SIENA, Italy Prosecutors are investigating the former management of Italy's troubled Monte dei Paschi (BMPS.MI) bank for bribery and fraud, judicial sources said on Wednesday, as pressure grew on the Bank of Italy and bourse watchdog Consob.
With parliamentary elections less than a month away, the scandal at Italy's third-largest bank has deepened with questions about the role of banking supervisors and the influence of local politicians.
Milan prosecutors said they had transferred an investigation into allegations that Monte dei Paschi executives took bribes to buy toxic derivatives from Dresdner Bank to Siena magistrates investigating the main corruption case.
At the same time, prosecutors in the southern town of Trani, who have previously taken on ratings agency Standard and Poor's, said they had opened an investigation against the Bank of Italy and Consob over accusations they failed in their regulatory duties.
The Siena-based bank is in a crisis over an opaque series of derivatives and structured finance deals that have produced losses of 720 million euros ($970 million) and raised questions about possible corruption by bank officials.
On Wednesday Moody's rating agency said it had put the bank's Ba2 rating under review for a downgrade.
The problems go back to at least 2008 when the bank was struggling to absorb its 9-billion-euro cash acquisition of rival Antonveneta just before the global financial crisis, which hit banks across the world.
Executives from Monte dei Paschi, which depends on a 3.9 billion euro ($5.29 billion) government lifeline, are accused of using the derivatives deals to massage accounts and conceal the impact of past losses on its weakened balance sheet.
Underlining the continued potential for trouble, the bank denied a report that it could face fresh losses of up to 500 million euros from a trade called "Chianti Classico", a 1.5 billion euro securitization of part of its property portfolio.
It said the operation had been submitted to its board for possible restructuring, which could reduce its costs and recoup part of the rights to the assets.
As the scandal has grown, authorities have been forced to respond to questions about how the complex derivatives operations could have been allowed to spin so badly out of control without action being taken.
On Tuesday, Economy Minister Vittorio Grilli defended the oversight of the scandal before the parliamentary finance committee and the Bank of Italy released a breakdown of steps it had taken against Monte dei Paschi.
However, many questions remain unanswered over a scandal which was known at least in part to regulators and the bank's own internal audit team as early as 2009 but which was not disclosed to investors until last week.
European Central Bank President Mario Draghi, who was governor of the Bank of Italy at the time of the deals, has come under scrutiny for his role in events which took place just before his move to Frankfurt in November 2011.
Prosecutors have already been looking at allegations of massive bribes taken to facilitate the Antonveneta acquisition as well as suspicions of fraudulent accounting over the derivatives transactions.
They have also put Monte dei Paschi itself under investigation under a law governing companies' responsibility for crimes committed by their employees.
On Wednesday, Milan prosecutors handed over to their Siena colleagues a separate inquiry into allegations that Monte dei Paschi executives took bribes to acquire toxic derivatives from Dresdner Bank via a Swiss consultancy named Lutifin.
Eighteen people are under investigation, none of them from Monte dei Paschi, although the former head of the bank's finance division Gian Luca Baldassari and another executive are named in prosecution documents seen by Reuters.
Giuseppe Vegas, head of the market regulator Consob, repeated accusations already made by the Bank of Italy and Monte dei Paschi's new management that former executives had concealed vital information from regulators about one deal in particular.
He said Consob had done all it was able to, given the information available to it.
The trade, dubbed "Alexandria", was linked to the bank's holdings of Italian BTP government bonds, which plunged in value as the euro zone debt crisis exploded in 2011.
It was not until October 2012 that the exact details of the trade became clear when the framework document behind the deal was found in a safe by the management team that replaced former managing director Antonio Vigni and chairman Giuseppe Mussari, who left the bank last year.
With less than a month to go before the elections on February 24-25, the Monte dei Paschi scandal has jumped to the top of the political agenda and thrown a spotlight on the tight links between the bank and local politicians.
The center-left Democratic Party (PD), which is leading in opinion polls, has faced particular pressure because it dominates the local government in Siena, the Tuscan town where Monte dei Paschi has been based since it was founded in 1472.
The center-right People of Freedom (PDL) party led by former prime minister Silvio Berlusconi has demanded a parliamentary inquiry into the affair.
An opinion poll published on Wednesday in the daily La Repubblica showed the center-left coalition's lead over the center-right has fallen slightly but it remained almost 10 percentage points ahead of Berlusconi's coalition.
The Bank of Italy has said it is pursuing disciplinary action against former bank managers which could include fines or other penalties. It is also disputing the 4 million euro payout to Vigni when he was forced out last year.
(Additional reporting by Silvia Ognibene and Emilio Parodi and Danilo Masoni in Milan; Writing by James Mackenzie; Editing by David Stamp and Jason Webb)