Morgan Stanley $3.4 Billion Italy Swaps Case Is Dropped

(Bloomberg) -- An Italian regional audit court ruled that it isn’t authorized to decide on a request for damages against Morgan Stanley and four former Treasury officials over derivatives deals the U.S. investment bank exited between the end of 2011 and the beginning of 2012.

“This court does not have jurisdiction,” reads the 96-page ruling released to the involved parties on Friday by a Rome-based panel and published on its website.

The regional court rejected the prosecutors’ claims:

  • that a bank is a Treasury adviser because of its role of specialist in the government bond auctions
  • that the judges are in a position to question the Treasury officials’ discretion in public debt management as that would contradict the principle of separation of powers

The Morgan Stanley derivative contracts from the 1990s were terminated in December 2011 and January 2012. Italy paid Morgan Stanley $3.4 billion to close the deals as the bank used an early termination clause included in the contract, a person with direct knowledge of the transactions said at the time.

Prosecutors had demanded almost 4 billion euros ($4.7 billion) in damages, 70 percent from the New York-based bank and the rest from former executives at the Treasury including Vittorio Grilli and Domenico Siniscalco, as well as from the ex-head of the debt agency Maria Cannata. Morgan Stanley and the former officials all denied any wrongdoing.

Prosecutors will likely appeal the ruling to the national audit court, a court official said. A spokesperson for Morgan Stanley wasn’t immediately available to comment on the ruling when contacted by Bloomberg News.

The Treasury couldn’t avoid paying Morgan Stanley following the bank’s request to unwind the contracts, Grilli, a deputy finance minister at the time of the transaction, told an Italian parliament committee in December.

Italy could not afford to contest the request as the country was in the midst of a crisis and that legal action could have prompted a default, Grilli said.

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