<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) December 22, 1994
BANKERS TRUST NEW YORK CORPORATION
(Exact Name of Registrant as Specified in Charter)
New York 1-5920 13-6180473
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
280 Park Avenue, New York, New York 10017
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (212) 250-2500
N/A
(Former Name or Former Address, if Changed Since Last Report)
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Item 5. Other Events
On December 22, 1994, Bankers Trust New York Corporation (the
"Corporation") submitted offers of settlement to the Securities and
Exchange Commission (the "SEC") and the Commodity Futures Trading
Commission (the "CFTC"), which accepted the offers. The offers to the SEC
and CFTC are attached hereto as Exhibits 99.1 and 99.2 to this Current
Report on Form 8-K, respectively. The SEC then issued an Order Instituting
Proceedings and the CFTC then issued a Complaint and Opinion and Order,
which are attached hereto as Exhibits 99.3 and 99.4 to this Current Report
on Form 8-K, respectively. The Corporation issued a press release
regarding these matters, a copy of which is included as Exhibit 99.5 to
this Current Report on Form 8-K.
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits
(c) Exhibits.
99.1 Offer of Settlement of BT Securities Corporation before
the Securities and Exchange Commission, dated December
21, 1994.
99.2 Offer of Settlement of Respondent BT Securities
Corporation before the Commodity Futures Trading
Commission, dated December 21, 1994.
99.3 Order Instituting Proceedings Pursuant to Section 8A of
the Securities Act of 1933 and Sections 15(b) and 21C of
the Securities Exchange Act of 1934, and Findings and
Order Imposing Remedial Sanctions, In re BT Securities
Corporation, Securities Act of 1933 Release No. 7124
(Dec. 22, 1994)
99.4 Complaint Pursuant to Sections 6(c) and 6(d) of the
Commodity Exchange Act and Opinion and Order Accepting
Offer of Settlement, Making Findings and Imposing
Remedial Sanctions, In re BT Securities Corporation, CFTC
Docket No. 95-2 (Dec. 22, 1994).
99.5 Press Release of Bankers Trust New York Corporation,
dated December 22, 1994.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Date: December 23, 1994
BANKERS TRUST NEW YORK CORPORATION
By: /s/ James T. Byrne, Jr.
Name: James T. Byrne, Jr.
Title: Secretary
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INDEX TO EXHIBITS
99.1 Offer of Settlement of BT Securities Corporation before the
Securities and Exchange Commission, dated December 21, 1994.
99.2 Offer of Settlement of Respondent BT Securities Corporation
before the Commodity Futures Trading Commission, dated December
21, 1994.
99.3 Order Instituting Proceedings Pursuant to Section 8A of the
Securities Act of 1933 and Sections 15(b) and 21C of the
Securities Exchange Act of 1934, and Findings and Order
Imposing Remedial Sanctions, In re BT Securities Corporation,
Securities Act of 1933 Release No. 7124 (Dec. 22, 1994)
99.4 Complaint Pursuant to Sections 6(c) and 6(d) of the Commodity
Exchange Act and Opinion and Order Accepting Offer of
Settlement, Making Findings and Imposing Remedial Sanctions, In
re BT Securities Corporation, CFTC Docket No. 95-2 (Dec. 22,
1994).
99.5 Press Release of Bankers Trust New York Corporation, dated
December 22, 1994.
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Exhibit 99.1
Administrative Proceeding
File No. 3-8579
UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
______________________________
:
In the Matter of :
: OFFER OF SETTLEMENT OF
BT SECURITIES CORPORATION : BT SECURITIES CORPORATION
:
Respondent. :
______________________________:
I.
Respondent BT Securities Corporation ("BT Securities"),
pursuant to Rule 8(a) of the Rules of Practice of the Securities and
Exchange Commission ("Commission"), [17 C.F.R. sec. 201.8(a)], submits this
Offer of Settlement ("Offer") in settlement of the proposed administrative
proceedings to be instituted by the Commission pursuant to Section 8A of
the Securities Act of 1933, and Sections 15(b)(4) and 21C of the Securities
Exchange Act of 1934 ("Exchange Act").
II.
Except as provided in Section IV.H below: (a) this Offer is
submitted only for the purpose of settlement of these proceedings, with the
express understanding that it will not be used in any way in said
proceedings unless the Offer is accepted by the Commission as hereinafter
set forth; and (b) if this Offer is not accepted by the Commission, it is
withdrawn without prejudice to Respondent and shall not become a part of
the record, or referred to, in these or any other proceedings.
III.
Solely for the purpose of these proceedings and any other
proceedings brought by or on behalf of the Commission or to which the
Commission is a party, and without admitting or denying the findings set
forth below and contained in the Commission's Order Instituting Proceedings
Pursuant To Section 8A of the Securities Act of 1933 and Sections 15(b)(4)
and 21C of the Securities and<PAGE>
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Exchange Act of 1934, and Findings and Order Imposing Remedial Sanctions,
except that BT Securities admits the jurisdiction of the Commission over
it and over the subject matter of these proceedings, BT Securities
consents to the entry of an Order by the Commission in the form attached
hereto, which:
A. finds that BT Securities, a broker-dealer registered with
the Commission pursuant to Section 15(b) of the Exchange
Act, willfully violated Section 17(a) of the Securities
Act and Section 10(b) of the Exchange Act and Rule 10b-5,
thereunder, and caused violations of Section 13(a) of the
Exchange Act and Rules 13a-1, and 12b-20 thereunder;
B. finds that BT Securities failed reasonably to supervise
persons subject to its supervision, with a view toward
preventing violations of Section 17(a) of the Securities
Act and Section 10(b) of the Exchange Act, and Rule 10b-
5, and causing violations of Section 13(a) of the
Exchange Act and Rules 13a-1 and 12b-20 thereunder, as
required by Section 15(b)(4)(E) of the Exchange Act;
C. censures BT Securities;
D. orders that BT Securities permanently cease and desist
from committing or causing any violation and any future
violation of Section 17(a) of the Securities Act and
Sections 10(b) and 13(a) of the Exchange Act and Rules
10b-5, 12b-20, and 13a-1 promulgated thereunder;
E. orders that BT Securities pay a civil penalty of
$10,000,000 within two business days of the issuance of
the Order to the United States Treasury1/; and
F. orders that BT Securities hire a consultant and take such
further actions as are specified in part VI.4 of the
Order.
1/ The $10 million paid pursuant to the Order will also
satisfy BT Securities' payment obligation under a
related Opinion and Order Accepting Settlement issued
by the CFTC.
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IV.
For the purpose of this Offer, BT Securities hereby waives:
A. service of an Order Instituting Proceedings;
B. all hearings or opportunities for hearings pursuant to
Section 8A of the Securities Act and Sections 15(b)(4)
and 21C of the Exchange Act.
C. the filing of proposed Findings of Fact and Conclusions
of Law;
D. an initial decision by an administrative law judge
pursuant to Rule 16(b) of the Commission's Rules of
Practice [17 C.F.R. sec. 201.16(b)];
E. all post-hearing procedures pursuant to Rules 16 and 17
of the Commission's Rules of Practice [17 C.F.R. secs.
201.16, 201.17];
F. all judicial review by any court;
G. all provisions of the Commission's Rules of Practice as
may be construed to prevent any member of the
Commission's staff from participating in, or advising the
Commission as to, the preparation of the order, opinion,
finding of fact, or conclusion of law to be entered
pursuant to this Offer; and
H. any claim of bias or prejudgment by the Commission based
upon any discussion among members of the Commission, its
staff, or between the Commission and the staff concerning
this Offer of Settlement or settlement of all or any part
of this matter on any other terms. The waiver described
in subparagraph H shall be effective even if this Offer
is withdrawn or rejected; and
I. consistent with the provisions of 17 C.F.R.
sec. 202.5(f), any claim of Double Jeopardy based upon
the settlement of this proceeding, including the
imposition of any remedy or civil penalty herein.
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V.
Respondent BT Securities represents that it is the Commission's
policy, set forth in 17 C.F.R. sec. 202.5(e), not to permit a respondent to
consent to an order that imposes a sanction while denying the allegations
and findings contained in the order. Respondent BT Securities further
understands that the Commission's acceptance of this Offer is based upon
compliance with this policy by Respondent BT Securities in any statements
concerning these proceedings.
VI.
