Should an investment bank worry about a client’s motive when it engages in a complex and potentially suspicious transaction?
Monte dei Paschi di Siena (MPS) has been just such a client. The Italian bank, which has just been rescued by the state, engaged in a series of fiendishly complex deals with Deutsche Bank, JPMorgan and Nomura which had the effect of giving a misleading picture of its finances.
One controversy relates to how MPS paid for its acquisition of Antonveneta, another Italian bank, in 2008. JPMorgan helped finance part of the deal by selling 1 billion euros in so-called FRESH notes, a type of bond convertible into MPS equity. But the Bank of Italy objected that they were not sufficiently loss-absorbing and insisted that MPS only pay money to JPMorgan to forward onto the investors if it made a profit.
The snag was that, by the time the BoI objected, the notes had already been sold and some of the investors were not happy with a change in the terms. MPS then gave indemnities to JPMorgan and Bank of New York (BNY), which was in turn an intermediary between JPMorgan and the FRESH investors.
It is not clear what these indemnities were. But the Siena prosecutors allege that MPS concealed the JPMorgan indemnity from the BoI and didn’t communicate the BNY indemnity to the central bank either, according to a document reviewed by Reuters.