Bankers Trust: The Customer’s Losses, the Seller’s Numbers

In the Bankers Trust Gibson Greetings derivatives fraud settlement, BT Securities agreed to a $10 million civil penalty over allegations that it misled its customer about derivatives risks and losses. The Securities and Exchange Commission said Gibson remained unaware of its actual losses and kept buying derivatives from the same seller.

BT Securities was a registered broker-dealer and wholly owned subsidiary of Bankers Trust New York Corporation. The Securities and Exchange Commission announced the settlement on December 22, 1994, alongside coordinated action by the Commodity Futures Trading Commission. This derivatives enforcement action concerned what the seller told Gibson Greetings about the products and the positions it already held.

The Valuations Behind Gibson’s Reported Losses

The Securities and Exchange Commission alleged that BT Securities misled Gibson about transaction risks and the value of its derivatives positions between October 1992 and March 1994. Its later account of the action connects the understated losses to continued purchases.

The Securities and Exchange Commission’s 1994 news digest identifies an especially consequential use of those numbers. On two occasions, Gibson asked BT Securities for valuations to prepare its Form 10-K, the annual report. According to the agency, BT Securities knew how Gibson would use the figures and supplied valuations that understated its derivatives losses by more than 50%. So Gibson’s own financial statements understated them too, the agency said.

We see a particularly ugly sales advantage in that account: the seller allegedly supplied the reassuring numbers that helped keep its customer buying. A repeat sale, built on a smaller-looking loss. The same relationship also supplied figures for the customer’s financial statements.

The Dealer Also Supplied the Number

Over-the-counter derivatives are privately negotiated contracts whose value depends on underlying rates, indexes or assets. The Commodity Futures Trading Commission’s explanation of the market describes businesses using them to manage exposures to interest rates, currencies and commodity prices, as well as to speculate. It also explains why a business might choose a tailored contract: its payment dates and exposure may not fit an exchange-traded product.

That customization makes the contract terms part of the valuation story. To understand a customer mark, we want to know which position it describes, which date it values and which assumptions produced it. The useful comparison is between the explanation the customer received and the work behind that explanation.

In the Gibson allegations, the dealer selling the derivatives also answered the customer’s requests for their values. That gives a valuation controller or treasury employee a concrete point of recognition. If an internal calculation and a customer report tell different stories about the same position, the person who understands the calculation can explain what changed between them.

The customer may see only the final mark. A salesperson may know what was said about risk, while a valuation employee may know the assumptions behind the number. We bring those accounts together around the particular transaction and communication, rather than treating a loss figure as the whole story.

What Evidence Is Required to Prove Fraud?

We assess the evidence with you by connecting what the customer was told to the valuation work and the decisions that followed. Here, the Securities and Exchange Commission’s account identifies risk explanations, understated position values, continued purchases and figures requested for financial reporting. An insider can recognize connections the customer could not see:

• The calculation and the customer mark. Original valuation runs, model assumptions and the report sent to the customer can show where the reported value departed from the calculation. We examine how the same position was described at the same point in time.
• The sales explanation and the position. Recordings or messages may connect a statement about risk or losses to a particular derivative and a later purchase. The salesperson’s knowledge can explain what the customer was being asked to believe.
• The request and the financial report. A valuation request can identify why the customer needed the number. The response and the resulting report can show where it went, while communications about the request can establish who knew its purpose.

The last connection is especially important in Gibson’s story. The Securities and Exchange Commission specifically alleged that BT Securities knew its valuations would be used in the annual filing. For a treasury or accounting employee, correspondence about the intended use of a number may explain something the final financial statement cannot: what the supplier knew when it sent the figure.

The 2024 working paper An Analysis of Market Manipulation Definitions Around the World, from a World Federation of Exchanges research project, identifies limited transparency in over-the-counter markets as a challenge for surveillance. It also says surveillance should include communication media such as chat rooms and social media. For a customer valuation concern, we examine the conversations and calculations behind the mark.

This is also where trading and communication records can make an insider’s account intelligible to someone outside the desk. A person who understands the records can explain which calculation belonged to which position, which message went to the customer and who approved the explanation. Our work starts with those connections and what you actually saw.

What the SEC and CFTC Each Addressed

The Securities and Exchange Commission’s action concerned securities derivatives sold by BT Securities, the representations made about them and the reporting consequences for Gibson. The agency also alleged inadequate supervision of the employees involved. For someone who reviewed the sales desk’s work, that raises a concrete question: what information reached the people responsible for checking the customer communications?

The Commodity Futures Trading Commission’s congressional testimony separately identifies its order against BT Securities concerning fraud in the sale of swaps. The Securities and Exchange Commission’s retrospective account describes the agencies working cooperatively and identifies the civil penalty as the amount their orders imposed together.

Another Place Where Swap Values Reached the Accounts

Infinity Q provides a later example of fraudulent over-the-counter swap valuations inside investment funds. In the Commodity Futures Trading Commission’s civil action against the founder, a federal court opinion found the valuation fraud proved, relying on what he admitted in his criminal guilty plea.

The comparison is useful for someone who works on prices or reports. Gibson’s account concerns values supplied by a dealer to a corporate customer. Infinity Q concerns fraudulent values within funds. In either setting, knowing how the number was produced gives an insider a way to explain what the recipient could not see.

How Much Is a Whistleblower Claim Worth?

The CFTC whistleblower program offers a reward range of 10% to 30% of qualifying monetary sanctions collected. It rewards original information that leads to successful enforcement. If you recognize comparable conduct, we assess the transactions and your information with CFTC whistleblower lawyers who understand derivatives valuation and customer disclosures.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. We work with you on bringing a derivatives concern forward and identifying the program that fits the conduct.

You Know What the Customer Was Told

If you saw a customer mark change between the valuation work and the sales conversation, speak with our whistleblower experts about that difference. We build your strongest derivatives whistleblower case around the pricing decisions and what the customer was told, bring in derivatives fraud whistleblower lawyers who know valuation cases, and stay with you the whole way.