These `Bank Notes' May Be Dead Letters

PRIME BANK NOTES, THOSE FAKE securities sold to dupes worldwide, may be headed for the shredder. The Securities & Exchange Commission has charged Trust Group, an outfit that has sold the notes since 1991, with securities fraud. As first disclosed in BUSINESS WEEK, Trust Group bills this paper as debt from the world's top banks, but authorities say it's worthless. By one estimate, investors in the notes have lost more than $500 million to various scammers. The Manhattan D.A.'s office is conducting a separate criminal probe.

The core of the SEC action involves the Kentucky Association of Counties (KACO), which manages an investment pool for localities. Authorities say KACO almost became a victim of the scheme by considering an investment in the notes. Trust Group allegedly promised yearly returns of at least 48%.

Also charged are Lawrence Gerschel, the grandson of financier Andre Meyer, and three associates--securities trader Sandi Kalez and lawyers Jeffrey Moritz and T. Robert Hughes. Says Hughes: "We expect to be fully vindicated." The others did not return calls.

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