Paschi Ex-Managers’ Trial Begins as Hidden Losses Become Focus

Three former executives of Banca Monte dei Paschi di Siena SpA went on trial for allegedly obstructing regulators in the first case related to how the managers may have embellished the bank’s finances.

The trial began in Siena, Italy today with a lawyer for the Bank of Italy seeking damages as a civil plaintiff. Giuseppe Mussari, Gianluca Baldassarri and Antonio Vigni face charges that they colluded to hide a document that showed how the world’s oldest bank entered into a financing agreement with Nomura Holdings Inc. in 2009 to conceal losses.

After Bloomberg News reported in January how Italy’s third-biggest bank used derivatives to conceal losses on a similar transaction with Deutsche Bank AG, Monte Paschi restated its accounts, taking a 730 million-euro ($986 million) hit to assets. The Nomura and Deutsche Bank transactions, which were bets on Italian government bonds, have backfired for Monte Paschi, forcing new management to seek additional state aid. The lender may be nationalized if it’s unable to meet European regulator demands that it tap private investors to repay part of the bailout next year.

Baldassarri, 52, the bank’s former finance head who’s under house arrest, attended today’s hearing, while Mussari, 51, and Vigni were represented by their lawyers. The trial was adjourned until Oct. 3.

Baldassarri isn’t responsible for the alleged wrongdoing, his lawyer said today. Mussari’s lawyer said his client is innocent and had no role in obstructing regulators, while Vigni’s lawyer told reporters he’s innocent.

Project Alexandria

Deutsche Bank, Germany’s largest bank, isn’t accused of any wrongdoing while Nomura, which isn’t involved in this trial, is being investigated for usury and fraud related to the financing.

As part of the transaction arranged by Nomura and dubbed Alexandria, Monte Paschi bought Italian government bonds with a loan from the Tokyo-based bank, swapping the fixed-rate interest payments on the bonds with a floating rate and guaranteeing the credit risk on the bonds. The mandate agreement for Nomura to arrange the financing, dated July 31, 2009, was found Oct. 10 last year, court filings show.

The Siena criminal trial coincides with civil proceedings in London in which Nomura is seeking confirmation from a judge that the Monte Paschi contracts are valid, while the Italian lender contends the case should be heard in Italy. Monte Paschi filed a separate suit against Nomura, Deutsche Bank and the former managers in Florence.

Nomura told a London court in a Sept. 19 filing that it doesn’t accept that the mandate agreement was discovered in October because it was registered with Monte Paschi’s management office, the document shows.

Judges of an Italian appeals court in July rejected a request by prosecutors to seize assets from Nomura. The court said former Paschi management knew of the deal’s objective, casting doubt on prosecutors’ allegations that Nomura committed fraud by tricking the executives. Still, Paschi should have booked a 220 million-euro net loss in 2009 that instead was hidden, the judges said.

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