Banker's Trust

EMPLOYEES OF Banker's Trust Company took advantage of derivatives trading to steal from such customers as multinational consumer goods firm Procter & Gamble, and greeting card company Gibson Greetings from 1991 to 1994.

The situation led to reforms in the derivatives market and, by forcing Banker's Trust to reorient its business away from derivatives trading, contributed to its takeover by Deutsche Bank. Derivatives are a family of complicated transactions used either to hedge the risk of a financial market or index, or to speculate upon it. As such, the transactions involve a high degree of risk and provide salespeople with high profits.

Banker's Trust employees did not fully explain derivatives to their customers. Bank employees concentrated primarily on the New York interest rate desk and the New York corporate desk exploited weaknesses in the derivatives business for their own purposes.

In one case, a trader used his facility with mathematics to develop a formula for a leveraged derivative product that concealed the amount of leverage embedded in the product. Attempts by the bank's internal control departments to enforce appropriate standards, such as determining if a transaction was suitable for a customer, were suppressed by senior management. The bank executives, including chairman Charles S. Sanford, Jr., proved more interested in marketing lucrative derivatives than in protecting the financial well-being of its clients.

When exposed, Banker's Trust fired the guilty employees who still remained with the firm. It settled lawsuits with its defrauded customers and four regulatory agencies. These agencies, the Commodity Futures Trading Commission, Federal Reserve, New York State Banking Department, and the Securities and Exchange Commission, subsequently issued a report recommending changes in the derivatives business.

Many of the recommendations have become standard operating procedure in the industry, including the practice of keeping written policy manuals and requiring that non-English speaking customers receive adequate disclosure of the terms and risks of derivatives in a language that they can clearly understand. The agencies also acknowledged that Banker's Trust Company had not made any institutional effort to defraud, mislead, or take advantage of its banking customers and that many of its employees had acted properly.