* Case could set precedent for other local authorities * May be "bit of a tsunami" for financial system -lawyer * Four banks ordered to hand back 90 million euros and fined * Verdict comes as UBS hit with $1.5 bln Libor penalty By Giulio Piovaccari and Silvia Aloisi MILAN, Dec 19 (Reuters) - An Italian court on Wednesdayfound Deutsche Bank, Depfa Bank, JP Morgan and UBS guilty of fraud for mis-selling derivatives toMilan that could set a precedent for hundreds of localgovernments to pursue. The court ordered the seizure of just under 90 million eurosfrom the lenders which were each fined 1 million euros ($1.3million). Nine bank employees were handed suspended jailsentences of up to eight months. The verdict, coming on the same day UBS was fined $1.5billion for manipulating global interest rates, related to aswap contract signed by the city of Milan council when it issueda 1.68 billion euro, 30-year bond in 2005. The four banks were accused of making 100 million euros inillicit profit and lying about the risks linked to the deal. "This is an historic sentence because it has recognised theprinciple that banks' dealings with the public administrationmust be transparent," prosecutor Alfredo Robledo told reportersafter the verdict. "Italy was like a lawless jungle," he said, adding that inBritain and other countries similar derivative contracts withlocal governments had long been banned. Deutsche Bank, JP Morgan and UBS said in separate statementsthey had done nothing wrong and would appeal. "The evidence at the trial demonstrated conclusively thatthe individuals behaved entirely honestly and appropriatelythroughout and that the transactions complied with Italian andEnglish law," the U.S. bank said. The trial was the first of its kind in Italy, where about600 local governments bought derivative products worth 36billion euros, many of which turned sour when the financialcrisis started to bite. Derivatives mis-selling is one of a number of bankingscandals that authorities are investigating following the globalfinancial crisis. The probe over the rigging of Libor interest rates hasresulted in big fines for UBS and Britain's Barclays,while Deutsche Bank is the subject of a number of probesincluding suspected tax evasion over trade in carbon permits. "This is a very dangerous verdict for the banks, which couldhave an impact for dozens of other legal battles involving localadministrations," said Tommaso Iaquinta, a lawyer who hasfollowed several similar cases. "This is just the first step of the judicial process but itcould be a bit of a tsunami for the whole system." According to the prosecutors, the swap contract at thecentre of the trial appeared to offer the Milan city council anattractive interest rate but turned out to carry much highercosts, paid for by taxpayers, than it had anticipated. Prosecutors also said the banks involved were both advisersto the city of Milan and counterparties in the derivative deal.Under the seizure order, JP Morgan will have to hand back 24.8million euros, Deutsche Bank 24.3 million euros, Depfa justunder 24 million euros and UBS 16.6 million euros. Bank of Italy data shows Italian cities face nearly 4billion euros of potential losses from derivatives contracts,many of which were signed by people lacking the expertise tofully understand them.