( L - R ) The Citibank logo. The Deutsche Bank logo. The UBS logo. The Morgan Stanley logo. - AP photos

The indictment yesterday of four international banks on criminal charges related to the 2003 failure of the Parmalat dairy empire could help bondholders recoup millions in losses and potentially exposes the banks to a ban from operating in Italy.

The four banks - Citigroup Inc., UBS AG, Deutsche Bank AG and Morgan Stanley - were charged with failing to have procedures in place that would have prevented alleged crimes that contributed to Europe's largest corporate bankruptcy, under a law that seeks to assign institutional responsibility for employee behaviour.

Also indicted in the criminal trial are 13 bank employees who were charged with making false statements mostly aimed at rigging the market for Parmalat bonds - some sold as late as the summer of 2003 just before Parmalat's web of financial deception started to unravel.

Trial in January

Trial is set to begin January 22 in Milan in one of several legal cases trying to assign responsibility for the collapse of the dairy company under €14 billion euros (US$18 billion) of debt.

Citigroup, UBS and Morgan Stanley issued statements denying wrongdoing and supporting their employees' conduct. Deutsche Bank did not immediately return calls seeking comment.

The indictment did not specify potential damages, which will be determined during the trial. If convicted, the banks could also potentially be barred from operating in Italy, and any profits from the allegedly fraudulent transactions could be seized.

Lawyers representing Parmalat bondholders welcomed the decision.

More than 40,000 bondholders have joined the Milan case as civil parties - a move that allows them to seek damages on top of the provision for restitution contained in the charge against the banks themselves.

Important Development

"This is an important development, because it is the banks that can pay," said a lawyer for about 32,000 bondholders, Carlo Federico Grosso.

Grosso said he could seek at least €280 million (US$374 million) to €300 million ($400 million) for the bondholders that he represents.

Prosecutors have said they believe that individuals charged released false information to the market regarding the bonds because they were acting in concert with the former management of Parmalat. The charges cover five bond sales worth more than 1.6 billion euros and other business deals.

Morgan Stanley said yesterday it would "vigorously contest this proceeding" on behalf of itself and the two employees charged.

"Morgan Stanley believes that those dealings, and the conduct of the firm and its employees, were entirely correct and that each of those transactions were initiated and carried out after proper due diligence and without any knowledge of the insolvency of Parmalat," the company said in a statement.

Citigroup said in a separate statement that the trial would prove it was innocent of all charges "and will confirm that Citigroup was an injured party in the worst bankruptcy in Italy's postwar history."

UBS pledged a "vigorous defence" and said it had no evidence that its employees behaved fraudulently or were aware "of the true state of Parmalat's finances."

Deutsche Bank flatly denied all of the allegations and said it would "staunchly defend" its employees in the matter, spokesman Roland Weichert told The Associated Press.

In Parmalat's hometown of Parma, a court has been hearing preliminary evidence for nearly a year in proceedings to decide charges against more than 60 former executives, financial advisers and bankers. That case is considered the most important because it alleges fraudulent bankruptcy and, in some cases, criminal association, and carries the highest penalties: up to 15 years in prison.

In another trial in Milan, Parmalat SPA founder Calisto Tanzi and 15 others, including external auditors, face charges of market rigging, providing false accounting information and misleading Italy's stock market regulator, in a trial that opened in September 2005.

They could be sentenced to up to five years in jail.

Bank of America - which was not named in Wednesday's indictment - is also a defendant in that case.

One of the key events leading to Parmalat's collapse was the discovery in late 2003 that a Parmalat subsidiary's US$5 billion account at Bank of America did not exist.

- AP