* Prosecutors allege bank misled regulators, investors-warrant
* Bank lent 1 bln euros to clients to buy its own shares-warrant
* Bank says fully cooperating with authorities
By Valentina Za and Silvia Aloisi
MILAN, Sept 29 (Reuters) - Prosecutors investigating alleged market violations at Banca Popolare di Vicenza said in a confidential search warrant that the bank misled regulators and investors about its financial soundness by lending money to customers to make them buy its own shares.
Between 2012-2014, the unlisted bank granted financing to clients for around 1 billion euros ($1.1 billion) so they would purchase its shares, artificially boosting the lender’s capital strength, the prosecutors said in the warrant, dated Sept. 21 and seen by Reuters.
Prosecutors issued the warrant as they ordered searches at the bank’s offices in four different cities, including the Vicenza headquarters, and for the first time revealed they were investigating the lender for alleged market manipulation and deceiving regulators.
At issue is whether Italy’s eighth biggest lender bank violated Italian law, which states that a company cannot lend money for the purchase of its own shares, except under specific circumstances and after adequately informing shareholders about the risks of such transactions.
In the case of Popolare di Vicenza, prosecutors allege that the lender breached the rules and also wrongfully included shares bought through the loans as core capital, so that its capital ratios appeared higher than they actually were.
The probe is the latest scandal to hit Italy’s banking sector, which scored the worst in Europe-wide health checks of lenders and has seen its image tarnished by a series of judicial investigations into Monte dei Paschi di Siena.
The probe also comes at a delicate junction for Popolare di Vicenza, which is preparing to tap investors for up to 1.5 billion euros and make its debut on the stock market in a share sale slated for early next year.
Bank Chairman Gianni Zonin, two board members, former CEO Samuele Sorato and two other former top executives have been placed under investigation by Vicenza prosecutors for running foul of capital requirements, according to the warrant.
The six are also being investigated for “spreading false information and coming up with other ploys aimed at boosting public confidence in the financial soundness of the bank.”
The bank said it was fully cooperating with authorities. Asked about specific allegations that it lent money to clients so that they could buy its shares, a spokeswoman for the bank said she could not comment as the investigation was ongoing.
The spokeswoman for the bank declined to comment about the people under investigation. A lawyer for Zonin declined to comment.
The lawyer for Samuele Sorato, Fabio Pinelli, said his client was “serene” and that judicial authorities should carry out all the necessary investigations into the matter. Giovanna Dossena and Giuseppe Zigliotto, the two board members, did not reply to emails seeking comment. Lawyers for the other two former executives did not reply to requests for comment.
Popolare di Vicenza scraped through last year’s health checks run by the European Central Bank (ECB) before it took over supervision of the sector in November 2014.
Since then, the ECB has taken a closer look at the bank’s accounts. Popolare di Vicenza said in its half-year report that the ECB had found loans worth 975 million euros had been granted to buy the lender’s shares.
The bank said the ECB had told it to set aside an equivalent amount in cash and deduct the money from its capital base. The bank posted a loss of 1 billion euros in the first half of 2015, following a 759-million euro loss in 2014. Its core capital fell to 6.8 percent - well below ECB requirements.
Based in the rich Veneto region, Popolare di Vicenza had already tapped investors for 1.2 billion euros in 2013 and 2014.
According to the search warrant, on both occasions the purchase of shares was partly funded by the bank through loans - so prosecutors allege that instead of getting fresh funds from investors, the bank used its own money to boost the balance sheet - something which, if true, is not allowed.
According to Adusbef, a consumer group that began filing complaints against the bank in 2008 related to the granting of loans tied to the purchase of shares, buying the bank’s shares was often a condition for obtaining a loan or a mortgage from the lender.
Paolo Trentin, who runs a packaging and logistics company in Schio, near Vicenza, said Popolare di Vicenza officials tried to persuade him to buy the bank’s shares last year, when he was seeking a 1.5 million-euro loan for his business.
“I said no way, that I believed the shares were over-valued and that I had heard from others you could not get rid of them afterwards,” Trentin told Reuters by phone. He later decided to close all accounts with the bank.
As shares in the bank are not listed, their value is set every year by its board and approved by shareholders. Following the ECB’s review, the bank in April for the first time ever wrote down the value of its shares to 48 euros each from 62.5 euros in 2014, to the ire of its shareholders.
Its value is still 1.2 times its tangible assets, against an average of 0.8 times for big Italian lenders.
Also, up until 2013 the bank had been allowed to buy back its own shares from shareholders who wanted to sell until it found another investor willing to purchase the stock.
However, tighter rules that came into force last year have made share buy-backs by unlisted cooperative banks harder. As a result, many Popolare di Vicenza’s customers-turned-shareholders have been unable to sell their shares for lack of buyers, according to the transcript of a shareholder meeting in April.
$1 = 0.8946 euros additional reporting by Sara Rossi; editing by Anna Willard