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Bankers Trust Investigation Narrows Focus

Published: March 13, 1999

Federal authorities investigating corruption at the Bankers Trust Corporation are focusing on the activities of B. J. Kingdon, who formerly ran one of the bank’s largest businesses and sat on its 12-member operating committee, according to lawyers and Bankers Trust employees involved in the inquiry.

Mr. Kingdon is a resident of Oceanport, N.J., and ran Bankers Trust’s custody, corporate trust and pension services businesses before resigning in early 1997. Stanley Arkin, an attorney representing Mr. Kingdon, said his client had not been charged with any wrongdoing and intended to contest any criminal charges if they were filed against him.

Mr. Kingdon reported directly to the president of Bankers Trust, Eugene B. Shanks, during years in which Bankers Trust illegally padded its results with funds left unclaimed by customers. Mr. Shanks did not return phone calls seeking comment, nor did Charles Sanford, who was the bank’s chief executive during Mr. Kingdon’s tenure.

The United States Attorney’s office in Manhattan has also questioned Timothy Yates, Bankers Trust’s former chief financial officer, as part of its investigation, although an attorney representing Mr. Yates said he was not a target of the inquiry.

Although no Bankers Trust employees were named in the court papers filed against the bank on Thursday, other former Bankers Trust employees who are being questioned as part of the Federal investigation include Paula C. Gabriele, former head of the bank’s retirement services business; Kenneth Goglia, a former managing director for financial controls who worked for Mr. Kingdon, and Let W. Lee, a former managing director in the bank’s global securities business.

Ms. Gabriele’s attorney said that she was not a target of the investigation. Mr. Lee’s attorney declined to comment. Mr. Goglia’s attorney did not return phone calls seeking comment.

Bankers Trust, the eighth-largest bank in the country, pleaded guilty Thursday to Federal criminal charges that senior officers and employees had illegally diverted $19.1 million in unclaimed checks and other credits owed to customers to the bank’s own books to improve its financial performance between 1994 and 1996.

Bankers Trust agreed to pay a $60 million fine to the Federal Government and a separate fine of $3.5 million to New York state authorities for the illegal scheme. Unclaimed bank funds fall under so-called escheat laws that vary from state to state but typically require that such funds be turned over to the state. Instead, Bankers Trust used the funds to pad its performance during a period when the bank was already mired in a scandal stemming from questionable sales tactics involving complex financial products known as derivatives.

The BankAmerica Corporation recently agreed to pay $187.5 million to settle charges that it mishandled hundreds of millions of dollars of bond payments between 1978 and 1995. The bank was accused by state and local authorities in California of pocketing unclaimed bondholder payments that should have been returned to be used for school construction and other public works.

While Federal regulators, including the Federal Reserve and the Comptroller of the Currency, said the theft of unclaimed funds was highly unusual and was generally not something consumers and other bank clients needed to worry about, the fact that Bankers Trust has pleaded guilty to such acts is no small matter. Bankers Trust is currently completing the terms of its acquisition by Germany’s Deutsche Bank A.G., but if the bank were still independent its viability would now be in doubt.

”This would be extraordinarily serious stuff if they were still independent,” said Lawrence Cohn, an analyst at Ryan, Beck & Company. ”Financial institutions face extraordinary risks when they plead guilty to a felony. Lots of customers won’t do business with convicted felons.”

Although Deutsche Bank said the guilty plea would not stymie the merger, it is yet another embarrassment for Bankers Trust, which was sold after a string of heavy trading losses last year.

In the early 1990’s, Bankers Trust was considered one of Wall Street’s most aggressive, innovative and loosely controlled trading houses before it was undone by hard-driving mandates imposed by its former chief executive, Mr. Sanford, and by a certain willingness to break the rules.

Indeed, Mary Jo White, United States Attorney for the Southern District of New York, said on Thursday that the illegal diversion of unclaimed funds began after Bankers Trust’s senior management ”placed severe pressure” on managers to generate revenue and meet expense targets. Bankers Trust, hammered by allegations of improper sales tactics in its derivatives unit, saw its earnings plunge to $215 million in 1995 from $615 million the year earlier and, according to court documents, began applying pressure ”on all areas of its business” to make up the difference.

An independent counsel appointed to investigate the bank’s derivatives activities issued a report in 1996 that criticized senior management for lax controls over that business between 1991 and 1994. Among those criticized in the report were Mr. Sanford, Mr. Shanks and Mr. Yates. These executives had all resigned or retired from the bank by 1997, when Frank N. Newman, a former senior United States Treasury official, became the new chief executive.

Mr. Kingdon joined Bankers Trust in 1982, became a managing director in 1986 and then went on to run a major division of the company now known as global institutional services. Mr. Kingdon resigned in early 1997 after an investigation of his division had been started by Bankers Trust. A bank spokesman said 13 other employees resigned from the bank when the division’s misappropriation of unclaimed funds was discovered. The bank notified regulators and the United States Attorney’s office of the problem in March 1996.

