CHICAGO -- Lawsuits caused by derivatives deals gone sour may change the way institutional investors, marketers, brokers, and dealers do business, according to a group of financial experts.

A panel of lawyers and bankers speaking at a meeting of the International Swaps and Derivatives Association said here last week that investors burned by derivatives investments are trying a variety of legal tactics to recoup their losses.

Most notable are three companies that have sued Bankers Trust New York Corp. in the past four months. One, Gibson Greetings Inc., settled its claims last month. Proctor & Gamble Inc. and Carlton Communications PLC are still pursuing their claims after taking respective charges of $157 million and $4 million on derivatives investments.

In addition, several government agencies are reviewing claims against Bankers Trust, and the Federal Reserve Bank has entered into a written agreement to oversee the bank's derivatives activities.

On the municipal side, panelists agreed it is almost inevitable that lawsuits will be filed in the wake of the storied losses in Orange County, Calif.'s investment fund. Officials in Cuyahoga County, Ohio, are already contemplating lawsuits against securities firms that sold investments to its now liquidated investment fund.

"Dealers are getting so concerned about this, they're beginning not just to disclose the risks of certain transactions, they're starting to require a written document representing that the client understands the risk" involved in each transaction, said Bruce Unger of CIBC/Wood Gundy.

But Barry Taylor of First Chicago noted that in the case of Orange County, such a document might not be enough to shield the dealer that recommended derivatives to the pool manager. The pool represented about 180 separate municipal entities, and "the chance that the risk profile is the same for all the parties is remote," he said.

He added that often principals in the pool are not disclosed to the financial professionals advising government officials. "You see undisclosed principlas more often than I would have thought and more often than I'd like," Taylor said.

In light of such murky situations, Unger said brokers and dealers are trying to duck legal responsibility by redefining their roles. Increasingly, they maintain that they are not fiduciaries for their investors. This claim, especially when supported by a written affirmation that investors understand the risks they're taking, can shield them from legal liability.

For instance, both Gibson Greetings and Proctor & Gamble based their lawsuits against Bankers Trust on claims of fraud and breach of fiduciary duty.

"A written representation [that the companies understood the risks involved in derivatives investments! would have made it much more difficult for them to include the fiduciary argument in their lawsuits," said attorney Peter Levin of Davis, Polk & Wardwell in New York.

Carlton Communications, a third company suing Bankers Trust, is trying a different tack. The company, which lost $4 million on its derivative investments, has alleged that Bankers Trust engaged in deceptive practices and did not have the company's approval to invest in the risky vehicles on its behalf.

"Carlton is pursuing a tort-type claim rather than a contractual claim against Bankers Trust," Unger said. "Bankers Trust in this case was the investment manager, not the dealer, and the question is whether it had the authority to make the investment, and whether it had a duty of disclosure."

But, Unger said, even a general document granting investment authority is not adequate legal protection these days.

"If a company has given someone authority to deal in notes, for instance, the question is are they authorized to deal in structured notes, which have derivatives embedded in them," he said.

Even more problematic is obtaining authorization from a pool of inexperienced investors like those involved in the Orange County fund, said Taylor.

Levin agreed in a recent article that government concern "has increased as classes of end-users broaden beyond sophisticated multinational companies to include municipal governments, pension funds, foundations, and retail investors."

"You can assume a certain amount of sophistication on the part of the intermediary" running the fund, Taylor said. "But the uproar in the Orange County case is about public money. The stories you see are not about the sophistication of the intermediary, but about the little people who are suffering."

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