Shares of Bankers Trust New York Corp. fell Thursday on a news report that federal regulators believe securities laws were broken in its sale of derivatives products to Gibson Greetings Inc.
The Washington Post reported that the Securities and Exchange Commission and Commodity Futures Trading Commission could file civil lawsuits against Bankers Trust within several weeks.
In afternoon trading, the bank's stock price was off $1.375 a share, to $57.875. A spokesman for the bank declined to comment on the Post's story.
If such legal action were taken by the government, it would have ramifications well beyond Bankers Trust. It would extend securities and anti-fraud laws to cover the essentially unregulated marketplace in swaps and derivatives.
Last month, Bankers Trust settled a suit brought by Gibson Greetings, a Cincinnati company whose specialty is greeting cards and related products.
Gibson posted losses of $23 million early this year after interest rate increases by the Federal Reserve soured the swaps contracts it had entered to achieve better returns in a lower rate environment.
The Post said it had been told by unnamed federal regulatory officials and a source close to Bankers Trust that the bank was negotiating terms of a consent decree with the SEC and CFTC that would require payment of fines.
Under a regulatory consent agreement, Bankers Trust would agree to prevent improprieties in the future while neither admitting nor denying any guilt.
Bankers Trust's shares were also hurt Thursday after analyst Judah S. Kraushaar of Merrill Lynch & Co. downgraded them to an investment rating of "intermediate term below average."
The analyst said he was concerned that earnings could be hurt by a "slower than average rebound in trading profits relative to other more diversified banks" and "the impact of negative publicity."
Mr. Kraushaar also downgraded the shares of J.P. Morgan & Co., New York, to an "intermediate term neutral" rating. Morgan's shares were down 62.5 cents, to $57.375.
"It was basically a confidence factor in their ability to produce a return on equity meaningfully above their cost of capital next year," he said. "With reduced estimates based on a lower trading forecast, I think they will have an O.K. year next year but probably with return on equity only around 14.5%,"
The Post said its sources confirmed that the prospective consent order accuses Bankers Trust of fraud in connection with the activities of an employee who sold swaps products to Gibson Greetings,
Specifically, the Post reported, federal investigators believe the bank "misrepresented" the value of derivatives it sold to Gibson in 1992 and 1993. The bank allegedly withheld its computer models, which showed the derivatives to be worth less than it was telling Gibson.
When interest rates rose this year, Gibson ended up making floating rate payments to Bankers Trust that far exceeded the fixed-rate payments it was scheduled to get from the bank.
Probable fallout from rising rates also led analyst Henry C. Dickson of Smith Barney & Co. to reduce earnings estimates on seven major regional banks. He said he believes their net interest margins may be weakened.
The banks are Shawmut National Corp., National City Corp., Comerica Inc., Firstar Inc., Huntington Bancshares, Meridian Bancorp., and Northern Trust Corp.
The Dow Jones industrial average closed Thursday up 19.18 points, at 3,765.47.
