losing about 367 million euros on an equity swap with Deutsche Bank. The Monte Paschi report confirmed the swap lost 362 million euros when it was closed and replaced by the fresh transaction that concealed the loss.

Italy’s finance police searched Nomura offices in Milan on March 27 as prosecutors stepped up their investigation. Nomura, Japan’s biggest brokerage, isn’t being investigated. Meantime, Deutsche Bank on March 22 voluntarily submitted documents to Siena prosecutors that relate to its deal with Monte Paschi, according to two people with direct knowledge of the case who declined to be identified because they weren’t authorized to speak publicly.

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