Another big mess

28 April 2009 By Rachel Sanderson

Italy could be brewing its biggest scandal since Parmalat. Prosecutors have reportedly seized assets from investment banks accusing them of misselling derivatives to local government. With E35bn of derivatives sold to municipalities, it s a worry for the banks and the state too.

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Italian authorities seized about $300m in assets from Depfa, Deutsche Bank, JP Morgan Chase and UBS, accusing the banks and some executives of aggravated fraud, according to a person familiar with the situation.

The seizures stem from the banks' handling of a $2.2bn municipal bond issue and swaps contracts that the city of Milan undertook to retire other debt in 2005, the International Herald Tribune reported.

The lead prosecutor has accused the banks of misleading the city and falsely claiming that the deal would generate savings, the newspaper said. If all the costs had been properly included, the entire debt would have been illegal under an Italian law that allows restructuring of debt only if it produces savings.

Alfredo Robledo, the prosecutor in Milan, claims the banks made $130m in illicit profits, according to the IHT.

Ten bankers and two employees of the city of Milan are under investigation.

The banks involved declined to comment.

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