The Bankers Trust of New York found itself engulfed yesterday in a maelstrom of allegations of fraud and systematic corruption in its derivatives division with the long-awaited publication of court filings against the bank in a multi-million-dollar lawsuit by Procter & Gamble.
Details of how traders at the bank apparently discussed a so-called "rip- off factor" - or ROF - in their dealings with nine different corporate customers, including P&G, are included in some 300,000 pages of documents and 6,500 tape recordings, submitted by P&G in its court filings.
Based in Cincinnati, P&G is claiming $195.5m in damages from the bank, which, it alleges, deliberately misled the company on the risks involved in derivatives purchased from it. P&G took a $102m after-tax charge on losses sustained on its Bankers Trust derivatives.
The company escalated its assault against the bank last month, when it added racketeering and corruption charges to its suit. Original plans by the financial magazine Business Week to publish the documents and tapes, obtained by P&G from Bankers through the legal discovery process, were blocked by a Detroit judge who sealed them. The papers were unsealed this week, however, and extracts are to be carried in the magazine's cover story due on newstands today.
It is not the first time that Bankers Trust has been hit by allegations related to its derivatives business. Its practices were highlighted in several media reports last year, including two Fortune magazine cover stories, and the bank was fined $10 million by regulators for lying to another of its customers, Gibson Greetings.
In its filings, P&G asserts that "fraud was so pervasive and institutionalised that Bankers Trust employees used the acronym 'ROF' - rip-off factor - to describe one method for fleecing clients".
Many of the transcripts of conversations between bank employees seem to support the allegation. In one instance, an employee asks about how to set about winning a client's confidence. "Funny business, you know?" comes the reply. "Lure people into that calm and then just totally fuck 'em."
In one video-taped training session for new employees, a bank instructor is seen describing a hypothetical transaction between Sony, IBM and the bank.
"What Bankers Trust can do... is get in the middle and rip them off - take a little money," the instructor says. He then retracts the comment, saying he has just realised that he is being filmed.
The bank claims that comments such as these have been taken out of context. It also accuses P&G of bringing in the names of eight other companies that apparently sustained derivatives losses, including Sandoz, to distract attention from the company's own failure to manage its account properly and to understand the risks involved.
Suggesting that P&G is indulging in "blackmail", the bank issued a statement saying, "What P&G has done is to use material we provided to manufacture a distorted view of transactions, markets, individuals and the corporation in a manner designed to serve its own objectives and to obscure P&G's own accountability."
Analysts warn, however, that the bank is likely to suffer a further loss of reputation while the lawsuit goes on and suggest that it may be tempted to settle out of court. "Having their name dragged through the mud again is not a plus, and it could have a bad effect on other parts of their business," commented David Berry of Keefe Bruyette & Woods, a New York brokerage firm.
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