By Silvia Ognibene and Manuela D'Alessandro
SIENA, Italy/MILAN Feb 14 Italian police arrested on Thursday the former head of Monte dei Paschi's finance department, who is at the centre of an inquiry into alleged fraud and bribery at Italy's third largest bank.
Gianluca Baldassarri is the first person to be arrested in a widening scandal that has rocked the world's oldest bank and stirred up a financial and political storm before parliamentary elections on Feb. 24-25.
Prosecutors in the Tuscan city of Siena, where the 540-year-old bank is based, have also submitted a written request to speak to the veteran chairman of Spain's Santander , Emilio Botin, one of Europe's most senior banking figures, a judicial source told Reuters.
The prosecutors are investigating Monte dei Paschi's costly acquisition of smaller rival Antonveneta from Santander in 2007 as well as a series of loss-making derivative and structured finance trades dating back to 2006-09.
They accuse Baldassarri of helping to mislead regulators over the true nature of a secret derivative contract that was found in a safe by the bank's new management in October 2012.
That accusation was extended on Thursday to the bank's former Chairman Giuseppe Mussari and its former director general Antonio Vigni, who were both already under investigation for other alleged offences in the case.
In a statement, the prosecutors said Baldassarri was detained in Italy's financial capital Milan because they feared he might leave the country. His Milanese home was being searched, the statement added.
Baldassarri's lawyer, Filippo Dinacci, said he was waiting to hear when his client would be questioned by magistrates. Mussari's lawyer said he had not been notified by prosecutors that his client was under investigation for a new offence. Vigni's lawyer was not immediately available for comment.
Baldassarri left Monte dei Paschi shortly after the arrival of new chief executive Fabrizio Viola in January 2012.
The Siena prosecutors are investigating allegations of corruption and other irregularities in the 9 billion euro ($12 billion) acquisition of Antonveneta, which stretched Monte dei Paschi's finances to the limit as the global financial crisis erupted.
As part of their inquiry, they want to speak to Botin as a witness, the judicial source said, adding that the prosecutors had asked him to go to Siena in late January, but he was unable to attend.
"The prosecutors will very likely go to Madrid to hear him," the source said. Santander declined to comment.
The Spanish bank had acquired Antonveneta as part of a three-way break-up bid for ABN AMRO in a deal valuing the Italian lender at 6.6 billion euros. It almost immediately sold it on to Monte dei Paschi, netting a big capital gain.
Mussari and Vigni, who are being questioned by magistrates, have declined to comment. Current managers who took office last year have said they have found no evidence of wrongdoing in the Antonveneta deal, but believe the loss-making derivatives trades were wrongly hidden.
HIDDEN IN A SAFE
Italian prosecutors seized about 40 million euros last week as part of their investigation. The prosecution seizure order, seen by Reuters, said the funds belonged to Baldassarri and four other people suspected of criminal conspiracy to commit fraud.
Baldassarri has never commented publicly on the allegations and his lawyers, repeatedly contacted by Reuters, have said he did not want to comment.
The scandal has raised questions over the future of Monte dei Paschi, which won final approval last month for a 3.9 billion euro state bailout.
The finance department headed by Baldassarri, who worked at Monte dei Paschi from 2001-2012, is at the heart of the probe.
Internal documents seen by Reuters show an audit of the department in August and September 2009 had uncovered a "systematic overshooting of risk limits" in the management of the group's 24-billion euro proprietary portfolio.
Last week, the lender put losses stemming from three derivatives trades at 730 million euros and said it may have to restate previous accounts.
One of the structured finance transactions under scrutiny is a complex 2009 trade between Monte dei Paschi and Japanese bank Nomura, known as "Alexandria".
The bank's new management says Monte dei Paschi's board never reviewed the trade for approval, and its true nature only came to light in October last year after a secret contract was found in a safe.
Nomura has said the transaction was approved at the highest level by Monte dei Paschi's then management.
"Nomura acted fairly and responsibly with the client at all times, and strongly refutes any suggestion to the contrary," the Japanese bank said in a Jan. 22 statement. It has declined to comment further since that statement.
In their statement on Thursday, the Siena prosecutors said they had feared Baldassarri may be seeking to leave the country because they had evidence he was trying to cash in securities worth more than 1 million euros after the Feb. 7 fund seizure.
Baldassarri's lawyer Dinacci however said he saw no reason for the prosecutors to argue his client was preparing to flee, saying Baldassarri had only recently returned to Italy from abroad. He said Baldassarri's home in Miami had been seized by authorities.
Prosecutors accuse former Monte dei Paschi executives of using the derivatives trades to massage accounts and conceal losses following the 9-billion-euro Antonveneta deal.
The bank's new chiefs and the Bank of Italy say the former management concealed details of derivatives operations linked to Italian government bond prices, which left Monte dei Paschi badly exposed when many European bond markets collapsed in 2011.
The Bank of Italy has faced increasing questions over its supervision, and Mario Draghi, who was governor of the Italian central bank before becoming president of the European Central Bank in November 2011, has also been drawn into the criticism.