UPDATE 1-Italy seeks derivatives trial for banks - source

MILAN, Nov 12 (Reuters) - An Italian prosecutor asked on Thursday that four foreign banks and 13 people be tried for aggravated fraud over derivatives from a 1.68 billion euro ($2.52 billion) bond issued by the city of Milan, a court source said. The banks -- JPMorgan Chase & Co, Deutsche Bank , the London unit of Switzerland's UBS and the Dublin unit of Germany's Depfa -- would face a preliminary hearing under the request. A date has not been set. Eleven bank employees and two former Milan city employees are charged in the case, said the source, who spoke on condition of anonymity. The investigation started last year after it emerged that Milan, Italy's fashion and financial capital, had lost more than 300 million euros on the deal. The banks are alleged to have failed to bar employee misconduct. UBS and Deutsche Bank had no immediate comment and Depfa declined to comment. "We are vigorously defending the legal proceedings brought by the prosecutor and are confident that the strength of our legal position will be demonstrated through the judicial process," JPMorgan said. "The J.P. Morgan employees involved in the transactions acted with the highest degree of professionalism and entirely appropriately." The Milan probe is the highest-profile among investigations throughout Italy after local governments racked up losses on derivatives contracts. Economists this year estimated that Italy's cities and regional bodies had an exposure to derivatives of about 40 billion euros with losses of more than 6 billion euros. The Milan charges stem from a derivatives swap between the city and the four banks over a 30-year bond issued on 2005. The derivatives swapped a fixed rate of interest on the bonds for a variable rate. They enabled Milan to repay the debt in yearly instalments. REDUCING DEBT Those charged are accused of lying about the swap and falsely representing the deal as a way to reduce Milan's debt. The derivatives contract was put under scrutiny because it let local administrators get some cash up front in exchange for inflated out-of-balance liabilities. According to a court document seen by Reuters, the Milan officials allegedly misled colleagues and city politicians into believing the deal was bringing cash into city coffers without any future harm. The document alleges the pair carried out the operation with the help of banks. A mock certificate at the time of the deal honoured one of those accused, former Milan Director General Giorgio Porta, for having proclaimed, "'Let there be Bond.' And there was Bond," business daily Il Sole 24 Ore said in July. It cited the transcript of a prosecutor's interview with Porta. Certificates also celebrated Porta as "the wheeler-dealer" among the "boys of Bond Street", the newspaper said. The Bank of Italy has reported that notional derivatives contracts between Italian banks and local administrations totalled 24.5 billion euros in March. According to one analyst's estimate, that amounts to half the outstanding contracts, the rest being with non-Italian banks. (Reporting by Milan newsroom, 39 02 6612 9507) ($1=.6668 Euro) Keywords: ITALY DERIVATIVES/ ([e-mail]; [phone]; Reuters Messaging: [e-mail]@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

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