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DEUTSCHE BANK, JPMORGAN, UBS ARE CHARGED WITH FRAUD (UPDATE2)

By Elisa Martinuzzi and Sonia Sirletti

March 17 (Bloomberg) — Deutsche
Bank AG
, JPMorgan Chase
& Co., UBS AG
and Hypo Real Estate Holding AG’s Depfa Bank Plc
unit were charged with fraud linked to the sale of derivatives
to the City of Milan.

Judge Simone Luerti
scheduled the trial of the four
firms, 11 bankers and two former city officials for May 6,
Prosecutor Alfredo Robledo
said after a hearing in Milan today.
The banks allegedly misled the city over swaps that adjusted
interest payments on 1.7 billion euros ($2.3 billion) of bonds
sold in 2005.

Prosecutors across Italy are investigating banks as local
and national government agencies face potential losses of 2.5
billion euros on derivatives, lawyers say. The Milan probe may
also affect cases as far away as the U.S., where securities
firms have faced charges for price-fixing and bid-rigging in the
sale of derivatives to municipalities, though not for fraud,
according to former regulator Christopher “Kit” Taylor.

“This case could have repercussions over here if the trial
showed deliberate intent,” said Taylor, a former executive
director of the Municipal Securities Rulemaking Board, the
national regulator of the municipal-bond market. “What happened
in Europe was the continuation of a pattern in the U.S.”

JPMorgan is “vigorously” defending its position against
the charges, the New York-based firm said in a statement. “The
employees involved in the transactions acted with the highest
degree of professionalism and entirely appropriately.”

‘No Criminal Plot’

UBS and “its exponents are confident that they will be
able to demonstrate, in the course of the trial, that no
criminal plot was conceived,” the Zurich-based bank said in a
separate statement.

Deutsche Bank believes it will be cleared of the charges
and that its employees acted with integrity, according to a
statement from the Frankfurt-based bank. Hypo Real Estate
Holding said in a statement that neither Depfa Bank nor its
employees “violated any law or regulation.”

Giacomo Beretta,
the City of Milan’s current finance
director, said in a statement that the municipality is “pleased
about the speed at which the case is moving ahead, and the
judiciary’s attention to detail in the case.”

Prosecutor Robledo alleges the London units of the four
banks misled Milan on the economic advantage of a financing
package that included the swaps and that they earned 101 million
euros in hidden fees.

U.K. Rules

He also claims the banks violated U.K. securities rules by
failing to inform Milan in writing that for the swap deal the
city was a counterparty to the lenders rather than a customer.
Banks abiding by the rules of the Financial Services Authority
are required to shield customers from conflicts of interest and
provide them with clear and fair information that isn’t
misleading.

Officials for the FSA in London didn’t have an immediate
comment.

The prosecutor, who seized assets from the banks equal to
their share of the alleged profit, is claiming JPMorgan charged
about 45 million euros in commissions that were hidden from the
municipality, while Deutsche Bank made about 25 million euros,
Depfa Bank earned 21 million euros and UBS made 10 million
euros, court documents show.

“The thesis brought forward by the prosecutor was
particularly innovative and aggressive,” said Giampiero
Biancolella
, an attorney specializing in financial crime who
isn’t involved in the case. “The indictments prove the
allegations are legitimate, though the charges don’t yet prove
the banks are guilty.”

Apulia, Liguria Cases

In another Italian investigation, magistrates in the region
of Apulia are probing Bank of America Corp. and last month
requested the company be stopped from doing business with the
country’s municipalities for two years amid allegations it
misled the municipality on derivatives linked to 870 million
euros of bonds. A unit of Dexia SA is also under investigation
in the same case.

Separately, Nomura
Holdings Inc.
bankers are under
investigation for alleged fraud relating to derivatives
contracts sold to the Italian region of Liguria in 2004, people
familiar with the case said last month.

Derivatives are typically unregulated financial instruments
linked to stocks, bonds, loans, currencies and commodities, or
related to specific events such as changes in interest rates or
the weather.

Bankers Charged

The individual bankers charged in the Milan case are:
Deutsche Bank’s Tommaso Zibordi
and Carlo Arosio;
Depfa’s Marco
Santarcangelo
and William Francis
Marrone
; JPMorgan’s Antonia
Creanza
, Fulvio Molvetti,
Simone Rondelli
and Francesco Rossi
Ferrini
; and UBS’s Gaetano Bassolino,
Matteo Stassano
and
Alessandro Foti.

Arosio, Bassolino, Stassano and Santarcangelo declined to
comment. Zibordi, Rossi Ferrini, Rondelli, Creanza, Marrone and
Foti didn’t immediately return calls seeking comment. Molvetti
couldn’t be reached and his lawyer didn’t return calls.

Giorgio Porta,
a former interim director general of Milan’s
city government, and Mario Mauri,
an external consultant, were
also charged with fraud and collusion for their role in helping
to oversee Milan’s debt restructuring and derivatives.

The judge will have to clear Mauri because there aren’t any
material claims against him, his lawyer said. Porta’s lawyer
didn’t immediately return calls.

The allegations have prompted Italian lawmakers to propose
new rules restricting the use of derivatives among
municipalities by boosting oversight and banning upfront
payments. Italy’s Senate Finance Committee on March 11
unanimously approved a proposal on tighter rules that will be
used by the finance ministry to shape regulation.

‘Paying the Bills’

“It’s time banks start paying the bills,” said senator
Elio Lannutti,
a member of the finance committee. The city was
the injured party in this case, he said.

Through swaps, “banks found a way to sell something that
is debt without making it look like debt,” former regulator
Taylor said. He advised a law firm that sued banks on behalf of
residents of Jefferson County, Alabama, which was on the brink
of bankruptcy after swaps backfired.

To contact the reporter on this story:
Elisa Martinuzzi
in Milan at
emartinuzzi@bloomberg.netSonia Sirletti
in Milan at
ssirletti@bloomberg.net

Last Updated: March 17, 2010 13:18 EDT

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