According to documents filed as part of the United States Attorney’s case against Bankers Trust, a group of employees working in Mr. Kingdon’s division, under the direction of an unnamed senior manager and controller, in 1994 began falsifying records and diverting millions of dollars of unclaimed funds into a ”slush fund.” The slush fund was then tapped at the end of financial reporting period’s to increase Bankers Trust’s bottom line.

Mr. Goglia was a senior controller working for Mr. Kingdon at the time, according to a 1995 directory of Bankers Trust employees, although it could not be determined if he is the individual referred to in court papers. Likewise, Mr. Lee ran a securities unit named in court papers, although it could not be determined if he is an unnamed individual cited in court papers. The United States Attorney’s office declined to comment.

”This is another one of those cases where the Government stretches the facts to make them fit into a criminal case,” Mr. Arkin said yesterday . ”If you wanted to talk about whether funds should be escheated or not, that’s one thing. But whether these people had criminal intent is another.”

In a brief interview on Thursday evening, Mr. Kingdon had said he had no knowledge of the Federal investigation and no indication that he was under investigation before declining further comment.

But Mr. Arkin contradicted his client’s statements yesterday, saying that he was retained by Mr. Kingdon two years ago and that Mr. Kingdon was fully aware of the investigation at that time.

So why the discrepancy?

”The pressure of events,” offered Mr. Arkin.


Published: July 22, 1988

LEAD: The Bankers Trust New York Corporation’s announcement Wednesday that it had overstated its foreign exchange revenues for 1987’s fourth quarter by $80 million resulted from its unusual style of trading and the size of its market positions, industry executives said yesterday.

The Bankers Trust New York Corporation’s announcement Wednesday that it had overstated its foreign exchange revenues for 1987’s fourth quarter by $80 million resulted from its unusual style of trading and the size of its market positions, industry executives said yesterday.

The restatement, which was ordered by the Federal Reserve Bank of New York, created a storm on Wall Street. George Vojta, a Bankers Trust executive vice president assigned to explain the move to analysts, tied the problem to the methods the bank had used to value foreign currency options with maturities of up to a year.

A foreign currency option gives a customer the chance to purchase a fixed amount of foreign currency at a specified exchange rate at a set date in the future. Valuation Complications

Mr. Vojta told analysts that the valuation had been complicated because, since such options were new financial instruments traded over-the-counter, there was no way to check their prices against an official market price. In addition, the lack of active trading made it harder to determine pricing.

Bankers Trust had relied heavily on its traders’ assessments to establish the value of the options for accounting purposes. Since then, it has changed its approach to reduce the impact of such subjective opinions. In addition, a bank spokesman said yesterday, the bank now will monitor the pricing of every currency option instead of relying on a sampling.

Executives at other financial institutions that also trade currency options have found the bank’s explanation puzzling. Officials at Citicorp, J.P. Morgan and Salomon Brothers declined to comment on Bankers Trust’s accounting troubles, but said they knew of no major valuation problems at their own institutions. Discrepancies Questioned

Industry executives agreed with Mr. Vojta’s assertions that there were no established market prices for many currency options. However, they said that discrepancies in valuation tended to be within predictable, and relatively small, ranges, say, $4 million or $5 million.

”If someone came in and told me that they had a really terrible problem, I would think at most it could be $10 million,” said the former chief financial officer of a major financial institution.

Currency options traders said they thought the bank’s problems had more to do with the size, complexity and illiquidity of some of the trading positions Bankers Trust was taking than with the difficulty of valuing currency options generally. Bankers Trust was well known for being willing to write large options contracts for obscure currencies.

In addition, the bank complicated its valuation challenge with its willingess to write contracts for delivery up to a year in the future. Other banks typically write such options for delivery in three months or less.

When valuations of trading positions are off the mark, traders said, they tend to be off by a percentage point or two. On that basis, an $80 million overvaluation would have required Bankers Trust’s trading position to be $8 billion, a figure they found implausible.

Those with extensive knowledge of currency options could make sense of Bankers Trust’s $80 million overvaluation only if they assumed the biggest possible discrepancy in valuation they could ever recall having seen, and a trading position of more than $1.5 billion. Known for Taking Big Positions

Bankers Trust was known last year for taking billion-dollar-plus positions in the markets, often using the complex computer-based strategies of its 32-year-old star trader, Andrew J. Krieger. At other institutions, trading positions half that size are more common.

In one incident last fall, Mr. Krieger apparently took such a large position in New Zealand dollars that the currency moved 5 percent in one day, causing local central banking authorities to complain to the bank. Mr. Vojta told analysts Wednesday that options on New Zealand dollars were among those that had to be revalued downward. Other currencies involved included yen, West German marks and British pounds.


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