* U.S. bank probed over alleged crime by employee-document
* JP Morgan says acted correctly, will defend itself
* Allegation relates to Monte Paschi's Antonveneta purchase
* Prosecutors allege JP Morgan employee obstructed regulator
By Silvia Ognibene and Silvia Aloisi
SIENA/MILAN, July 31 Italian prosecutors probing
Monte dei Paschi's 2007 acquisition of a smaller rival
are investigating U.S. investment bank JP Morgan over an
alleged crime committed by one of its employees, according to a
The document, seen by Reuters, said the alleged crime was
the obstruction of Italian regulators by an unknown JP Morgan
employee relating to a 1 billion euro ($1.3 billion) hybrid
financial instrument used to partly fund Monte dei Paschi's
purchase of Antonveneta.
JP Morgan denied any wrongdoing and said it would defend
itself vigorously. "We believe that JP Morgan and its employees
acted correctly at all times," it said in an emailed statement.
Monte dei Paschi is also under investigation in the probe
for a range of alleged crimes including market manipulation and
making false statements to the market, as are its former
chairman Giuseppe Mussari, its former director general Antonio
Vigni and seven other former bank employees.
Under Italy's 231 law, a company can be held responsible if
it is deemed that it failed to prevent, or attempted to prevent,
a crime by an employee that benefited the company.
In the document, Italian prosecutors allege the JP Morgan
employee failed to inform the Bank of Italy of a deal which they
say violated requirements set by the central bank over the
hybrid instrument, known as FRESH 2008.
They allege the unknown employee had "a representative,
administrative and management role" at the U.S. bank.
The document, which wraps up a preliminary investigation
started in October 2011 and was sent to all the parties
involved, says the alleged crime was committed "in the interest
and to the benefit of JP Morgan".
The FRESH 2008 instruments in question were essentially
notes convertible into Monte dei Paschi's shares that JP Morgan
sold to a number of investors.
The prosecutors allege that Monte dei Paschi struck a
so-called indemnity agreement with JP Morgan which protected the
U.S. bank from potential losses related to FRESH 2008.
JP MORGAN DENIES ALLEGATIONS
JP Morgan said it never benefited from the indemnity, which
it said "only existed for a matter of days."
"No claim was ever made under this indemnity ... either for
the benefit of JP Morgan or any of its employees," it said.
The FRESH notes were issued as part of a deal under which JP
Morgan underwrote a 950 million euro capital increase in Monte
dei Paschi to help the Italian bank fund the acquisition of
Antonveneta from Spain's Santander. The acquisition was
announced in November 2007 and completed in May 2008.
Prosecutors allege the deal hid the real risks faced by
Monte dei Paschi, which was already stretched and struggling to
afford the 9 billion euro price tag for Antonveneta.
They also allege the indemnity agreement violated
requirements set by the Bank of Italy by making FRESH 2008 work
like a bond rather than an hybrid equity instrument.
Monte dei Paschi needed to show the Bank of Italy that it
had sufficient equity capital in place to win approval for
Based on the information officially received from the bank,
the regulator allowed Monte dei Paschi to calculate those notes
as core Tier 1 capital, a measure of a bank's financial strength
which is closely monitored by regulators, boosting its capital
base and allowing it to demonstrate its finances were solid
enough to absorb the Antonveneta deal.
The central bank had initially raised objections about the
FRESH operation, saying in its original form its was too similar
to a bond, and demanded changes to ensure that if Monte dei
Paschi made no profit, it would have no financial obligations
towards JP Morgan or the investors in FRESH 2008.
However, prosecutors allege the secret indemnity agreements
violated that requirement, putting the financial burden of the
operation squarely on Monte dei Paschi.
The Monte dei Paschi probe widened this year to loss-making
derivative contracts carried out by its previous management. The
lender received a 4 billion euros state bailout in February.