Italy’s Financial Police Seizes Bank of America, Dexia Assets Amid Fraud Probe

Feb. 3 (Bloomberg) — Italy’s financial police are seizing 73.3 million euros ($102 million) of assets from Bank of America Corp. and a unit of Dexia SA as part of a probe into an alleged derivatives fraud in the region of Apulia.

Police are investigating losses on derivatives linked to the sale of 870 million euros of bonds sold by the regional government in 2003 and 2004, according to an e-mail from the prosecutor’s office in Bari today. The banks misled the municipality, located in the heel of Italy, on the economic advantages of the transaction and concealed their fees, the prosecutor said.

The region, also known as Puglia, joins more than 519 Italian municipalities that face 990 million euros in derivatives losses, according to data compiled by the Bank of Italy. In Milan, prosecutors seized assets from four banks including JPMorgan Chase & Co. and UBS AG in April and requested they stand trial for alleged fraud. Hearings started this month.

“Italy, like other countries, is full of these examples,” said Dario Loiacono, a banking lawyer in Milan who isn’t involved in the case. “It’s the result of the unavoidable asymmetry of information between the banks and the municipal borrowers.”

Police are sequestering a further 30 million euros that the municipality was set to place in a fund managed by the banks on Feb. 6, the prosecutor said. The magistrate also asked that Charlotte, North Carolina-based Bank of America be stopped from doing business with Italian municipalities for two years. A hearing is slated for next month.

Merrill Lynch

A spokesman for Bank of America in London declined to comment. Dexia Crediop SpA doesn’t have derivatives contracts with the region, the Rome-based Dexia unit said in an e-mailed statement. An official for the bank declined further comment.

Merrill Lynch, bought by Bank of America in January 2009, managed the bond sales for Apulia in 2003 and 2004. The bank didn’t provide the municipality with appropriate information on the financing, said the prosecutor. Officials at the municipality didn’t speak English, and contracts weren’t translated into Italian.

Merrill also recommended that Apulia seek advice from an international law firm, without disclosing that Merrill itself had a long-standing business relationship with the law firm, the prosecutor said.

Prosecutors allege that when the banks arranged swaps and created a fund that invests money the region set aside to repay the bonds in 2023, they misled the region about the economic advantages of the transaction. Banks skewed the swaps to their advantage to hide fees, the prosecutor said.

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in interest rates or weather.

The seizure of Apulia’s semi-annual repayment of the bond will neither affect the interest payments bondholders receive nor will it affect the final repayment, the prosecutor said. Apulia is rated A1 by Moody’s Investors Service, four levels below the top investment grade.

To contact the reporter on this story: Elisa Martinuzzi in Milan at [email protected]

Last Updated: February 3, 2010 16:59 EST
By Elisa Martinuzzi

Source: Bloomberg

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