A. Respondent BT Securities represents that it has read and
understands the foregoing Offer and that this Offer is
made voluntarily, and that, except as set forth in Part
VI.B below, no promises, offers, threats, or inducements
of any kind or nature whatsoever have been made by the
Commission or any member, officer, employee, agent, or
representative of the Commission in consideration of this
Offer or otherwise to induce it to submit this Offer.
B. BT Securities submits this Offer on the condition that it
resolves all liability of BT Securities, Bankers Trust
Company, Bankers Trust New York Corporation and any
affiliated entity thereof (collectively "the BT
Entities") in any action or proceeding brought by or on
behalf of the Commission, arising from conduct occurring
before the date of this Offer and involving (i) the
marketing, offer, purchase, sale, amendment, termination
or valuation of privately negotiated over-the-counter
derivative products, or (ii) the provision of valuations
of privately negotiated over-the-counter derivatives to
customers for the purposes of preparing financial
statements for inclusion in filings with the Commission.
This Offer does not, however, affect the rights of the
Commission (a) to conduct any investigation or inspection
concerning conduct by the BT Entities or others; (b) to
bring any action or proceeding against any officer,
director, employee, agent or representative of the BT
Entities arising from conduct occurring before or after
the date of this Offer; or (c) to bring any action
against any BT Entity
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that results from conduct occurring after the date of this
Offer.
C. BT Securities, for itself and the BT Entities defined in
the preceding paragraph of this Offer, hereby agrees that
the BT Entities shall cooperate with the staff of the
Commission in such further investigations and inspections
as the Commission shall determine to pursue relating to
the marketing, offer, purchase, sale, amendment,
termination or valuation of privately negotiated over-
the-counter derivative products by BT Securities, arising
out of or relating to conduct which occurred before the
date of this Offer. Furthermore, the BT Entities shall
actively seek the cooperation of all employees, agents
and representatives of the BT Entities in any such
investigation or inspection. At the request of the
Commission's staff, the BT Entities shall appear and
testify, and shall use their best efforts to obtain the
appearance and testimony of their employees, agents and
representatives, at any investigative testimony,
deposition, hearing or trial.
Respectfully submitted,
/s/ Howard M. Schneider
BT Securities Corporation
By: Howard M. Schneider
Title: President
State of New York )
) ss.
County of New York )
On this 21st day of December, before me personally appeared
Howard M. Schneider, to me known to be the person who executed the
foregoing Offer of Settlement.
/s/ Tanya M. Jaeger
NOTARY PUBLIC
My Commission Expires:
Approved as to form:
/s/ Gandolfo V. DiBlasi
Attorney for BT Securities
<PAGE> 1
Exhibit 99.2
UNITED STATES OF AMERICA
Before the
COMMODITY FUTURES TRADING COMMISSION
______________________________
:
In the Matter of : CFTC Docket No. 95-2
BT SECURITIES CORPORATION, :
:
Respondent :
______________________________:
OFFER OF SETTLEMENT
OF RESPONDENT BT SECURITIES CORPORATION
I.
BT Securities Corporation ("BT Securities") hereby submits this
Offer of Settlement pursuant to Rule 10.108 of the Commission's rules, 17
C.F.R. sec. 10.108 ("Offer"). This Offer is submitted solely to dispose of
the allegations and issues raised in the Complaint and Opinion and Order
Accepting Offer of Settlement, Making Findings and Imposing Remedial
Sanctions ("Order") issued by the Commission against BT Securities in this
matter and to terminate this proceeding against BT Securities. Pursuant to
Rule 10.108, if this Offer is not accepted by the Commission as hereinafter
set forth, it shall be null and void with respect to any acknowledgement,
admission, waiver, stipulation or consent contained herein, and shall not
be used in any manner in this proceeding by any party hereto.
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II.
Without admitting or denying the allegations or findings in the
Order in this proceeding, before the taking of any testimony and without
any adjudication on any issue of fact or law, BT Securities:
A. Acknowledges service of the Order;
B. Admits the jurisdiction of the Commission with respect to
all matters set forth in the Order;
C. Waives:
1. notice of hearing;
2. a hearing;
3. all post-hearing procedures;
4. judicial review by any court;
5. any objection to the staff's participation in the
Commission's consideration of the offer; and,
6. any claim of Double Jeopardy based upon the
settlement of this proceeding, including the
imposition of any remedy or civil penalty herein;
D. Stipulates that the record basis on which the Commission
Order accepting this Offer may be entered shall consist
solely of the Order and the findings consented to in this
Offer;
E. Consents, solely on the basis of this Offer, and without
any adjudication on the merits, to the entry of an Order
in the form attached hereto which:
1. makes findings of fact and finds that BT Securities
violated Section 4o(1)(A) of the Commodity Exchange
Act, as amended, 7 U.S.C. sec. 6o(1)(A). BT
Securities consents to the use of these findings in
this proceeding and in any other proceeding brought
by the Commission or to which the Commission is a
party; provided, however, that BT Securities does
not consent to the use of the Order as the sole
basis for any other proceeding brought by the
Commission;
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2. directs BT Securities to cease and desist from
violating Section 4o(1)(A) of the Commodity
Exchange Act, as amended, 7 U.S.C. sec. 6o(1)(A);
3. directs BT Securities to pay a civil monetary
penalty in the amount of $10 million dollars
($10,000,000.00). This civil penalty will be paid
by BT Securities to the U.S. Treasury within two
(2) days of the date of this Order;1/
4. orders that BT Securities comply with the
undertakings in Part III below.
III.
In consideration of the Commission's acceptance of this Offer,
and solely by virtue of this Offer, BT Securities hereby undertakes:
A. to retain at its expense, within 30 days of the entry of
this Order, an independent consultant, acceptable to the
Commission and to the SEC2/, to review and make
recommendations concerning (i) BT Securities' compliance
policies and procedures related to the marketing, offer,
sale, purchase, amendment, termination or valuation of
privately negotiated over-the-counter derivative
products, (ii) any and all improper conduct engaged in by
BT Securities with respect to the marketing, offer,
purchase, sale, amendment, termination or
1/ The $10 million paid pursuant to the Order will also
satisfy BT Securities' payment obligation under a
related Order issued by the SEC.
2/ The SEC's Order will contain a similar requirement to
retain an independent consultant and to implement the
consultant's recommendations concerning Respondent's
compliance procedures. Respondent may retain a single
consultant acceptable to both the Commission and the
SEC for this purpose, which shall jointly satisfy the
requirements of this Commission's Order and the
requirements of the SEC's Order.
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valuation of privately negotiated over-the-counter
derivative products from January 1991 to the present, and
(iii) any disciplinary actions against individuals that
may be warranted in view of events or conduct involved in
the marketing, offer, purchase, sale, amendment, termination
or valuation of privately negotiated over-the-counter
derivative products by BT Securities;
B. to cooperate fully with the consultant, including
obtaining the cooperation of BT Securities' employees or
other persons under its control. BT Securities shall
place no restrictions on the consultant's communications
with Commission staff;
C. to require the consultant, at BT Securities' expense, to
prepare a report setting forth his or her findings,
analysis and recommendations as to the matters described
in paragraph III A above;
D. to require the consultant to deliver the report within
six months of the issuance of this Order to (i) BT
Securities, (ii) the Boards of BT Securities, Bankers
Trust and Bankers Trust New York Corporation, and
(iii) Commission staff, which may make such further use
thereof as it may in its discretion deem appropriate;
and,
E. to adopt all recommendations by the consultant in the
report within six months after its issuance, including
the recommendations for disciplinary action; provided,
however, that as to any of the consultant's
recommendations that BT Securities determines is unduly
burdensome or impractical, BT Securities, may suggest an
alternative procedure designed to achieve the same
objective, submitted in writing to the consultant and to
Commission staff. The consultant shall reasonably
evaluate BT Securities' alternative procedure.
BT Securities will abide by the consultant's
determinations with regard thereto and adopt those
recommendations deemed appropriate by the consultant. BT
Securities shall, within six months after the issuance of
the consultant's report, in a letter to Commission staff,
attest to, and set forth
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the details of, its implementation of the recommendations
contained in the report.
