Legal alarms about the year-2000 computer bug are not getting any softer.

Thomas P. Vartanian, the Washington managing partner of the New York- based law firm Fried, Frank, Harris, Shriver & Jacobson, said there is and should be enormous concern about litigation and the costly consequences for institutions that do not fix their systems in time.

He said they might be sued for negligence, breach of contract, fraud, and violating disclosure agreements. "Stockholders are potential plaintiffs," he said.

There are various ways to quantify the risk, he said. Liable institutions may face compensatory damages, consequential damages, punitive damages, downstream liability, or damage related to specific performance.

In any case, Mr. Vartanian said, regulators will be looking to see whether institutions understand the problem and have done enough to head it off.

"We have seen a handful of regulatory actions," he said. "We expect to see more between now and December."

He said he expects that regulators might first work out written agreements with companies to meet systems requirements in time for 2000. The next step might be punishment-"usually a monetary penalty," Mr. Vartanian said.

A step beyond that could be the removal of executive officers or board members who have not done enough to prepare the company for the change. A last resort might be a seizure, forced sale, or merger.

He suggested that regulators, in their second examinations of financial services companies, might find the percentage of satisfactory ratings below the 90% found the first time around.

Testing of all mission-critical systems should be completed by June 30, he said.

But, he asked, "Who is going to pay?" for the year-2000 problem. Based on the estimate of 8 cents to correct each line of software code, spending by corporations worldwide would be $600 billion.

Speaking at the Bank and Financial Analysts Association banking symposium this month, Mr. Vartanian said analysts should keep an eye on regulatory filings. This includes looking at 10-K and 8-K reports over the next several weeks and at quarterly statements during the year.

He said problems in a company may be seen in "extraordinary expenditures" or resignations, "particularly if it is the chief technology officer." There also might be reason to speculate if a company signs new contracts or outsources some technology functions.

Citing some specific pitfalls, he said,"liquidity will be an interesting risk. The Federal Reserve is stockpiling cash and yet is telling people not to hoard cash. There is a bit of a contradiction there."

Then there is employee availability, which he termed an "interesting risk." Another is whether "contingency plans are deep enough and broad enough. The unknown factors can create problems," Mr. Vartanian said.

Some external risks could lie in computer networks, vendors, trading parties, power grids, regulators, customers, and foreign governments and companies.

His final advice to the analysts: "Make sure companies have a clear record of adherence to regulatory requirements."

Mindful of the Y2K legal implications, State Street Corp. moved a former general counsel, John R. Towers, into the job of executive vice president of global operations. Since the beginning of last year, State Street's Resolution 2000 office has reported to him.

Mr. Towers told the analysts' gathering that the bank's technology dependence exposes it to the risks of multiple outside parties. "Our ability to deliver services depends on our network providers," he said- 1,800 of them worldwide.

"We have a powerful incentive to make year-2000 convergence," Mr. Towers said, because "our reputation and future depend on solving this problem. We're neither complacent nor comfortable."

Domestically, Mr. Towers said he is not too concerned about noncompliance. But internationally, he said, "Y2K could create liquidity problems, upheaval, and significant delays in market information. My greatest fear is of public concern."

State Street, he said, seriously intends to answer public concerns by achieving compliance and verifying the readiness of its third parties. However, "full disclosure and information sharing between parties is still inhibited," partly because of the fear of punitive damages. "I hope Congress will help mitigate the chill on global problem-solving," Mr. Towers said.

In monitoring its third-party vendors, State Street has set high standards for communication and answering questionnaires. It will either replace vendors who are not compliant or will develop internal capabilities to replace them. State Street has identified trigger dates for each subcustodian and is developing a subcustodian business recovery plan that will be ready in June.

Yet in some emerging markets, "We are unable to obtain detailed information," Mr. Towers said. "We can't exercise the same level of influence over foreign providers."

He said it must be recognized that information-sharing can empower year- 2000 efforts. "But if you're too candid, you risk people flocking out of the market. If you disclose too little, you may be liable."

To date, State Street has surveyed half of its markets, dividing them into three tiers. Tier One consists of countries expected to be compliant and includes Singapore. Tier Two contains some countries that are question marks but are still not expected to experience major disruptions, Canada being an example.

The Tier Three countries are those for which there is insufficient information.

Over the next nine months, State Street will continue to evaluate markets and exposures.

"There may well be markets that can't get us satisfactory information," said Mr. Towers. "If there are, we'll warn our customers to exit that market."

Yet amid the gloom is a bright spot.

"The financial industry is the most prepared of all sectors in each country," said Mr. Towers. "State Street is doing everything it can, from the chief information officer down to each programmer."


PITTSBURGH-As part of an effort to reassure customers that it is ready for 2000, Mellon Bank Corp. said it will open some key retail bank locations on Saturday, Jan. 1.

In early December, Mellon said it will publicize a list of standard and supermarket offices in locations throughout Pennsylvania, New Jersey, Delaware, and Maryland that will be open for business on New Year's Day and the day after. All Mellon offices also will have extended hours on Friday, Dec. 31, some until 8 p.m.

"As 1999 draws to a close, we anticipate that many of our customers will be looking for reassurance that on Jan. 1, 2000, they will be able to gain access to their accounts and complete transactions," said Martin McGuinn, Mellon chairman and chief executive officer. "Our systems will be ready for the year 2000, and our goal is to make the transition uneventful for our customers."

Also open throughout the entire New Year's weekend will be the MellonDirect24 center, which is staffed 24 hours a day, seven days a week. The MellonDirect24 Center provides access to electronic services such as telephone banking, bank-by-Web, Internet bill paying, and PC banking.

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