A local paper producer PT Esa Kertas Nusantara (EKN) has filed a lawsuit against Bank Danamon to seek Rp 1 trillion (US$84 million) in damages, accusing the country’s fifth largest lender of selling “misleading derivative products”.

EKN said Danamon had allegedly sold the products aimed at speculative gains rather than for hedging purposes, EKN’s financial advisor PT Independent Research and Advisory Indonesia (IRAI) said in a statement.

IRAI was founded by senior capital market analyst Lin Che Wei.

IRAI representative Chengwy Karlam said Tuesday the company had suffered Rp 1 trillion in losses due to these structured financial products.

“The losses can be more than Rp 1 trillion as some contracts have not yet come to maturity,” he said, adding that this litigation was aimed at protecting EKN from bigger losses.

Chengwy said EKN started buying Danamon derivative products in 2007, and since then the lender continued to offer other similar products, but in different forms.

“These sophisticated products are offered to unsophisticated clients,” he said.

The lawsuit was filed with the South Jakarta District Court last week.

In response to the allegation, Danamon vice president director Joseph Luhukay said the bank had not been notified about EKN’s lawsuit. However, he confirmed  EKN was one of the bank’s clients and had been exposed to a derivatives contract.

“We are in the middle of restructuring it (the contract). Danamon has filed a request to Bank Indonesia for mediation services,” Joseph said.

However, Chengwy claimed the restructuring scheme offered by the bank was considered unclear,  thus forcing EKN to take this legal step.

EKN is a company which produces and exports coated and uncoated paper. It is based in Jakarta and Karawang, West Java, employing around  1,200 workers.

Danamon said recently it had 22 customers that were exposed to derivatives products, with a total contract value of $220 million.

Danamon’s net profits dropped by 28 percent to Rp 1.5 trillion last year from Rp 2.1 trillion in 2007 after the bank had to set aside a major provision against possible losses on derivatives transactions.

A derivative transaction is a foreign exchange contract that derives its value from an underlying asset, commodity or liability, and is normally used as a hedging or investment tool.

Aside from Danamon, US-based Citibank Indonesia also received last week notification of a lawsuit from local palm oil producer PT Permata Hijau Sawit in connection with derivatives products.

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