F. for itself and Bankers Trust Company, Bankers Trust New
York Corporation and any affiliated entity thereof
(collectively the "BT Entities") to cooperate with the
staff of the Commission in such further investigations
and inspections as the Commission shall determine to
pursue relating to the marketing, offer, purchase, sale,
amendment, termination or valuation of privately
negotiated over-the-counter derivative products by BT
Securities, arising out of or relating to conduct which
occurred before the date of this Offer. Furthermore, the
BT Entities shall actively seek the cooperation of all
employees, agents and representatives of the BT Entities
in any such investigations or inspections. At the
request of the Commission's staff, the BT Entities shall
appear and testify, and shall use their best efforts to
obtain the appearance and testimony of their employees,
agents and representatives, at any investigative
testimony, deposition, hearing or trial.
IV.
BT Securities submits this Offer on the condition that it
resolves all liability of the BT Entities in any action or proceeding
brought by or on behalf of the Commission, arising from conduct occurring
before the date of this Offer and involving (i) the marketing, offer,
purchase, sale, amendment, termination or valuation of privately negotiated
over-the-counter derivatives products, or (ii) the provision of valuations
of privately negotiated over-the-counter derivatives to customers, for the
purposes of preparing financial statements for inclusion in filings with
the Securities Exchange Commission. This Offer does not, however, affect
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the rights of the Commission (a) to conduct any investigation or inspection
concerning conduct by the BT Entities or others; (b) to bring any action or
proceeding against any officer, director, employee, agent or representative
of the BT Entities arising from conduct occurring before or after the date
of this Offer; or (c) to bring any action against any BT Entity that
results from conduct occurring after the date of this Offer.
V.
BT Securities hereby warrants that this Offer has been duly
authorized by its Board of Directors and is signed and submitted on its
behalf by a duly empowered officer.
VI.
BT Securities represents that it has read this Offer and
declares that no promise, threat or inducement of any kind has been made by
the Commission or its staff to induce it to tender this Offer and that
submission of this Offer is a free and voluntary act on BT Securities'
part.
Respectfully submitted,
/s/ Howard M. Schneider
BT Securities Corporation
By: Howard M. Schneider
Title: President
Approved as to form:
/s/ Gandolfo V. DiBlasi
Attorney for Respondent
BT Securities Corporation Date: December 21, 1994
<PAGE>1
Exhibit 99.3
UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES ACT OF 1933
Release No. 7124/ December 22, 1994
SECURITIES EXCHANGE ACT OF 1934
Release No. 35316/ December 22, 1994
ADMINISTRATIVE PROCEEDING
File No. 3-8579
:
In the Matter of : ORDER INSTITUTING PROCEEDINGS
: PURSUANT TO SECTION 8A
: OF THE SECURITIES ACT OF 1933
BT SECURITIES CORPORATION, : AND SECTIONS 15(b) AND 21C OF
: THE SECURITIES EXCHANGE ACT OF
: 1934, AND FINDINGS AND ORDER
Respondent. : IMPOSING REMEDIAL SANCTIONS
:
I.
The Securities and Exchange Commission ("Commission") deems it
appropriate and in the public interest that public administrative
proceedings be, and they hereby are, instituted: (i) pursuant to Section 8A
of the Securities Act of 1933 ("Securities Act") to determine whether BT
Securities Corporation ("BT Securities") violated Section 17(a) of the
Securities Act; (ii) pursuant to Section 21C of the Securities Exchange Act
of 1934 ("Exchange Act") to determine whether BT Securities violated
Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder,
and caused violations of Section 13(a), and Rules 13a-1 and 12b-20
thereunder; and (iii) to determine whether any order should be issued as to
BT Securities pursuant to Section 15(b)(4) of the Exchange Act.
II.
In anticipation of the institution of these administrative
proceedings, BT Securities has submitted an Offer of Settlement which the
Commission has determined to accept. Solely for the purpose of these
proceedings and any other proceedings brought by or on behalf of the
Commission or to which the Commission is a party, and without admitting or
denying the findings set forth herein, BT Securities consents to the entry
of the findings and to the imposition of the remedial sanctions set forth
below and to the issuance of this Order Instituting Proceedings ("Order").
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III.
The Commission finds the following: 1
A. RESPONDENT
Respondent BT Securities is a corporation organized under the laws of
the State of Delaware with its principal place of business at 130 Liberty
Street, New York, New York. BT Securities is registered with the
Commission as a broker-dealer pursuant to Section 15(b) of the Exchange
Act.
B. OTHER RELEVANT ENTITIES
Bankers Trust Company ("Bankers Trust") is a banking corporation
organized under the laws of the State of New York with its principal place
of business located at 280 Park Avenue, New York, New York. Bankers Trust
was the counterparty to each derivative that BT Securities sold to Gibson
Greetings, Inc. ("Gibson"). Bankers Trust maintained on its books certain
information relating to derivatives transactions with Gibson.
All of the outstanding stock of both Bankers Trust and BT Securities
is owned by Bankers Trust New York Corporation ("BTNY"), a publicly traded
bank holding company organized under the laws of the State of New York with
its principal place of business located at 280 Park Avenue, New York, New
York. For some purposes, the results of operation of Bankers Trust, BT
Securities and other companies are reported on a consolidated basis by
BTNY. At year-end 1993, BT Securities accounted for 28% of the
consolidated assets of BTNY.
Gibson is a corporation organized under the laws of the State of
Delaware with its principal place of business at 2100 Section Road,
Cincinnati, Ohio. Gibson's primary business is manufacturing and selling
greeting cards and gift wrap in the United States and abroad. The stock of
Gibson is registered with the Commission pursuant to Section 12(g) of the
Exchange Act and quoted on the Nasdaq stock market.
1 The findings herein are solely for the purpose of these
proceedings. These findings are not binding on any other person or
entity named as a defendant or respondent in any other proceeding.
The Commission's investigation of the matters discussed in this Order
is continuing with respect to the conduct of individuals.
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C. FACTS
This matter involves violations of the reporting and antifraud
provisions of the federal securities laws in connectionwith transactions
in derivatives sold by BT Securities to Gibson. 2
1. Background
In May 1991, Gibson issued and privately placed $50 million of senior
notes with an interest rate of 9.33% and annual serial maturities from 1995
through 2001 ("the notes"). After the issuance of these notes, interest
rates declined. Because the notes could not be prepaid for a number of
years, Gibson began to explore the possibility of engaging in interest rate
swaps to effectively reduce the interest rate paid on the notes. In
connection with those efforts, Gibson sought proposals from a number of
entities, and eventually decided to purchase derivatives from BT
Securities.
From November 1991 to March 1994, representatives of BT Securities 3
proposed, and Gibson entered into, approximately 29 derivatives trans-
actions, including amendments to existing derivatives, and terminations
of derivatives or portions thereof. Over time, the derivatives sold to
Gibson by BT Securities became increasingly complex, risky and intertwined.
Many had leverage factors which caused Gibson's losses to increase
dramatically with relatively small changes in interest rates.
The derivatives that BT Securities sold to Gibson were customized and
did not trade in any market. As a result, Bankers Trust used sophisticated
computer models to establish values for those derivatives. Such values, as
adjusted, were reflected in the financial statements that BTNY, the parent
of BT Securities, filed with the Commission. 4 Gibson, however, did not
have the
2 This matter does not involve any finding or conclusion relating
to the suitability of the derivative products described herein for Gibson.
3 The BT Securities' representatives referred to in this Order
were primarily the persons responsible for handling the Gibson account.
4 The value of Bankers Trust's derivatives portfolio, as
reflected on BTNY's 1992 financial statements, was adjusted by general
reserves intended to reflect market risk, model risk, operations cost, as
well as other valuation considerations, and general credit reserves. These
reserves did not reflect any differential between values quoted to Gibson
and the computer model value of Gibson's positions.
(continued....)
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expertise or computer models needed to value the derivatives it purchased
from BT Securities. Instead, as BT Securities knew, Gibson used the
information provided by BT Securities about the value of its derivatives
positions to evaluate particular transactions and to prepare its financial
statements, which would be included in periodic reports filed with the
Commission. 5
BT Securities has stated that it also quoted prices at which
derivatives transactions could be terminated or "torn up." These prices
might vary from the computer model values to reflect, among other factors,
market conditions, hedging costs, credit concerns, or discounts offered to
customers for competitive reasons. Bankers Trust has stated that its
policy was that it was willing to execute on the basis of a quoted
termination or "tear-up" price. However, in 1993, Bankers Trust tore up
only two transactions at prices below the computer model value, and none of
the transactions with Gibson, except for the final restructuring
transaction in March 1994, were executed at less than computer model
values.
