Italian prosecutor probes Deutsche Bank for possible market manipulation

By Vincenzo Damiani BARI, Italy (Reuters) - An Italian prosecutor is investigating Deutsche Bank for possible market manipulation regarding the sale of 7 billion euros (5.5 billion pounds) in Italian government bonds five years ago, an investigative source said on Friday. Deutsche Bank said it was cooperating with Italian authorities and had given information to market regulator Consob about a related inquiry in 2011. It did not give any further details or comment. The German bank sold the bonds in the first half of 2011 as Italy slid towards a debt crisis that eventually brought down the government of former Prime Minister Silvio Berlusconi. A prosecutor in Trani, southern Italy, is investigating the fact Deutsche told clients in a research note in early 2011 that Italy's public debt was no cause for concern, and then sold almost 90 percent of its own holding, the investigative source said. Five former Deutsche Bank managers as well as the bank itself are under investigation in the case, the source added. In recent years the same prosecutor also opened probes into ratings agencies Moody's, Standard & Poor's and Fitch, saying their reports on Italy and its banks during the crisis were mismanaged and provoked sharp losses on the Milan stock market. The case against Moody's was dropped before a trial began in Trani last year. The case against Fitch Italia and its country head was moved to Milan, where a judge threw it out on Friday. However David Riley, Fitch's former head of sovereign ratings, remains on trial in Trani, along with five S&P officials. The ratings agencies have denied wrongdoing. In a written response to a question from a parliamentarian about the issue in August 2011, Italy's economy ministry said Deutsche Bank had explained the sale by saying it needed to balance out its exposure to Italian debt after taking on more when it bought out Deutsche Postbank in 2010. The U.S. ambassador to Italy, John Phillips, mentioned the ratings agency probe in a speech to students in Milan last month in which he said Italy's justice system was deterring investors. In the United States it was "highly unlikely that such a case would be brought outside the major financial centers, where prosecutors have both jurisdiction and expertise in securities fraud prosecutions," Phillips said. "Needless to say, it is startling that executives may be restricted from international travel based on arrest warrants issued in a small city with no direct connection to Standard and Poor's," he added. Berlusconi and his ministers often cited Deutsche Bank's sudden offloading of its billions of euros of Italian bonds as evidence of an international plot to bring down his government. (Writing by Isla Binnie; Editing by Giselda Vagnon and Mark Potter)