Last week's out-of-court settlement between Bankers Trust New York Corp. and Procter & Gamble Co. was a double-barreled victory for the derivatives industry.

Settling the case over two derivatives contracts that soured when interest rates rose in early 1994, Procter & Gamble agreed to pay $35 million of the $195 million it owed Bankers Trust, and to forgo between $5 million and $14 million in gains on a separate contract.

Banking and legal experts noted that a trial would have entailed a public airing of tapes that seemed to show derivatives salesmen plotting to mislead a client about the risk of the contracts.

What's more, the observers noted that a series of pretrial rulings by Judge John Feikens of the U.S. District Court for the Eastern District of Michigan may provide the industry with a defense against future claims by disgruntled clients.

A public trial "would have done for banking law what the O.J. Simpson case did for criminal law," said Kathleen Collins, of Morgan, Lewis and Bockius, at an American Bar Association conference in Washington.

"Legally, Bankers Trust had a good case, but all the other noise was negative," said David M. Visher, director of financial products with CIBC Wood Gundy. "The tapes were fatal."

Excerpts from some of the tapes were released last year, and Procter & Gamble intimated at a press briefing Monday that it planned to air additional damaging tapes if the case went to trial.

Merton Miller, the Nobel Prize-winning economist at the University of Chicago, said Bankers Trust officials must have thought the tapes would have "inflamed" a jury if they were admitted as evidence.

"Trash talk by traders is not unusual and nobody takes it seriously," he said. "But a jury may have."

A spokeswoman for Procter & Gamble said copies of the tapes the company received during discovery for the case would either be returned to Bankers Trust or destroyed.

A series of rulings by Judge Feikens, sitting in Cincinnati, just prior to the settlement should help the derivatives industry in the future, some observers said.

Perhaps most damaging to Procter & Gamble's case was the judge's ruling that the bank did not owe a fiduciary duty to the Cincinnati-based company. He said the two companies were sophisticated and dealing on a business level.

"Theirs was not a 'special relationship' that would support a claim of negligent misrepresentation under New York law," the judge wrote.

Henry Hu, a professor at the University of Texas Law School in Austin, said Judge Feikens' rulings were "definitely helpful to the derivatives industry."

He said the industry should benefit from the rulings that Procter & Gamble could not sue the bank for violating the Commodities Exchange Act because the swaps were exempt from that act. Likewise, he ruled the contracts were not securities under federal or state securities laws, making the claims groundless.

"This kind of precedent could be used to confirm that not all (over-the- counter) derivatives are securities," he said.

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