2. Provision of Inaccurate Valuations to Gibson
During the period from October 1992 to March 1994, BT Securities'
representatives misled Gibson about the value of the company's derivatives
positions by providing Gibson with values that significantly understated
the magnitude of Gibson's losses. As a result, Gibson remained unaware of
the actual extent of its losses from derivatives transactions and continued
to purchase derivatives from BT Securities. In addition, the valuations
provided by BT Securities' representatives caused Gibson to make material
understatements of the company's unrealized losses from derivatives
transactions in its 1992 and 1993 notes to financial statements filed with
the Commission.
In a conversation on February 23, 1994 taped by an internal
4 (...continued)
On BTNY's 1993 financial statements, the value of Bankers
Trust's derivatives portfolio was adjusted by general reserves and by
specific reserves intended to reflect the differential between the
"quoted values" of positions and the computer model values. With
respect to Gibson, the specific reserve reflected 25% of the differential
between the computer model value and the "quoted value" of Gibson's
position at the end of November 1993.
5 As a public company whose securities are registered with the
Commission, Gibson was required, by rules promulgated under Section 13(a)
of the Exchange Act, to file with the Commission annual and periodic
reports that included accurate annual and quarterly financial statements.
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BT Securities taping system, a BT Securities managing director discussed the
"differential" between the computer model value of Gibson's positions and
the valuation provided to Gibson:
I think that we should use this [a downward market price
movement] as an opportunity. We should just call [the Gibson
contact], and maybe chip away at the differential a little
more. I mean we told him $8.1 million when the real number was
14. So now if the real number is 16, we'll tell him that it is
11. You know, just slowly chip away at that differential
between what it really is and what we're telling him.
Later the same day, the managing director stated, in response to a question
about whether he intended to provide Gibson with values for its positions
that day:
I want to. And the reason is that ... the problem is that we
are too far away between what he thinks it is and what reality
is....
And, you know, if this continues on and on like this, we're
going to have to start unwinding. And I don't think that we
want to be in a position of unwinding something that's worth,
I'm exaggerating, but worth 20 million, and he thinks it's 11
[million]. You know, we gotta try and close that gap. And I
think that on days where there's a big move, it's an
opportunity to close the gap....
[I]f the market hadn't changed at all, or was just kind of
dottering around within a couple of ticks, then you know,
there's nothing that we can really say. He is going to keep
thinking that it is around 8.1 [million], when it is really 14
[million]....
You know, which is what it was yesterday. But when there's a
big move, you know, if the market backs up like this, and he is
down another 1.3, we can tell him he is down another 2. And
vice versa. If the market really rallies like crazy, and he's
made back a couple of million dollars, you can say you have
only made back a half a million.
On two occasions when Gibson sought valuations for the specific
purpose of preparing its financial statements, representatives of BT
Securities provided Gibson with valuations that differed by more than 50%
from the value generated by the computer model and recorded on Bankers
Trust's books. In early February 1993, Gibson asked representatives of BT
Securities for the value of its derivatives as of December 31, 1992 and
stated that the information would be used in preparing Gibson's 1992
<PAGE>
<PAGE> 6
year-end financial statements. As of December 31, 1992, Bankers Trust's
books reflected a negative value of $2,129,209 for Gibson's derivatives
positions. BT Securities, however, provided Gibson with a "mark-to-market"
value for the derivatives positions of a negative $1,025,000, a difference
of $1,104,209, or 52%.
The next fiscal year, in a letter dated December 31, 1993, Gibson
asked representatives of BT Securities to provide Gibson with the value of
Gibson's derivatives as of that date to use in preparing Gibson's 1993
year-end financial statements. As of December 31, 1993, Bankers Trust's
books reflected a negative value of $7,470,886 for Gibson's derivatives
positions. Representatives of BT Securities, however, provided Gibson with
a "mark-to-market" value for the derivatives positions of a negative
$2,900,000, a difference of $4,570,886, or 61%.
3. Offer and Sale of Securities to Gibson
Certain of the derivatives that BT Securities sold to Gibson were
securities within the meaning of the federal securities laws. BT
Securities' representatives made material misrepresentations and omissions
in the offer and sale of these securities.
a. Treasury-Linked Swap
On February 19, 1993, BT Securities sold Gibson a derivative
transaction sometimes referred to as the "Treasury-Linked Swap." 6
6 While called a swap, the Treasury-Linked Swap was in actuality
a cash-settled put option that was written by Gibson and based initially
on the "spread" between the price of the 7.625% 30-year U.S. Treasury
security maturing on November 15, 2022 and the arithmetic average of the
bid and offered yields of the most recently auctioned obligation of a
two-year Treasury note. The option was based on a notional amount of $30
million. Because the Treasury-Linked Swap related to securities that are
direct obligations of the United States and satisfied the other requirements
set forth in Exchange Act Rule 3a12-7, the Treasury-Linked Swap was an
"exempted security," as defined in Section 3(a)(12) of the Exchange Act.
As a result, any dealer that restricts its securities activities to
transactions involving this product and other exempted securities would
not be required to be registered as a broker-dealer under Section 15 of
the Exchange Act. In addition, the Treasury-Linked Swap was an option
on a group or index of government securities. Accordingly, the
Treasury-Linked Swap would not fall within the definition of government
security set forth in Section 3(a)(42)(D) of the Exchange Act. As a
result, any dealer that
(continued...)
<PAGE>
<PAGE> 7
The Treasury-Linked Swap was within the class of options that are
securities, within the meaning of the federal securities laws. During
late January and early February 1993, immediately before selling the
Treasury-Linked Swap to Gibson, BT Securities provided Gibson with four
different proposals for restructuring a derivative position held by the
company known as the Ratio Swap. In connection with one of those
proposals, they represented to Gibson that the Ratio Swap had a negative
value to Gibson of $1,000,000.
By mid-February 1993, according to Bankers Trust's own books, the
value of the Ratio Swap had improved to a negative value of $138,000 to
Gibson. However, BT Securities' representatives failed to inform Gibson of
this improvement in the value of the Ratio Swap. Unaware of this
information, Gibson entered into the Treasury-Linked Swap on February 19,
1993 as a means of reducing the risk on the Ratio Swap.
The Treasury-Linked Swap had a term of eight months. Under the terms
of the transaction, Gibson was required to pay the London Interbank Offered
Rate ("LIBOR") and would receive LIBOR, plus 200 basis points, on a $30
million notional amount (the amount used to determine the periodic payments
between the counterparties). At maturity, Gibson was required to pay
Bankers Trust $30 million, and Bankers Trust would pay the lesser of $30.6
million or an amount determined by the following formula:
103 x 2-yr. Treasury yield
$30,000,000 x 1 - 4.88% - 30-yr. Treasury price
100
In return for entering into the Treasury-Linked Swap, the maturity of
the Ratio Swap was shortened from five years to four years. On
February 19, 1993, the day Gibson entered into the Treasury-Linked Swap,
Bankers Trust's own books and computer models indicated that the fifth year
of the Ratio Swap had a negative value to Gibson of $851,700. At the time,
BT Securities' representatives knew that Gibson would incur a loss of $2.1
million, composed of an unrealized loss and transactional charges, built
into the structure of the Treasury-Linked Swap.
BT Securities proposed, and Gibson entered into, five amendments
to the Treasury-Linked Swap. Each of the amendments
6 (...continued)
restricts its securities activities to transactions involving this product
and other exempted securities (other than government securities) would not
be required to register either as a broker-dealer under Section 15 of the
Exchange Act or as a government securities dealer under Section 15C of the
Exchange Act.<PAGE>
<PAGE> 8
was a security within the meaning of the federal securities laws. Each
amendment was proposed by BT Securities as a way to improve Gibson's
derivatives positions. In connection with entering into the amendments,
representatives of BT Securities misled Gibson and, accordingly, Gibson
sustained unrealized losses of approximately $2 million.
b. Knock-Out Call Option
On June 10, 1993, BT Securities sold Gibson another derivative
transaction sometimes referred to as the "Knock-Out Call Option." 7 The
Knock-Out Call Option was an option on a security and, thus, was a
security within the meaning of the federal securities laws.
BT Securities' representatives marketed the Knock-Out Call Option to
Gibson as part of a strategy to reduce Gibson's exposure on the
Treasury-Linked Swap, described above, by reducing its notional amount.
