Bankers Trust Derivatives Sales Case: The Losses Shrank on Paper

In the Bankers Trust derivatives sales case, BT Securities agreed to pay a $10 million civil penalty over Securities and Exchange Commission allegations involving derivatives sales and misleading customer valuations. The SEC alleged that the seller supplied figures for Gibson Greetings’ annual report that understated the customer’s derivatives losses. If you worked on the pricing or passed those figures to a customer, you may recognize how a valuation becomes someone else’s public disclosure.

The Commission announced the settlement in its December 22, 1994 news digest. BT Securities Corporation was a registered broker-dealer wholly owned by Bankers Trust New York Corporation. This page follows the customer valuations and their use in financial reporting, while our broker-dealer fraud and misconduct page covers the broader business of recommendations, execution, customer assets and supervision.

What Did BT Securities Tell Gibson About Its Derivatives?

According to the SEC, BT Securities gave Gibson valuations that understated its derivatives losses by more than 50%. Gibson had asked for the value of its derivatives on two occasions. The Securities and Exchange Commission alleged that BT Securities knew on both occasions that Gibson would use the values to prepare its Form 10-K, and that Gibson’s financial statements understated its derivatives losses as a result.

We see the seller’s conflict plainly in the SEC’s allegation: the firm selling the derivatives also supplied the figures that made the customer’s losses look smaller. The losses got a better presentation.

For a client-service employee, the customer’s request may explain something a valuation printout cannot: what the customer intended to do with the number. For someone in valuation, the supporting calculation may show how the answer was produced. We examine those pieces together because the request and the calculation answer different questions about the same representation.

The Broker’s Value Became the Customer’s Disclosure

The SEC described Gibson Greetings as a company registered with the Commission and said that certain derivatives BT Securities sold it were securities under federal securities laws. Its account addressed both the sales of those securities derivatives and the valuations supplied for Gibson’s reporting.

In the SEC’s allegation, a figure supplied by the trading counterparty became part of what investors learned about Gibson’s business. That puts the customer’s accounting entries and report versions alongside the seller’s valuation work when we consider what an insider could explain.

That connection gives the case a second audience inside the business. A person reviewing the customer’s financial reporting may know where an outside valuation entered the accounts, while a person at the seller may know the assumptions behind it. We follow the value across that boundary, from the representation made to the customer to the loss shown in the customer’s report.

The Records Behind a Customer Valuation

The useful evidence behind a disputed valuation connects the customer-facing figure to the contract, assumptions, model version and review that produced it. In a matter involving similar conduct, we would work with you to identify which model version was used and what its review showed. The comparison has to explain how the value reached the customer and what information supported it at the time.

A valuation request can identify the purpose for which the customer needs the figure. The response and the account statement can show what the customer received, while accounting entries and report versions can show how that information entered the financial statements. The Bankers Trust allegations make the seller’s knowledge of the intended reporting use especially important.

These are comparisons we would make in a new matter with you. Someone in pricing may understand the assumptions, someone in client service may understand the request, and someone in accounting may understand the resulting disclosure. Your contribution may be the connection between those records that their readers would otherwise miss.

The SEC Resolution Reached Supervision Too

The Securities and Exchange Commission’s settled order formally reprimanded BT Securities and required it to stop committing or causing the antifraud and reporting violations the Commission described. The order also included a finding that the firm failed to supervise. BT Securities agreed to the civil penalty as part of that administrative resolution.

For an insider, supervision makes the review process part of the inquiry. We want to understand who checked a customer valuation, what information reached that reviewer and how the firm responded to a concern. The value sent outside the firm and the decisions made inside it are parts of the same story.

What a Derivatives Valuation Employee Can Add

A derivatives valuation employee can identify a change in the assumptions that a customer never saw. A client-service employee may know that the customer asked for a value for its annual report. If those are the pieces you know, we can work with you to connect them to the resulting disclosure.

The 2018 Journal of Forensic & Investigative Accounting paper The Significance of Whistleblowing as an Anti-Fraud Measure examined occupational-fraud data from the Association of Certified Fraud Examiners. It found that whistleblower complaints were the most common detection method in its sample. Its analysis also associated more participants in a fraud and more anti-fraud measures with a greater likelihood of detection through whistleblowing.

A valuation, a customer request and an accounting entry each show part of the process. Someone who knows why they diverged can explain a discrepancy that the public financial statement leaves invisible.

An SEC whistleblower award can be 10% to 30% of sanctions collected in a qualifying action exceeding $1 million in monetary sanctions. Separately, a whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. We assess the relevant program with you as part of developing a securities fraud report around the conduct and information you know.

You Know How the Value Reached the Customer

If you saw a customer valuation leave out what the pricing work showed, talk with our whistleblower experts about the number and the decisions behind it. We work with your knowledge of derivatives sales, valuation and financial reporting to build the case and bring in securities fraud whistleblower lawyers who understand those records. We stay beside you as we turn that inside knowledge into your strongest securities fraud whistleblower case.