Deutsche Bank, JPMorgan, UBS charged with derivatives fraud

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 ($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 on derivatives, lawyers say. The Milan probe may also affect cases as far away as the US, 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 US.”

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.”

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 in hidden fees.

He also claims the banks violated UK 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.