The transaction required Bankers Trust to pay Gibson on settlement date an
amount calculated as follows:
(6.876% - Yield at Maturity of 30-year Treasury security) x
12.5 x $25,000,000.
If at any time during the life of the Knock-Out Call Option, the yield on
the 30-year U.S. Treasury security dropped below 6.48%, the option expired,
or was "knocked out," and became worthless. The option was not exercisable
until maturity.
During the summer of 1993, the yield on the 30-year U.S. Treasury
security began to decline, increasing the Knock-Out Call Option's potential
payout but also increasing the likelihood that the option would expire
worthless. BT Securities thereafter
7 The Knock-Out Call Option was a European-style, cash-settled
call option that was written by BT Securities and had a return based on the
yield of the 7.125% 30-year U.S. Treasury security maturing February 15,
2023. The option was based on a notional amount of $25 million. Because
the Knock-Out Call Option related to a security that is a direct obligation
of the United States and satisfied the other requirements set forth in
Exchange Act Rule 3a12-7, the Knock-Out Call Option was an "exempted
security," as defined in Section 3(a)(12) of the Exchange Act. As a
result, any dealer that restricts its securities activities to transactions
involving this product and other exempted securities would not be required
to register as a broker-dealer under Section 15 of the Exchange Act. Also,
the Knock-Out Call Option was an option on a government security and,
therefore, would be a government security within the definition set forth
in Section 3(a)(42)(D) of the Exchange Act.
<PAGE>
<PAGE> 9
proposed, and Gibson entered into, a number of amendments to the Knock-Out
Call Option. Each of the amendments to the Knock-Out Call Option was a
security within the meaning of the federal securities laws.
On August 4, 1993, Gibson agreed to enter into an interest rate swap
known as the Time Swap. As part of the transaction, Gibson agreed to
terminate another interest rate swap, and BT Securities agreed to lower the
knock-out barrier on the Knock-Out Call Option. BT Securities' represen-
tatives had proposed that Gibson enter into the transactions to preserve an
opportunity for "substantial" gain. BT Securities'representatives knew that,
asa result of amending the Knock-Out Call Option in this fashion, Gibson
would sustain approximately $1.4 million in unrealized losses built into
the structure of the Time Swap, but failed to disclose that information to
Gibson. The cost of entering into the Time Swap was almost equal to
Gibson's maximum possible profit on the Knock-Out Call Option.
Approximately one week later, as the yield on the 30-year U.S.
Treasury security continued to decline, BT Securities' representatives
proposed that Gibson again lower the knock-out barrier of the Knock-Out
Call Option, this time in exchange for adjusting the leverage factor in the
Time Swap. On August 12, 1993, Gibson accepted the proposal and entered
into an amendment of the Knock-Out Call Option and increased the leverage
factor in the Time Swap. By entering into this amendment, Gibson
unknowingly sustained unrealized losses of approximately $89,000, which
were built into the structure of the amendment at the time it was entered
into.
Several weeks later, BT Securities' representatives proposed that
Gibson enter into yet another amendment to the Knock-Out Call Option, in
exchange for restructuring the Time Swap. A BT Securities' representative
told Gibson that the Time Swap "continues to look pretty good." In fact,
at that time, the Time Swap held a substantial negative value to Gibson.
Gibson agreed to purchase the amendment to the Knock-Out Call
Option's barrier on August 26, 1993 by entering into another amendment to
the Time Swap. By entering into this amendment, Gibson unknowingly
incurred a loss of approximately $578,000, composed of an unrealized loss
and transactional charges, built into the structure of the amendment at the
time it was entered into. The next day Gibson agreed to terminate the
Knock-Out Call Option and was paid $475,000 by Bankers Trust. In the three
amendments to the Knock-Out Call Option, Gibson unknowingly incurred
unrealized losses of $3 million built into the structure of the Time Swap.
In comparison, the maximum possible payout of the Knock-Out Call Option
never exceeded $2.3 million.<PAGE>
<PAGE> 10
4. Failure to Supervise
The combination of Gibson's frequent trades on terms favorable to
Bankers Trust made Gibson a particularly lucrative customer for BT
Securities. During 1993 alone, the BT Securities managing director dealing
with Gibson generated approximately $8 million in derivatives revenues from
Gibson, out of a total of approximately $20 million from all of his
derivatives customers that year. And BT Securities generated overall
revenues of approximately $13 million from these transactions with Gibson.
BT Securities' managing director for the Gibson account told his
supervisor in February 1994 that "from the very beginning, [Gibson] just,
you know, really put themselves in our hands like 96% . . . And we have
known that from day one." The managing director also told the Bankers
Trust relationship officer responsible for the Gibson account that
"these guys [Gibson] have done some pretty wild stuff. And you know,
they probably do not understand it quite as well as they should. I think
that they have a pretty good understanding of it, but not perfect.
And that's like perfect for us."
Despite the volume of BT Securities' transactions with Gibson and
their profitability, BT Securities did not take steps to determine whether
it was providing Gibson with information that accurately reflected the
value of its positions. In fact, for more than one year, BT Securities'
representatives provided Gibson with valuations substantially more
favorable to Gibson than the values contained on Bankers Trust books and
generated by its computer models. Although these valuations were not
provided to Gibson, they were incorporated in the filings made with the
Commission by BTNY, the parent of BT Securities.
D. LEGAL DISCUSSION
1. Causing Misstatements by Gibson in Financial Statements
As set forth above, representatives of BT Securities provided Gibson
with valuations which materially understated Gibson's losses from
derivatives transactions. On two occasions, Gibson asked representatives
of BT Securities to provide such valuations to assist it in preparing year-
end financial statements. On both occasions, BT Securities provided Gibson
with valuations which were over 50% below the value of those positions
reflected on Bankers Trust's books. BT Securities' representatives knew
that the numbers they were giving Gibson understated Gibson's unrealized
losses and would be used to prepare financial statements that would be
filed with the Commission. However, those representatives never informed
Gibson that the numbers they had provided did not accurately reflect the
value of Gibson's positions. As a result, Gibson used the values in its
financial statements, and those statements materially <PAGE>
<PAGE> 11
understated the company's losses from derivatives activities. Accordingly,
BT Securities caused violations of Section 13(a) of the Exchange Act and
Rules 13a-1 and 12b-20 thereunder.
2. Offer and Sale of Securities
As discussed above, the Treasury-Linked Swap, the Knock-Out Call
Option, and the amendments to these derivatives, were securities under the
federal securities laws. BT Securities engaged in material
misrepresentations and omissions in its offer and sale of these derivative
securities to Gibson. In offering and selling these securities, as set
forth above, BT Securities violated Section 17(a) of the Securities Act,
Section 10(b) of the Exchange Act and Rule 1Ob-5. As a result, Gibson
engaged in a series of derivatives transactions to BT Securities' financial
advantage.
3. Failure to Supervise
Section 15(b)(4)(E) of the Exchange Act authorizes the Commission to
impose sanctions against a broker-dealer if the firm has "failed
reasonably to supervise, with a view to preventing violations of federal
securities laws, another person who commits such a violation, if such other
person is subject to his supervision."
BT Securities failed to take reasonable steps to supervise its
representatives. BT Securities had no procedure that could reasonably be
expected to prevent or detect the violative conduct described herein.
BT Securities' procedures allowed its representatives to engage in a
practice of providing Gibson with values that materially understated
Gibson's unrealized losses. The valuations were provided to a public
company, Gibson, with knowledge that they would materially affect its
financial statements filed with the Commission and relied on by the
investing public. The valuations were created by and provided to Gibson by
BT Securities' marketers who had an interest in having Gibson engage in
derivatives transactions. In such circumstances, BT Securities failed
reasonably to supervise with a view to preventing violations of the federal
securities laws.
IV.
FINDINGS
Based on the foregoing, the Commission finds that BT Securities
willfully violated Section 17(a) of the Securities Act and Section 10(b) of
the Exchange Act and Rule 10b-5 promulgated thereunder, and that
BT Securities caused violations of Section 13(a) of the Exchange Act, and
Rules 13a-1 and 12b-20 thereunder.
<PAGE>
<PAGE> 12
V.
