UBS AG (NYSE:UBS), Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB), Depfa Bank, and JPMorgan Chase & Co. (NYSE:JPM) have been found guilty for mis-selling derivatives to Milan, by an Italian court today. Banks are alleged to have made 100 million euros in illicit profit after lying about the risks linked to the deal. All four banks are claiming they had done nothing wrong and would appeal the ruling.
"The evidence at the trial demonstrated conclusively that the individuals behaved entirely honestly and appropriately throughout and that the transactions complied with Italian and English law," JPMorgan Chase & Co. (NYSE:JPM) said.
The Italian court ordered the confiscation of approximately 90 million euros from the banks lenders, which were each fined 1 million euros ($1.3 million). Additionally, nine bank employees were issued jail sentences of up to eight months. Data from The Bank of Italy reveal that Italian cities face nearly four billion euros of potential losses from derivatives contracts.
For UBS AG (NYSE:UBS), it was a double blow, as in yet another case today, it was fined 1.5 billion for manipulating global interest rates, related to LIBOR. Today's Milan ruling is also linked to a swap contract signed by the city of Milan council, when it issued a 1.68 billion euro, 30-year bond in 2005.
"This is an historic sentence because it has recognized the principle that banks' dealings with the public administration must be transparent," prosecutor Alfredo Robledo told reporters after the verdict.
"Italy was like a lawless jungle," he said, adding that, in Britain and other countries, similar derivative contracts with local governments had long been banned.
The trial, could set a precedent for hundreds of local governments, where they bought derivative products worth 36 billion euros, the majority of which turned sour, due to the financial crisis and Euro-crisis.
"This is a very dangerous verdict for the banks, which could have an impact for dozens of other legal battles involving local administrations," said Tommaso Iaquinta, a lawyer who has followed several similar cases. "This is just the first step of the judicial process but it could be a bit of a tsunami for the whole system."
Recently, banking industry have been stained by a series of scandals, ranging from Derivatives mis-selling, the rigging of Libor interest rates to suspected tax evasion. Earlier, HSBC Holdings plc (LON:HSBA) (NYSE:HBC) and Standard Chartered PLC (LON:STAN) (LON:STAC) were been fined by US authorities over money laundering charges. In June, Barclays PLC (LON:BARC) (NYSE:BCS), HSBC Holdings plc (LON:HSBA) (NYSE:HBC), Lloyds Banking Group PLC (NYSE:LYG) (LON:LLOY) and Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) agreed to compensate small and medium sized businesses for mis-priced interest rate hedging products. The Libor scandal resulted in big fines for UBS AG (NYSE:UBS) and Britain's Barclays PLC (LON:BARC) (NYSE:BCS).