Comments on Investment Bankers Facing Criminal Trial In Italy for Allegedly Fraudulent Sales of Deri

From the WSJ, word of an upcoming criminal fraud trial in Italy against investment bankers selling derivatives to municipalities.

Some points to consider. The Italian system allows one trial to include both criminal charges and civil claims. And, Italian law is explicit that criminal sanctions may be lessened if restitution is paid to victims. Also, the trials often proceed in phases and relattively slowly, as shown by the Eternit trial in Italy arising from conditions at asbestos-cement manufacturing plants, and thousands of resulting injuries and hundreds of deaths. So, one might well bet on the bankers starting trial, followed by a summer time civil settlement and plea agreements.

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MILAN—A Milan judge ordered UBS AG, J.P. Morgan Chase & Co., Deutsche Bank AG and Depfa Bank PLC, now a unit of Hypo Real Estate AG, to stand trial for the alleged fraudulent sale of €1.68 billion ($2.31 billion) in derivatives.

The banks are accused of having earned about €100 million in "illicit profits" from irregularities in the sale of derivatives linked to a bond issue by the City of Milan, conducted between 2005 and 2007.

"It is the first time in the world that banks have to stand trial for the sale of derivatives to municipalities," Alfredo Robledo, the prosecutor bringing the case against the banks, said in a telephone interview.

Judge Simone Luerti has ordered the banks and 13 individuals—11 current bank employees and two former city employees—to stand trial, according to a person familiar with the case. Hearings start May 6.

In April 2009, assets valued at more than €476 million were seized by Italian tax police from the banks as part of an investigation that lasted more than two years.

In separate statements, the banks denied any wrongdoing and said they would defend themselves. "We are…confident that the strength of our legal position will be demonstrated through the judicial process," J.P. Morgan said. "The J.P. Morgan employees involved in the transactions acted with the highest degree of professionalism and entirely appropriately."

UBS said it didn’t commit any fraud. "No illicit profit was earned by the banks, since the intermediation costs applied were fully legitimate and were not hidden from the City," it said.

Deutsche Bank said it was confident its employees involved in the transactions acted with integrity. A spokeswoman for Depfa, which was acquired by Hypo Real Estate in October 2007, said the bank was convinced it hadn’t violated any law or regulation.

—Sabrina Cohen in Milan contributed to this article.

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About Kirk

Since becoming a lawyer in 1983, Kirk’s over 30 years of practice have focused on advising a wide range of corporations, associations, and individuals (as both plaintiffs and defendants) on both tort and commercial law issues centered around “mass torts.”

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