OFFER OF SETTLEMENT
BT Securities has submitted an Offer of Settlement in which, without
admitting or denying the findings herein, it consents to the Commission's
issuance of this Order, which makes findings, as set forth above, and
orders BT Securities to permanently cease and desist from committing or
causing any violation or future violation of Section 17(a) of the
Securities Act; and Sections 10(b) and 13(a) of the Exchange Act and
Rules 10b-5, 13a-1 and 12b-20 promulgated thereunder; to pay a penalty of
$10 million pursuant to both this Order and the Commodity Futures Trading
Commission's ("CFTC") Opinion and Order Accepting Settlement; to retain an
outside consultant and to implement the consultant's recommendations
concerning Respondent's compliance procedures; and to a censure of BT
Securities pursuant to Section 15(b) of the Exchange Act. As set forth
in BT Securities' Offer of Settlement, BT Securities undertakes to cooperate
fully with Commission staff in preparing for and presenting any civil
litigation or administrative proceeding concerning the transactions that
are the subject of this Order.
VI.
ORDER
Accordingly, IT IS HEREBY ORDERED THAT:
1. BT Securities shall permanently cease and desist from
committing or causing any violation or future violation of Section 17(a) of
the Securities Act; and Sections 10(b) and 13(a) of the Exchange Act and
Rules 1Ob-5, 13a-1 and 12b-20 promulgated thereunder;
2. BT Securities shall be, and hereby is, censured;
3. BT Securities shall pay a civil penalty of $10 million within
two business days of the issuance of this Order to the United States
Treasury.8 BT Securities shall simultaneously furnish copies of the
documents evidencing such payment to the Secretary of the SEC;
4. BT Securities shall comply with the following:
a. BT Securities shall retain at its expense, within 30 days
of the entry of this Order, an independent consultant,
8 The $10 million paid pursuant to this Order will also satisfy
BT Securities' payment obligation under a related Opinion and Order
Accepting Settlement issued by the CFTC.
<PAGE>
<PAGE> 13
acceptable to the Commission and to the CFTC, 9 to review and make
recommendations concerning (i) BT Securities' compliance policies and
procedures related to the marketing, offer, sale, purchase, amendment,
termination or valuation of privately negotiated over-the-counter
derivative products, (ii) any and all improper conduct engaged in by
BT Securities with respect to the marketing, offer, purchase, sale,
amendment, termination or valuation of privately negotiated over-the-
counter derivative products from January 1991 to the present, and (iii) any
disciplinary actions against individuals that may be warranted in view of
events or conduct involved in the marketing, offer, purchase, sale, amendment,
termination or valuation of privately negotiated over-the-counter derivative
products by BT Securities;
b. BT Securities and its affiliates shall cooperate fully
with the consultant, including obtaining the cooperation of BT Securities'
employees or other persons under its control. BT Securities shall place no
restrictions on the consultant's communications with Commission staff;
c. BT Securities shall require the consultant, at BT
Securities's expense, to prepare a report setting forth his or her
findings, analysis and recommendations as to the matters described in
paragraph 4a above;
d. BT Securities shall require the consultant to deliver the
report within six months of the issuance of this Order to
(i) BT Securities, (ii) the Boards of BT Securities, Bankers Trust and
BTNY, and (iii) Commission staff, which may make such further use thereof
as it may in its discretion deem appropriate; and
e. BT Securities shall adopt all recommendations by the
consultant in the report within six months after its issuance, including
the recommendations for disciplinary action; provided, however, that as to
any of the consultant's recommendations that BT Securities determines is
unduly burdensome or impractical, BT Securities may suggest an alternative
procedure designed to achieve the same objective, submitted in writing to
the consultant and to Commission staff. The consultant shall reasonably
evaluate BT Securities' alternative procedure. BT Securities will abide by
the
9 The CFTC's Opinion and Order Accepting Settlement will contain
a similar requirement to retain an independent consultant and to implement
the consultant's recommendations concerning Respondent's compliance
procedures. Respondent may retain a single consultant acceptable to both
the Commission and the CFTC for this purpose, which shall jointly satisfy
the requirements of this Commission's Order and the requirements of the
CFTC's Opinion and Order Accepting Settlement.
<PAGE>
<PAGE> 14
consultant's determination with regard thereto and adopt those
recommendations deemed appropriate by the consultant. BT Securities shall,
within six months after the issuance of the consultant's report, in a
letter to Commission staff, attest to, and set forth the details of, its
implementation of the recommendations contained in the report.
By the Commission.
/s/ Jonathan G. Katz
Jonathan G. Katz
Secretary
<PAGE> 1
Exhibit 99.4
UNITED STATES OF AMERICA
Before the
COMMODITY FUTURES TRADING COMMISSION
: CFTC Docket No. 95-2
In the Matter of : COMPLAINT PURSUANT TO
BT SECURITIES CORPORATION, : SECTIONS 6(c) AND 6(d)
: OF THE COMMODITY EXCHANGE
: ACT AND OPINION AND ORDER
: ACCEPTING OFFER OF
: SETTLEMENT, MAKING FINDINGS
Respondent. : AND IMPOSING REMEDIAL SANCTIONS1
I.
The Commodity Futures Trading Commission's ("Commission") Division of
Enforcement ("Division") alleges and the Commission finds that:2
1By virtue of the simultaneous filing of this Complaint and Opinion
and Order, no Notice of Hearing has been issued by consent of the
Respondent.
2In anticipation of the filing of this Complaint, BT Securities has
submitted an Offer of Settlement ("Offer") which the Commission has
determined to accept. In BT Securities' Offer, without admitting or
denying the allegations of the Complaint, BT Securities acknowledges
service of the Complaint; admits the jurisdiction of the Commission with
respect to the matters set forth in the Complaint; waives a hearing, and
all post-hearing procedures, judicial review by any court, and any
objection to the staff's participation in the Commission's consideration of
the Offer; and stipulates that the record basis on which this Complaint and
Opinion and Order (hereinafter referred to as the "Opinion and Order") is
entered consists of the findings consented to in the Offer, which are
incorporated in this Opinion and Order.
In its Offer, BT Securities agrees that these findings may be used
solely for the purpose of this proceeding and in any other proceeding
brought by the Commission or to which the Commission is a party; provided,
however, that BT Securities does not consent to the use of this Opinion and
Order or its Offer as the sole basis for any other proceeding brought by
the Commission.
<PAGE>
<PAGE> 2
A. RESPONDENT
1. Respondent BT Securities is a corporation organized
under the laws of the State of Delaware with its principal place
of business at 130 Liberty Street, New York, New York 10006. BT
Securities is registered with the U.S. Securities and Exchange
Commission ("SEC") as a broker-dealer.
B. OTHER RELEVANT ENTITIES
2. Bankers Trust Company ("Bankers Trust") is a banking
corporation organized under the laws of the State of New York
with its principal place of business located at 280 Park Avenue,
New York, New York 10017. Bankers Trust was counterparty to each
derivative that BT Securities sold to Gibson.
3. All of the outstanding stock of both Bankers Trust and
BT Securities is owned by Bankers Trust New York Corporation
("BTNY"), a publicly traded bank holding company organized under
the laws of the State of New York with its principal place of
business located at 280 Park Avenue, New York, New York 10017.
For some purposes, the results of operation of Bankers Trust, BT
Securities and other companies are reported on a consolidated
basis by BTNY. At year-end 1993, BT Securities accounted for 28%
of the consolidated assets of BTNY.
4. Gibson Greetings, Inc. ("Gibson") is a corporation
organized under the laws of the State of Delaware with its
principal place of business at 2100 Section Road, Cincinnati,
Ohio 45237. Gibson's primary business is manufacturing and
selling greeting cards and gift wrap in the United States and
abroad.
C. FACTS
5. This matter involves violations of the antifraud
provisions of the federal commodity laws in connection with
transactions in privately negotiated over-the-counter derivatives
sold by BT Securities to Gibson.3
1. Background
6. In May 1991, Gibson issued and privately placed $50
million of senior notes with an interest rate of 9.33% and annual
serial maturities from 1995 through 2001 ("the notes"). After
the issuance of these notes, interest rates declined. Because
the
These findings are not binding on any other person or entity
named as a defendant or respondent in any other proceeding.
3This matter does not involve any finding or conclusion
relating to the suitability of the derivative products described
herein for Gibson. In addition, this Order does not affect, in
any way, the legality or enforceability of swap transactions.
