JP Morgan Probed in Monte Paschi Fraud Inquiry

Monte Dei Paschi Di Sienna bank
Adam Jeffery | CNBC

Italian prosecutors stepped up investigations into alleged fraud at Monte dei Paschi bank by ordering police to gather evidence from JPMorgan Chase, one of several foreign lenders linked to a scandal rocking the financial and political establishment.

JPMorgan helped Monte dei Paschi to finance its costly purchase in 2007 of Antonveneta bank through a 1 billion euro ($1.3 billion) hybrid bond, whose true nature was not fully disclosed to Italian regulators, according to prosecutors.

Banca Monte dei Paschi di Siena, which calls itself the world's oldest bank, also entered into a derivatives deal with JPMorgan, one of several on which the Siena-based bank accumulated heavy losses.

Two investigative sources told Reuters on Thursday that Siena prosecutors had asked tax police to visit JPMorgan's offices in central Milan to seek documents relating to Monte dei Paschi's 9-billion-euro acquisition of Antonveneta.

A Reuters witness saw three tax police officials enter the JPMorgan's offices on Thursday. The U.S. bank had no immediate comment on Thursday, but has repeatedly denied any suggestion of wrongdoing.

Monte dei Paschi had to request 4 billion euros of state aid after heavy losses on the derivatives deals and consequences of the Antonveneta purchase endangered its survival.

Two days ago the Siena magistrates also ordered the seizure of up to 1.95 billion euros of assets from Nomura in an attempt to stem losses at Monte dei Paschi deriving from a structured deal agreed with the Japanese investment bank.

(Read More: Judges Seize $2.4 Billion in Monte Paschi Probe)

The seizure order was aimed at preventing Monte dei Paschi from giving more cash to Nomura as collateral for the 2009 "Alexandria" trade, a huge bet on Italian government debt made more costly by an interest rate swap that forces the Siena bank to take losses when rates are lower than expected.

Monte dei Paschi has posted losses of 730 million euros from the Alexandria deal and two other derivative trades, carried out after the Antonveneta purchase to spread losses from previous structured trades over several years.

Three Deals

Apart from "Alexandria," Monte dei Paschi's previous management entered a deal called "Santorini" with Deutsche Bank and another called "Nota Italia" with JPMorgan, the latter with a smaller negative impact on its accounts.

Flavio Valeri, the head of Deutsche Bank in Italy told Reuters that the German bank had not been informed of any possible proceedings against it by Italian prosecutors investigating the Monte dei Paschi case.

"We have not been notified of anything," Valeri said when asked if prosecutors could be targeting Deutsche Bank after the order against Nomura.

Nomura and Deutsche Bank have also repeatedly denied any suggestion of wrong doing. When asked whether Italian prosecutors could also take steps against Deutsche Bank, a judicial source told Reuters earlier this week that their examination of the "Alexandria" trade was at a more advanced stage than that of "Santorini," but that they could consider such a move.

The prosecutors' seizure order, reviewed by Reuters, said the "Santorini" deal was a "twin" of "Alexandria."

However, a banking source with knowledge of the matter said Italian authorities were differentiating between the Nomura derivatives deal and the Deutsche Bank deal.

"Deutsche Bank does not expect anything similar (to the seizure order against Nomura) and is not preparing for such a case," the banking source said.