Bankers Trust Corp.'s guilty plea on federal fraud charges last week culminated a five-year saga that began as a response by rogue employees to earnings pressure from the embattled company's top management.
Court filings and internal bank documents provide an in-depth look at how a small group of workers diverted $19.1 million of clients' unclaimed money into the bank's own accounts from 1994 to 1996. The aim was to inflate the financial performance of their unit-client processing services- at a time when Bankers Trust was counting on it for one-third of its earnings.
The guilty plea, accompanied by a $60 million fine, was a fresh blow to Bankers Trust's once-sterling image. The legacy of the 96-year-old bank, which agreed in November to be acquired by Deutsche Bank, will inevitably be tied up with a series of scandals that have plagued it since the mid- 1990s.
"It certainly does not do good things for the history of the company. If Bankers Trust weren't involved in the deal for Deutsche Bank, this kind of news would have destroyed it," said Lawrence Cohn, a bank analyst with Ryan Beck & Co., Livingston, N.J.
Bankers Trust auditors began uncovering wrongdoing in the client services group in March 1996 as part of a routine inspection. The bank, which has been cooperating with federal prosecutors and state and federal banking regulators, confirmed last week that 13 employees have resigned in the wake of the probe.
Within months it became clear that three businesses within client processing services were involved: corporate trust and agency, which provided paying agent services to securities issuers; the retirement services group, which handled employee benefit payments services; and global securities services, which provided custody services.
Bankers Trust said it has since reorganized client processing services into a new unit-global institutional services-with new senior management and tighter controls on business practices.
"We took immediate action to address these problems," said Frank N. Newman, chairman and chief executive officer of Bankers Trust, in a statement last week. "This settlement should not have a significant effect on our businesses going forward."
According to court documents, the U.S. Attorney in Manhattan found that a group of employees concocted a scheme to transfer unclaimed funds to the bank's own accounts "to meet internal and external financial pressures at Bankers Trust to meet revenue and expense targets." The employees involved included two managing directors of the bank, one of them a partner.
In securities processing, checks are written to customers to pay dividends or interest on their securities, but some customers fail to cash them. Customers are also given credits for overpaying for services such as settling or clearing securities transactions.
Bankers Trust is one of the leaders in securities processing. During the time of the transfers, Bankers Trust's client processing services unit administered $422 billion of corporate and government debt and $1.4 trillion in custody assets. The unit processed $400 billion in securities transactions daily for more than 8,000 clients worldwide and employed 4,000.
The U.S. Attorney said Bankers Trust was supposed to research and return unclaimed checks and credits to their rightful owners. After a while, those unclaimed funds would be classified as abandoned property owed by law to the state.
Instead, employees misdirected the unclaimed funds and tried to conceal the transfers by creating false records, according to Bankers Trust's plea agreement.
David D. Brown 4th, the Bankers Trust managing director and counsel who entered the plea last week, described how some of the unclaimed funds were diverted.
The first discrepancy came on June 30, 1994, Mr. Brown told the court. Client processing services employees transferred $2.4 million of unclaimed checks issued to customers by the corporate trust and agency group to the bank's own account. Mr. Brown said the transfer was falsely recorded as a "movement of funds."
The second false entry came on May 24, 1995, when employees of the unit transferred $946,610.48 of unclaimed checks issued by retirement services group from liability accounts to a reserve account of the bank. The transfer was falsely entered as "OCS reclass."
The third discrepancy came on Feb. 9, 1996, when employees of the unit transferred $3.9 million of unclaimed credits to customers of global securities services to be transferred to reserve accounts of the bank. Those transfers were falsely recorded as "reserve funds" or "beginning reserve balance," Mr. Brown said.
"In moving various funds to bank reserves, the CPS employees acted with the purpose and expectation that these funds would later be used to falsely enhance the financial performance" of the unit, Mr. Brown told the court.
The bank also said employees in the client processing services unit unlawfully transferred $1.3 million in outstanding customer checks to the bank's accounts in 1989.
Upon discovering the wrongdoing in March 1996, Bankers Trust mobilized its internal auditors, its outside counsel, Sullivan & Cromwell, and its accounting firm, Arthur Andersen. Over the next year they reviewed over 2,300 "errors and claims" tickets, 2.5 million pieces of e-mail, and 8,000 archived files, a bank spokesman said. In addition, they conducted over 100 interviews of bank employees.
The bank pleaded guilty late Thursday in the U.S. District Court in the Southern District of New York on three felony counts and agreed to pay a criminal fine of $60 million to the United States and an additional $3.5 million to the State of New York.
A spokesman said Friday that Deutsche Bank, which hopes to complete it acquisition of Bankers Trust in May, was made aware of the U.S. Attorney's investigation during the deal's due diligence process and has been kept fully apprised along the way.
In a statement issued Thursday night, the bank said it reported its initial findings in March 1996 to federal and state officials, its board, and its internal and external auditors. The amounts involved in the investigation have been restored to the appropriate accounts, the bank said.
With fourth-quarter 1996 earnings, the bank said it had created a reserve for "potential charges established after a review of accounting operations since 1989 in the corporation's transaction processing business."
At the time, the bank said the reserve was a significant portion of the $25 million increase in other noninterest related expenses in that period but was not material to results in any prior period.
Bankers Trust has since shaken up the senior management of the group.
It hired 20-year Citicorp veteran Mary Cirillo in July 1997 to become senior managing director and head of Global Institutional Services, which included client processing services.
Ms. Cirillo replaced B.J. Kingdon, former head of the processing unit, who retired in at the end 1996. A spokesman would not comment Friday on whether Mr. Kingdon was involved in the investigation. Mr. Kingdon could not be reached.
Alex Young K. Oh, assistant U.S. Attorney in Manhattan in charge of the prosecution, said Friday she could not comment on any aspect of the investigation.