<PAGE>
<PAGE> 3
notes could not be prepaid for a number of years, Gibson began to
explore the possibility of engaging in interest rate swaps to
effectively reduce the interest rate paid on the notes. In
connection with those efforts, Gibson sought proposals from a
number of entities, and eventually decided to purchase
derivatives from BT Securities.
7. From November 1991 to March 1994, representatives of BT
Securities 4 proposed, and Gibson entered into, approximately 29
derivatives transactions, including amendments to existing
derivatives, and termination of derivatives or portions thereof.
Over time, the derivatives sold by Gibson by BT Securities became
increasingly complex, risky and intertwined. Many had leverage
factors which caused Gibson's losses to increase dramatically
with relatively small changes in interest rates. These
transactions included derivatives sometimes described as the
ratio swap, periodic floor, spread lock 1 and 2, Treasury-linked
swap, knock-out call option, LIBOR-linked payout, time swap and
wedding band 3 and 6. These transactions, as well as the initial
"plain vanilla" swap transactions, are described in Appendix A
attached hereto.
8. The derivatives that BT Securities sold to Gibson were
customized and did not trade in any market. As a result, Bankers
Trust used sophisticated computer models to establish values for
those derivatives. Such values, as adjusted 5, were reflected in
the financial statements of BTNY, the parent of BT Securities.
Gibson, however, did not have the expertise or computer models
needed to value the derivatives it purchased from BT Securities.
Instead, as BT Securities knew, Gibson used the information
provided by BT Securities about the value of its derivatives
positions to evaluate particular transactions and to prepare its
financial statements.
4The BT Securities' Representatives referred to in this
Order were primarily the persons responsible for handling the
Gibson account.
5The value of Bankers Trust's derivatives portfolio, as
reflected on BTNY's 1992 financial statements, was adjusted by
general reserves intended to reflect market risk, model risk,
operations cost, as well as other valuation considerations, and
general credit reserves. These reserves did not reflect any
differential between values quoted to Gibson and the computer
model value of Gibson's positions.
On BTNY's 1993 financial statements, the value of Bankers
Trust's derivatives portfolio was adjusted by general reserves
and by specific reserves intended to reflect the differential
between the "quoted values" of positions and the computer model
values. With respect to Gibson, the specific reserve reflected
25% of the differential between the computer model value and the
"quoted value" of Gibson's position at the end of November 1993.
<PAGE>
<PAGE> 4
9. BT Securities has stated that it also quoted prices at
which derivatives transactions could be terminated or "torn up."
These prices might vary from the computer model values to
reflect, among other factors, market conditions, hedging costs,
credit concerns, or discounts offered to customers for
competitive reasons. Bankers Trust has stated that its policy
was that it was willing to execute on the basis of a quoted
termination or "tear-up" price. However, in 1993, Bankers Trust
tore up only two transactions at prices below the computer model
value, and none of the transactions with Gibson, except for the
final restructuring transaction in March 1994, were executed at
less than computer model values.
10. The combination of Gibson's frequent trades on terms
favorable to Bankers Trust made Gibson a particularly lucrative
customer for BT Securities. During 1993 alone, the BT Securities
managing director dealing with Gibson generated approximately $8
million in derivatives revenues from Gibson, out of a total of
approximately $20 million from all of his derivatives customers
that year. BT Securities generated overall revenues of
approximately $13 million from these transactions with Gibson.
2. Provision of Inaccurate Valuations to Gibson
11. BT Securities' representatives made material
misrepresentations and omissions in the offer and sale of
derivatives to Gibson. During the period from October 1992 to
March 1994, BT Securities' representatives misled Gibson about
the value of the company's derivatives positions by providing
Gibson with values that significantly understated the magnitude
of Gibson's losses. As a result, Gibson remained unaware of the
actual extent of its losses from derivatives transactions and
continued to purchase derivatives from BT Securities. In
addition, the valuations provided by BT Securities'
representatives caused Gibson to make material understatements of
the company's unrealized losses from derivative transactions in
the notes to its 1992 and 1993 financial statements.
12. In a conversation on February 23, 1994 taped by an
internal BT Securities taping system, a BT Securities managing
director discussed the "differential" between the computer model
value of Gibson's positions and the valuation provided to Gibson:
I think that we should use this [a downward market
price movement] as an opportunity. We should just call
[the Gibson contact], and maybe chip away at the
differential a little more. I mean we told him $8.1
million when the real number was 14. So now if the
real number is 16, we'll tell him that it is 11. You
know, just slowly chip away at that differential
between what it really is and what we're telling him.
<PAGE>
<PAGE> 5
Later the same day, the managing director stated, in response to
a question about whether he intended to provide Gibson with
values for its positions that day:
I want to. And the reason is that -- the problem is
that we are too far away between what he thinks it is
and what reality is.
And, you know, if this continues on and on like this,
we're going to have to start unwinding. And I don't
think that we want to be in a position of unwinding
something that's worth, I'm exaggerating, but worth 20
million, and he thinks it's 11 [million]. You know, we
gotta try and close that gap. And I think that on days
where there's a big move, it's an opportunity to close
the gap....
[I]f the market hadn't changed at all, or was just kind
of dottering around within a couple of ticks, then you
know, there's nothing that we can really say. He is
going to keep thinking that it is around 8.1 [million],
when it is really 14 [million]....
You know, which is what it was yesterday. But when
there's a big move, you know, if the market backs up
like this, and he is down another 1.3, we can tell him
he is down another 2. And vice versa. If the market
really rallies like crazy, and he's made back a couple
of million dollars, you can say you have only made back
a half a million.
13. On two occasions when Gibson sought valuations for the
specific purpose of preparing its financial statements,
representatives of BT Securities provided Gibson with valuations
that differed by more than 50% from the value generated by the
computer model value and recorded on Bankers Trust's books. In
early February 1993, Gibson asked representatives of BT
Securities for the value of its derivatives as of December 31,
1992 and stated that the information would be used in preparing
Gibson's 1992 year-end financial statements. As of December 31,
1992, Bankers Trust's books reflected a negative value of
$2,129,209 for Gibson's derivatives positions. BT Securities,
however, provided Gibson with a "mark-to-market" value for the
derivatives positions of a negative $1,025,000, a difference of
$1,104,209, or 52%.
14. The value that BT Securities provided to Gibson as of
December 31, 1992 related to the ratio swap, and the periodic
floor.
15. The next fiscal year, in a letter dated December 31,
1993, Gibson asked representatives of BT Securities to provide
Gibson with the value of Gibson's derivatives as of that date to
use in preparing Gibson's 1993 year-end financial statements. As
of December 31, 1993, Bankers Trust's books reflected a negative
<PAGE>
<PAGE> 6
value of $7,470,886 for Gibson's derivatives positions.
Representatives of BT Securities, however, provided Gibson with a
"mark-to-market" value for the derivatives positions of a
negative $2,900,000, a difference of $4,570,866, or 61%.
16. The value that BT Securities provided to Gibson as of
December 31, 1993 related to spread lock 1 and wedding band 3.
17. On October 1, 1992, BT Securities and Gibson entered
into the ratio swap. BT Securities represented to Gibson that
the ratio swap had a negative value to Gibson as of December 31,
1992 of $975,000. In fact, as of December 31, 1992, Bankers
Trust's computer models showed that the ratio swap had a negative
value to Gibson of $2,003,929.
18. By mid-February 1993, according to Bankers Trust's
computer models the value of the ratio swap had improved to a
negative value of $138,000 to Gibson. However, BT Securities
failed to inform Gibson of the improvement in the value of the
ratio swap at the time BT Securities presented proposals for
restructuring the ratio swap. Unaware of this information,
Gibson entered into Treasury-Linked Swap on February 19, 1993 as
a means of reducing the risk on the ratio swap.
19. In return for entering into the Treasury-Linked Swap,
the maturity of the ratio swap was shortened from five years to
four years. On February 19, 1993, the day Gibson entered into
the Treasury-Linked Swap, Bankers Trust's books and computer
models indicated that the fifth year of the ratio swap had a
negative value to Gibson of $851,700. At the time, BT
Securities' representatives knew that Gibson would incur a loss
of $2.1 million, composed of an unrealized loss and transactional
charges, built into the structure of the Treasury-Linked swap.
BT Securities' representatives also knew that Gibson was unaware
that it would incur the unrealized loss.
