Settlement of Bankers Trust Case May Have Effect on O.C. : Investigation: Sources believe two federal agencies will make similar aggressive inquiries.
The expected settlement of a federal investigation into the sale of derivatives by Bankers Trust New York Corp. means two federal agencies will make similar aggressive inquiries into Orange County’s bond debacle, sources said Thursday.
“The action they will take (against Bankers Trust) has much broader implications,” said a source familiar with the negotiations, which involve the Securities and Exchange Commission and the Commodity Futures Trading Commission.
Both the SEC and the CFTC have auditors poring over the Orange County investment pool, according to regulatory sources. It is rare for both agencies to be involved at the same time, but the complex activities that resulted in big losses in the county’s investment portfolio could have involved futures contracts as well as conventional securities.
If fraud is involved, both agencies could make cases, according to regulatory officials, but preliminary inquiries have not yet turned up evidence that Orange County managers were defrauded by the brokerage firms selling the derivatives.
“It appears they had a sophisticated strategy and knew what they were doing,” one CFTC official said, referring to the county fiscal managers.
However, he emphasized that the CFTC inquiry, still in a preliminary stage, is an intensive one involving personnel from the agency’s Los Angeles office as well as a special auditor from Washington.
In the next several weeks, Bankers Trust expects to reach a settlement with the SEC and the CFTC that would involve filing civil lawsuits and a simultaneous consent decree, according to a knowledgeable source. It involves one employee of the securities firm and Gibson Greetings, the client that bought the often highly complex derivatives.
The basic sale of derivatives to dozens of clients is a legitimate activity of the bank and is not being challenged, the source said.
The conducting of parallel inquiries by two federal agencies that usually cover different sectors of the investment world reflects the mounting concern and uncertainty over sales and promotions of derivatives as investments. Derivatives are financial instruments, often highly complex, linked to underlying stocks or bonds or to indexes connected with stock and bond markets.
The CFTC oversees futures contracts, which are agreements to buy or sell commodities for future delivery at prices fixed today. The commission also handles complex variations of these contracts.
“We want to see if there are instruments that fall under our jurisdiction,” the CFTC official said.
