Concerns that derivatives trouble could spill over into other areas at Bankers Trust New York Corp. were heightened by the latest developments in Procter & Gamble Co.'s lawsuit over the bank's derivatives sales practices.
The court released documents on Tuesday that reportedly include allegations of misleading statements by Bankers Trust's salespeople. The court also ruled that Procter & Gamble may add charges under the Racketeer Influenced and Corrupt Organizations Act - enabling the irate client to treble any damage award.
The lawsuit stems from $196 million in losses on derivatives the Cincinnati-based consumer goods company bought from the bank. The company has yet to pay this amount to Bankers Trust, pending the outcome of the lawsuit, which charges the bank did not fully disclose the risks of these instruments before selling them.
Analysts are concerned that the publicity surrounding this case and others, including one that ended in a settlement with Gibson Greetings Inc. earlier this year, could have a long-term effect.
George Salem, a bank analyst at Gerard Klauer Mattison & Co. said the negative publicity could harm other parts of the bank.
"If I were a corporate treasurer or any kind of client, I would at least stop and think about whether the practices we are learning about from this suit prevail to any degree in other areas of the company," Mr. Salem said.
In a prepared statement, the bank acknowledged that some employees' comments "were irresponsible and regrettable," but said such behavior is not condoned. "We will always take action if we believe our employees have been disrespectful, unethical, and unfair," the statement read.
Recent quarterly declines in the bank's core derivatives business have some analysts wondering whether the publicity surrounding the case is already taking its toll on performance.
"We are still trying to assess the evidence, but this is a much bigger issue than just the P&G suit," said Tanya Azarchs, a U.S. bank analyst with Standard & Poor's Ratings Group, which has placed Bankers Trust debt on "negative outlook."
"The RICO filing is just a small piece of the overall mosaic," Ms. Azarchs said.
The ultimate effect on earnings from the lawsuit depends largely on whether the court rules the bank must pay damages in addition to writing off the gains earned on the derivative contracts.
Raphael Soifer, a bank analyst with Brown Brothers Harriman & Co., said the bank has already set aside Proctor & Gamble's obligations under the contract in a nonperforming credit account. If the loss does not exceed this amount, earnings will not be affected.
"The only potential direct income effect would be if the bank wound up paying more" than the gains Bankers Trust has recorded on transactions with the company, he said.
P&G has not specified damages.
Still, some investors apparently were convinced that between the RICO claim and the reputation damage, the value of the bank's stock could suffer. In trading Wednesday, the stock closed 25 cents lower, at $69 a share. This follows a 75-cent-a-share fall in Tuesday trading.