Procter & Gamble Co. has upped the ante in its derivatives suit against Bankers Trust New York Corp., by filing a civil claim under the Racketeer Influenced and Corrupt Organizations Act of 1970.
If the RICO charge is allowed by Judge John Feikens of the U.S. District Court for the Southern District of Ohio in Cincinnati, P&G could receive triple the $195 million it seeks in damages and claim reimbursement for its legal fees.
"If (Bankers Trust has) to pay punitive damages, that would have an income statement effect," said Raphael Soifer, a bank analyst at Brown Brothers Harriman & Co.
What's more, some observers said, if the use of the RICO statute is successful in the widely watched case it could set a costly precedent for banks that wind up as defendants in derivatives-related claims.
Legal experts said that the RICO filing amounts to an escalation of a battle against Bankers Trust stemming from derivatives contracts that soured when interest rates rose in 1994. "Procter & Gamble in a sense is using more and more ammunition," said Henry Hu, a law professor at the University of Texas.
Mr. Hu cautioned, however, that the images associated with a racketeering charge as it applies to a securities suit are not accurate.
The word conjures up images of "men wearing pin-striped suits and carrying violin cases," said Mr. Hu, but "the statute is so broadly drafted that behavior you don't think of as mob behavior is captured."
In securities-type litigation, he said, racketeering charges do come up. In fact, RICO charges filed by P.T. Adimitra Rayapratama, an Indonesian corporation, over a Bankers Trust swaps transaction were dismissed last month.
Legal experts said that companies generally don't get particularly concerned about RICO charges, because more often than not, the charges are dismissed.
"There are numerous legal requirements that ... often result in victory for the defendant," said Dan Reidy, a partner in the Chicago office of Jones, Day, Reavis & Pogue.
An expert on RICO cases, Mr. Reidy said that there are a number of technical issues associated with RICO that will lead to substantial court pleading. "You can count on a huge motion to dismiss emphasizing a lot of technical points," said Mr. Reidy.
