Bankers' Trust

In the mid-1990s, BT Securities Corporation, now part of Deutsche Bank, was involved in two landmark legal cases that helped clarify the duties and responsibilities of swap dealers and their customers.

The first case involved Gibson Greetings, Inc., a manufacturer of greeting cards and related products. Gibson sued BT for losses on two swap transactions where BT was the dealer. The contracts in dispute represented the cumulative position resulting from 27 earlier transactions. Of the 29 transactions between Gibson and BT, many involved the termination of one position in exchange for entering into another position. This process requires agreement between the parties as to the terms that will equate the market value of the terminated swap (or swap portion) to the value of the new position (or amendment) received in exchange.

The dispute between Gibson and BT centered on the duties of each party in determining the termination value of the swaps. Gibson alleged that an advisory relationship existed between BT and Gibson, meaning that BT was supposed to be acting on Gibson's behalf. BT argued that their transactions with Gibson were strictly arm's-length deals and that the swap master agreement did not establish any advisory or fiduciary relationship. BT argued that termination values they quoted were simply that—quotations at which BT stood ready to terminate a swap. BT argued that Gibson was free to shop for better deals in the market. The suit was settled out of court in November 1994, with Gibson paying BT only $6.2 million out of the $20.7 million owed under the terms of its swap agreements.

In a second case, Procter & Gamble (P&G) sued over its similar experience with BT. P&G accused BT of misleading statements about the terms of two interest rate swaps. The swap agreements included some complicated option features designed to allow P&G to lock in a favorable interest rate even if interest rates rose.

The pricing of the deals relied on BT's proprietary valuation models. P&G had placed itself in a position in which it had to rely on the computations of BT, without understanding how the results were reached. In large part, this was due to the complex option provisions of the swaps. P&G claimed that it relied on BT's models to value the swaps but that BT would not share the specifics of their models. P&G claimed that it was the victim of a financial fraud, a charge that BT strongly contested. BT argued that P&G was fully aware of the risks when it had agreed to the swaps and was free to get a second opinion on swap values from another dealer. The case was settled out of court with P&G paying BT $35 million of the more than $200 million BT claimed it was owed.

As a result of these two cases, swap dealers are careful to enumerate the duties of the dealer and the responsibilities of the dealer's customers. Swap dealers are also careful to abide by these duties once established.