US bank faces dollars 73m suit over derivatives

NEW YORK - In what is likely to become the test case for lawsuits over derivatives losses, a small US greeting cards maker is suing Banker Trust for dollars 73m, blaming the New York bank for its disastrous investment in the exotic interest-rate swaps last spring, writes Larry Black.

Gibson Greetings, a Cincinnati firm that was once the investment vehicle of William Simon, the former US treasury secretary, accused the bank's securities arm of making 'false representations' about the risks of the investments, which have so far cost it dollars 23m.

Gibson was one of six Bankers Trust clients that complained in April of big losses in the derivatives market as a result of the rise in US interest rates. Procter & Gamble, another Cincinnati-based customer of the bank, reported a dollars 157m pre-tax derivatives loss, and is also considering legal action against Bankers Trust.

In its suit, the first over corporate derivatives losses, Gibson said Bankers Trust Securities had repeatedly said its risks and exposures would be substantially reduced by the investment, when in fact they dramatically increased.

It also claims that the firm waited several weeks before disclosing that Gibson's potential losses were unlimited, and offering to either close out the investment or cap Gibson's losses.

Bankers Trust said again yesterday that its actions were 'legal, proper and appropriate'. The bank is well known on Wall Street for keeping good records of contacts with clients, to the point of tape-recording the conversations of its sales people and traders.

Many corporate treasurers suffered big losses in the derivatives market last spring, and analysts say many will be watching Gibson's case to see if it wins a favourable settlement. Despite the complexity of the transactions, Gibson requested a jury trial. A substantial award could lead to a flood of similar claims against US securities firms and banks, they warn.