MILAN An Italian judge on Wednesday ordered four foreign banks and 13 people to stand trial over a complex derivatives deal involving Milan in a criminal test case for cities facing heavy losses from derivatives deals.
UBS UBSN.VX(UBS.N), Deutsche Bank (DBKGn.DE), Germany's Depfa and JPMorgan Chase & Co (JPM.N) were ordered to stand trial for aggravated fraud over a derivatives swap on a 1.68 billion euro (1.5 billion pounds) bond issued by Milan.
The judge also ordered 11 bank officials and two former Milan city employees to stand trial on the same charges arising from the 30-year bond issued in 2005.
The trial is to start on May 6 and would be a litmus test for hundreds of local Italian entities that rushed to sign up for sophisticated financial deals, ranging from regional governments down to a local theatre group.
"This is a step in the process. It's a delicate stage, but a stage," prosecutor Alfredo Robledo told reporters.
He said the Milan case would be the first criminal case involving derivatives sold to a local administration. In an administrative case, Britain closed its derivatives market in the early 1990s when the House of Lords held that interest rate contracts entered by a London council were unenforceable.
The Milan charges stem from a derivatives swap between the city and the banks over the 2005 bond, the biggest issued by an Italian city.
The derivatives exchanged a fixed rate of interest on the bonds for a variable rate.
Those charged are accused of lying about the swap and falsely representing the deal as a way to reduce Milan's debt.
JPMorgan said it was defending itself "vigorously," adding that the "employees involved in the transactions acted with the highest degree of professionalism and entirely appropriately."
UBS also denied any wrongdoing. Deutsche Bank said it was confident that its people had acted with integrity and that the bank would be cleared.
A spokeswoman for Depfa said: "We see no wrongdoing on behalf of Depfa or on behalf of the accused employees. We will defend our position."
Milan says it faces a 100 million euro loss on the deal. The city council of Italy's financial powerhouse is also suing the banks in the civil courts for 239 million euros in total liabilities.
Milan is the most prominent Italian city among hundreds that raced to sign up for derivatives contracts in an attempt to cut interest costs on lending but then saw losses from the deals.
Almost 500 small and large Italian cities are facing mark-to-market losses of 2.5 billion euros on the contracts, according to the Bank of Italy. Analysts say that figure will balloon when interest rates go up.
Italy's central bank put the notional value of derivatives contracts at 24.1 billion euros in June 2009.
In the southern region of Puglia, prosecutors also are seeking to bar Merrill Lynch, part of Bank of America Corp (BAC.N), from government contracts for two years. The move stems from derivatives losses from 870 million euros in regional bonds.
(Additional reporting by Nigel Tutt in Milan and by Ed Taylor in Frankfurt; Writing by Ian Simpson; Editing by David Cowell)