Bankers Trust Derivative Sale Violated Law, Regulators Say

Federal regulators have concluded that Bankers Trust New York Corp., in its sale of risky derivatives to Gibson Greetings Inc., violated federal securities and commodities anti-fraud laws.

Civil suits naming Bankers Trust could be filed within the next several weeks by the Securities and Exchange Commission and the Commodity Futures Trading Commission, according to regulatory officials and a source close to Bankers Trust. These sources said the bank is negotiating the final terms of a consent decree with the two agencies that would settle the suits and require Bankers Trust to pay fines.

The actions against Bankers Trust, following a six-month investigation, would represent the most decisive move yet by federal regulators to combat abuses in the sale of these complex financial instruments, known as derivatives because they are derived from other underlying securities, such as stocks or bonds. The latest flap over derivatives involves Orange County, which filed for bankruptcy last week after its treasurer invested county funds in exotic bets on interest rates.

Sources said there were two breakthroughs for regulators in the Bankers Trust case. The first was evidence of fraud, which the SEC and CFTC have authority to police in financial markets. The second was the regulators’ decision to treat the derivatives sold by Bankers Trust variously as securities and commodities futures--making them subject to regulatory supervision by both agencies.