Four international investment banks face a claim for damages of €300 million (£200 million) and a trading ban in Italy after being ordered to stand trial in connection with the collapse of Parmalat, the Italian dairy firm, in 2003.

Citigroup and Morgan Stanley, of the US, UBS, of Switzerland, and Deutsche Bank are accused of turning a blind eye to widespread fraud that enabled the company to hide debts of €14 billion.

All will deny charges of failing to prevent market-rigging at the hearing in January next year. Judge Cesare Tacconi, who sits in Milan, also indicted 13 of the banks’ employees on charges of making false financial statements about Parmalat bonds. The charges relate to five bond sales worth a total of more than €1.6 billion, the last of which was launched in 2003 as the company teetered on the brink of ruin. If found guilty, the employees face a maximum sentence of five years in jail.

The indictment issued yesterday strengthens the hand of 40,000 Parmalat bondholders, who are seeking compensation and damages.

“This is an important development, because it is the banks that can pay,” Carlo Federico Grosso, a lawyer representing 32,000 bondholders, said. He added that they would seek between €280 million and €300 million.

Francesco Greco, the state prosecutor, said that small investors could hope to recoup at least some of their money. He said: “It is the first time that there will be a trial of the banks accused of having manipulated the market.” However, he noted: “It will be a very difficult trial.”

Italian prosecutors allege that bankers helped Parmalat to establish false accounts through fictitious contracts to sell nonexistent products, which turned a loss into a profit. They also claim that Parmalat’s banks, which took a total of €2.8 billion in commissions, knew about the transfer of debt to shell companies that masked its looming insolvency.

The banks assert that they were victims of a scandal that they never suspected until shortly before Parmalat was declared bankrupt in 2003.

Two separate cases that involve former Paramalat executivs are already under way.

Milk goes sour

Dec 03: €7 billion hole found in Parmalat’s offshore accounts

Jan 04: Auditors from Grant Thornton questioned. Founder Carlo Tanzi arrested. US lawsuit filed against Citigroup over its dealings with Parmalat. Bank of America admits $274 million exposure

March: Parmalat agrees loan package to keep its factories running

August: Parmalat sues UBS, Bank of America and Citigroup, alleging that the banks flattered its finances

October: Citigroup sues the Italian Government over Parmalat’s collapse

June 05: Eleven Parmalat executives and a lawyer convicted of market-rigging

Times Recommends

• Equitable Life halts £7bn sale on market turmoil
• Potential buyers emerge to save Woolworths staff
• Terrorist attacks close Bombay Stock Exchange