Livio M. Borghese and Michael P. Triguboff, principals at Borghese Triguboff Investment Corp., a small investment company, thought the deal was all set. They planned to acquire Curtis Industries Inc., a Midwest manufacturer, and had a preliminary agreement with a Bankers Trust New York Corp. unit for the financing. But instead of shaking hands, Borghese Triguboff and Bankers Trust wound up shaking fists at each other--in court.
The dispute, which began in 1990 and is still in litigation in New York Supreme Court, involves charges of illegal tying, whereby a bank refuses to provide a service, usually a loan, unless the customer agrees to buy another service as well. Tying is receiving increasing attention from regulators, who feel it may be hurting small companies that are trying to recover from the recession but are finding credit scarce.
Borghese Triguboff claims it was told by officials of BT Commercial, the Bankers subsidiary, that unless the company agreed to hire another Bankers subsidiary as financial adviser, "BT Commercial would reconsider providing senior financing." With less than 20 days to go before Borghese Triguboff stood to forfeit a good-faith deposit it had put on the deal, it signed the engagement letter.
Two Bankers units later sued Borghese Triguboff to recover fees for services provided for the planned financing of the deal. Borghese Triguboff filed counterclaims accusing Bankers of pressuring it into buying other services if it wanted the financing. Bankers Trust says the charge "is groundless and has been brought in a cynical attempt to avoid the payment of fees that are due and payable."
Tying is illegal under the Bank Holding Company Act and Federal Reserve regulations. It has become a hot issue in banking circles because critics charge the scarcity of credit gives banks leverage to use loans as a means to promote various fee-based services. The rationale behind the Bank Holding Company Act ban on tying is that banks shouldn't take unfair advantage of their power as key sources of credit. Some ties are allowed--banks may give preferential rates to customers who leave large balances on deposit--but most are barred.
AX TO GRIND. The Comptroller of the Currency and the Federal Reserve currently are checking into charges that banks are tying services to loans for municipal and corporate clients. The Fed told Representative Henry B. Gonzalez (D-Tex.) on Nov. 2 that it is looking into three alleged incidents of tying. Securities & Exchange Commissioner Richard Y. Roberts has denounced the practice.
In a letter to the Fed last August, Morgan Stanley & Co. described dozens of alleged cases of actual or probable tying. One bank allegedly told a large service company its revolving-credit agreement would be continued only if the bank was hired to help underwrite debt issues. Another, financing a retail chain emerging from bankruptcy, allegedly insisted it help manage the chain's securities offerings. Ironically, Morgan Stanley named few banks, perhaps because it, too, needs bank services.
Of course, securities firms, such as Morgan Stanley, have an ax to grind about tying. Concerned about banks' inroads in the securities business, they have an interest in proving that tying gives an unfair edge to banks offering services such as investment banking. In a letter to members last month, the Securities Industry Assn. said: "We need your help to provide specific instances of abuses or illegalities to the federal regulators."
Many borrowers, worried about alienating a source of credit, keep quiet. One case that has come to light involved Huntington Bancshares Inc. in Columbus, Ohio, and several subsidiaries, which were sued starting in 1990 by Human Services Plaza Partnership, a former client. In the spring of 1988, says a source close to the case, Human Services officials had approached Huntington for at least $20 million to build a government office building in Cleveland. In November, a Huntington subsidiary agreed--if it could serve as exclusive financial adviser and agent. Howard Shanker, a general partner of Human Services, alleged in an affidavit that "it was made clear to me by Mr. Caruso formerly a vice-president in Huntington's mortgage subsidiary that if I wanted the financing for this project that HSPP must use the services of Huntington Company."
Human Services agreed. It needed to break ground on the building by the end of 1988 to meet its lease obligations. But on Dec. 30, Human Services charged, it got a letter from Huntington saying it would provide only an $8 million letter of credit and that it would try to find other lenders to provide the remainder.
Huntington Chief Counsel Ralph K. Frasier says the bank denies any tying and declines further comment. But Huntington's Anthony Caruso testified his bank didn't want to issue a letter of credit for a note issue "that was going to be placed by any other company that duplicates services that Huntington could provide."
UNDER PRESSURE. Another Cleveland case cited in the Morgan Stanley letter involves a bank subsidiary of National City Corp. In early 1992, National wrote to a potential client saying that a letter of credit would be "subject to National City Financial Corp. representation as agent of marketing of bond issue."
The client did not publicly complain about the letter. Thomas A. Plant, counsel for National City, says the letter in question was only a "discussion piece." He says the Fed is reviewing the matter, and National City, which prohibits illegal tying as a matter of corporate policy, is cooperating with that review.
Like the National City client, most borrowers quietly acquiesce to bank pressure. But with growing regulatory attention on the problem, banks that try to tie up customers are increasingly likely to find themselves tied up in court.
TABLE: TIES THAT ILLEGALLY BIND?
BANKERS TRUST NEW YORK CORP. Accused by investment company of demanding use of Bankers' advisory services in return for financing
HUNTINGTON BANCSHARES Sued, along with its units, by real estate developer, who alleges bank wouldn't provide letter of credit for note issue unless its affiliate was designated agent to place notes
NATIONAL CITY CORP. Document sent to client tied granting letter of credit to engagement of bank to market bond issue