Italian police searched the headquarters of Banca Monte dei Paschi di Siena on Wednesday, investigating whether the world's oldest bank misled regulators over its pricey 2007 purchase of smaller rival Antonveneta from Spain's Santander.
A statement from prosecutors in Siena, where Monte dei Paschi is based, said the offices of the bank's main shareholder as well as those of several Italian and foreign financial banks that had dealings with the Tuscan lender were being searched.
Sources close to the situation told Reuters police visited the Milan offices of Intesa Sanpaolo, Deutsche Bank and J.P. Morgan as well as other banks in connection with the probe. None of those banks are under investigation, the sources said.
The sources also said police took documents from investment bank Mediobanca, one of the advisers to Monte dei Paschi during its purchase of Antonveneta, the target of a bitter cross-border takeover battle that shook Italy's traditionally closed banking system.
The searches targeted also the private homes of several past and present Monte dei Paschi executives, including former chairman Giuseppe Mussari. Sources close to the probe said four past and present executives of Monte dei Paschi had been placed under investigation.
The prosecutors' statement said the probe concerned "a series of activities that were carried out starting from 2007, at the time of the acquisition of Antonveneta bank from Spain's Santander, and that continued until 2012".
The investigation alleges possible market manipulation and obstruction of regulators in connection with raising funds for the 9 billion euro ($11.7 billion) cash acquisition of Antonveneta that stretched the bank's finances just ahead of the subprime crisis.
Santander bought Antonveneta as part of a three-way break up bid for Dutch bank ABN AMRO in a deal valuing the Italian lender at 6.6 billion euros. The Spanish bank almost immediately sold it on to Monte dei Paschi, netting a hefty gain.
Monte dei Paschi is being investigated because prosecutors believe that it did not give regulators a true picture of the repercussions on its finances of such an expensive purchase. There are also questions surrounding an unexplained sharp drop in the bank's share price earlier this year.
The Antonveneta acquisition catapulted Monte dei Paschi, advised on the deal by Merrill Lynch and Mediobanca, into the big league of Italian banks and gave it a foothold in Italy's wealthy northeast.
The crisis at the bank, founded in 1472 to extend loans to the needy and still a major source of employment for the 55,000 people who live among medieval Siena's frescoed palazzi, has raised the alarm among locals.
Monte dei Paschi, with its headquarters in a 13th century fortress, is the "jewel in the crown for Siena", a prominent resident told Reuters in March as the bank's problems worsened.
Despite two capital increases since the Antonveneta purchase, the Monte dei Paschi is regarded as one of Europe's most vulnerable since it must plug a capital shortfall of 3.3 billion euros by June to meet tougher European regulatory requirements.
An investigative source told Reuters that prosecutors had started looking at the Antonveneta deal last October, at the height of the euro crisis, because of the pressure the acquisition had placed on Monte dei Paschi's finances.
"The question is whether the operation and its impact on Monte dei Paschi and its shareholders were assessed properly and whether the rules were followed and a proper picture of the situation was given to (market watchdog) Consob and the Bank of Italy," the source said.
Monte dei Paschi said the searches were connected to a 5 billion euro capital increase it carried out in 2008 to pay for Antonveneta.
A bank spokeswoman pledged "maximum collaboration" with authorities. She said the probe was focused on 1 billion euros of so-called Fresh convertible notes that the bank issued as part of its capital hike, which was underwritten by J.P. Morgan.
A source with direct knowledge of the matter said prosecutors believed Monte dei Paschi had misled the Bank of Italy, at the time headed by current European Central Bank President Mario Draghi, on the terms of the convertible notes.
Based on the information received by the bank, the regulator allowed Monte dei Paschi to calculate those notes as core Tier 1 capital, boosting its financial base, the source said.
Monte de Paschi's top shareholder, a charitable foundation with close links to Siena politicians, said prosecutors were also looking at an "anomalous" drop in the bank's shares in early January, when the stock tumbled around 26 percent in the space of a few days, hitting a record low of 0.19 euros.
Back in January the foundation was negotiating with creditors how to pay back around 1 billion euros of debts it had ran up to fund the bank's 2008 capital increase and another 2.5 billion euros cash call in 2011.
The foundation's debt was guaranteed by its shares in the bank. As the share price fell, the foundation was forced to put up more shares as collateral, at one stage giving creditors almost full control over its 49 percent stake.
A recovery in the stock price since mid-January allowed the foundation to sell down its stake and partially pay back 12 creditors, including JP Morgan, Credit Suisse and Mediobanca.
Monte dei Paschi's Chief Executive Fabrizio Viola and its newly appointed Chairman Alessandro Profumo were "following the matter closely," a senior executive at the bank said outside its Siena headquarters.
News of the probe hit Monte dei Paschi's shares, which closed 7 percent lower after repeated suspensions from trade.
The foundation now holds 36.3 percent of Monte dei Paschi. It faces a May 15 deadline to agree with creditors the rescheduling of outstanding debts worth around 350 million euros.
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