The Procter & Gamble Co. lawsuit against Bankers Trust Co. over a $157 million derivatives loss, regardless of the ultimate outcome of the case, reveals clearly a breakdown in professional trust, the supposed cornerstone of any investment relationship.
Is this the way business works?
The case, first filed last year, has become more protracted, complex and sensational, raising most recently constitutional issues stemming from the inadvertent release of filings sealed by the court.
The contents of controversial Bankers Trust tape recordings of employee conversations are as explosive as the Mark Fuhrman tapes in the O.J. Simpson trial. Now that they are available, Bankers Trust might want to consider hiring the Dream Team lawyers, who won an acquittal verdict for Mr. Simpson.
"If derivatives fit, you must acquit," one can imagine in echoing resonance the closing argument on Bankers Trust's behalf.
Only a person with hubris or someone reckless would, before the disclosure of more details about the arrangements between the two litigants, judge the ultimate outcome of the case at this point. The dispute has now gone on longer than the Simpson case. But the filings show so far there is some blame on both sides.
Procter & Gamble, for example, changed some treasury executives after the loss, leading to suggestion something was awry internally in managing its corporate cash investments.
Bankers Trust, for its part, acknowledged improper actions in derivatives losses involving other companies, reimbursing some for losses.
It also replaced some executives who worked in its derivatives department.
The suit offers instructive lessons about the investment relationship for everyone in the institutional investment community, including pension executives, other fund sponsors and money managers. Even though the case involves Procter & Gamble's corporate cash management rather than pension assets, institutional investors should read the filings as they become available and follow the developments.
One lesson for corporations and fund sponsors: the court filings show return doesn't come without risk. Internal memoranda show Procter & Gamble executives bragging about how their speculative money-market investments outperformed benchmarks of Merrill Lynch professionals by 55 basis points and Goldman Sachs professionals by 41 basis points over only a two-year period.
They used those returns to justify a proposal to increase short-term investment risk. Such a move would increase P&G's return "an additional $7.6 million."
Was that extra return worth the additional risk the company assumed? Short-term investing offers only so much extra return; in this example, Procter & Gamble was expecting only a one-percentage-point boost.
But the risk potential was for much bigger losses than any possible reward, as Procter & Gamble found out.
And, Bankers Trust's money management unit, one of the largest in the country, may well suffer marketing damage, even though the case doesn't involve the unit. Repercussions probably will come especially from prospective clients. Prospects may pass on hiring Bankers Trust, uncertain over its fidelity in light of the sordid allegations in the pending lawsuit.