20. On August 4, 1993, Gibson agreed to enter into the time
swap. As part of the transaction, Gibson agreed to terminate the
periodic floor entered into on October 30, 1992, and amend the
knock-out call entered into on June 10, 1993. BT Securities'
representatives had proposed that Gibson enter into the
transactions to preserve an opportunity for "substantial" gain.
BT Securities' representatives knew that, as a result of these
transactions, Gibson would sustain approximately $1.4 million in
unrealized losses built into the structure of the time swap, but
failed to disclose that information to Gibson. The cost of
entering into the time swap was almost equal to Gibson's maximum
possible profit on the knock out call.
21. Approximately one week later, as the yield on the
30-year U.S. Treasury security continued to decline, BT
Securities' representatives proposed that Gibson again amend the
knock-out call, this time in exchange for adjusting the leverage
factor in the time swap. On August 12, 1993, Gibson accepted the
proposal
<PAGE>
<PAGE> 7
and entered into an amendment of the knock-out call and increased
the leverage factor in the time swap. By entering into these
transactions, Gibson unknowingly sustained unrealized losses of
approximately $89,000.
22. Several weeks later, BT Securities' representatives
proposed that Gibson enter into yet another amendment to the
knockout call, in exchange for restructuring the time swap. A BT
Securities representative told Gibson that the time swap
"continues to look pretty good." In fact, at that time, the time
swap held a substantial negative value to Gibson.
23. Gibson agreed to purchase the amendment to the
knock-out call on August 26, 1993 by entering into another
amendment to the time swap. By entering into these transactions,
Gibson unknowingly incurred unrealized losses and transactional
charges of approximately $578,000. The next day Gibson agreed to
terminate the knock-out call and was paid $475,000 by Bankers
Trust. In the three amendments to the knock-out call, Gibson
unknowingly incurred unrealized losses of $3 million built into
the structure of the time swap. In comparison, the maximum
possible payout of the barrier option never exceeded $2.3
million.
24. On January 11, 1993 and May 6, 1993, BT Securities and
Gibson entered into spread lock 1 and 2, respectively. In
September 1993, BT Securities recommended that Gibson amend each
spread lock to reduce the amount of Gibson's payment to Bankers
Trust on the swaps. On September 22, 1993, BT Securities and
Gibson amended and restructured spread locks 1 and 2 by entering
into wedding band 3. On the same day, Bankers Trust's books
showed a positive value for Gibson of the amendments to the
spread locks of approximately $380,00, and a negative value for
Gibson of wedding band 3 of approximately $1.4 million. Thus, by
entering into these transactions Gibson unknowingly incurred an
unrealized loss and transactional charges of approximately
$1,020,000.
25. On January 14, 1994, BT Securities and Gibson
terminated spread lock 1 and 2 and the time swap, and entered
into the LIBOR linked payout and wedding band 6. On January 13,
BT Securities representatives misled Gibson by stating that
Gibson would not go "further in the hole" by entering these new
positions when, in fact, Gibson immediately incurred an
additional unrealized loss of approximately $4,954,000.
26. On February 23, 1994, BT Securities' representatives
told Gibson that the value of Gibson's derivatives portfolio was
negative $8.1 million when, in fact, the value that Bankers Trust
carried on Bankers Trust's books on that date was negative $15.45
million.
27. On February 25, 1994, BT Securities' representatives
told Gibson that the value of Gibson's derivatives portfolio was
negative $13.8 million when, in fact, the value that Bankers
Trust
<PAGE>
<PAGE> 8
carried on Bankers Trust's books on that date was negative $16.25
million.
3. Commodity Trading Advisor
28. BT Securities' managing director for the Gibson account
told his supervisor in February 1994 that, "from the very
beginning, [Gibson] just, you know, really put themselves in our
hands like 96% . . . . And we have known that from day one." The
managing director also told the Bankers Trust relationship
officer responsible for the Gibson account that "these guys
[Gibson] have done some pretty wild stuff. And you know, they
probably do not understand it quite as well as they should. I
think that they have a pretty good understanding of it, but not
perfect. And that's like perfect for us."
29. By the statements contained in paragraph 28,
representatives of BT Securities acknowledged that they had
entered into an advisory relationship with Gibson which, under
the facts and circumstances of this case, is sufficient to cause
BT Securities to have become a commodity trading advisor with
respect to its derivatives transactions with Gibson.
COUNT I
VIOLATIONS OF SECTION 4o(1)(A) OF THE ACT:
FRAUDULENT MISREPRESENTATIONS AND OMISSIONS IN
CONNECTION WITH DERIVATIVES.
30. By virtue of the conduct described above, BT
Securities, a commodity trading advisor, during the period from
at least October 1992, and continuing through at least March
1994, by use of the mails and the means and instrumentalities of
interstate commerce, directly and indirectly has employed
devices, schemes, and artifices to defraud Gibson in violation of
Section 4o(1)(A) of the Act, 7 U.S.C. 6o(1)(A).
II.
FINDINGS
Solely on the basis of the consent evidenced by the Offer,
and without any adjudication on the merits, the Commission finds
that BT Securities has violated Section 4o(1)(A) of the Act, 7
U.S.C. sec. 6.o(1)(A).
<PAGE>
<PAGE> 9
III.
ORDER
Accordingly, IT IS HEREBY ORDERED THAT:
1. BT Securities shall cease and desist from violating
section 4o(1)(A) of the Act, 7 U.S.C. sec. 6o(1)(A).
2. BT Securities shall pay a civil penalty of $10 million
within two business days of the issuance of this Order.6
3. BT Securities shall comply with the following
undertakings:
a. BT Securities shall retain at its expense, within
30 days of the entry of this Order, an independent consultant,
acceptable to the Commission and the SEC,7 to review and make
recommendations concerning (i) BT Securities' compliance policies
and procedures related to the marketing, offer, sale, purchase,
amendment, termination or valuation of privately negotiated over-
the-counter derivative products, (ii) any and all improper
conduct engaged in by BT Securities with respect to the
marketing, offer, sale, purchase, amendment, termination or
valuation of privately negotiated over-the-counter derivative
products from January 1991 to the present, and (iii) any
disciplinary actions against individuals that may be warranted in
view of events or conduct involved in the marketing, offer, sale,
purchase, amendment, termination or valuation of privately
negotiated over-the-counter derivative products by BT Securities;
b. BT Securities and its affiliates shall cooperate
fully with the consultant, including obtaining the cooperation of
BT Securities' employees or other persons under its control. BT
Securities shall place no restrictions on the consultant's
communications with Commission staff;
c. BT Securities shall require the consultant, at BT
Securities' expense, to prepare a report setting forth his or her
6The $10 million paid pursuant to this Order will also
satisfy BT Securities' payment obligation under a related Order
issued by the SEC.
7The SEC's Order will contain a similar requirement to
retain an independent consultant and to implement the
consultant's recommendations concerning Respondent's compliance
procedures. Respondent may retain a single consultant acceptable
to both the Commission and the SEC for this purpose, which shall
jointly satisfy the requirements of this Commission's Order and
the requirements of the SEC's Order.
<PAGE>
<PAGE> 10
findings, analysis and recommendations as to the matters
described in paragraph 3a above;
d. BT Securities shall require the consultant to
deliver the report within six months of the issuance of this
Order to (i) BT Securities, (ii) the Boards of BT Securities,
Bankers Trust and BTNY, and (iii) Commission staff, which may
make such further use thereof as it may in its discretion deem
appropriate;
e. BT Securities shall adopt all recommendations by
the consultant in the report within six months after its
issuance, including the recommendations for disciplinary action;
provided, however, that as to any of the consultant's
recommendations that BT Securities determines is unduly
burdensome or impractical, BT Securities may suggest an
alternative procedure designed to achieve the same objective,
submitted in writing to the consultant and to Commission staff.
The consultant shall reasonably evaluate BT Securities'
alternative procedure. BT Securities will abide by the
consultant's determination with regard thereto and adopt those
recommendations deemed appropriate by the consultant. BT
Securities shall, within six months after the issuance of the
consultant's report, in a letter to Commission staff, attest to,
and set forth the details of, its implementation of the
recommendations contained in the report; and
f. BT Securities, Bankers Trust Company, Bankers Trust
New York Corporation and any affiliated entity thereof
(collectively the "BT Entities") shall cooperate with the staff
of the Commission in such further investigations and inspections
as the Commission shall determine to pursue relating to the
marketing, offer, sale, purchase, amendment, termination or
valuation of privately negotiated over-the-counter derivative
products by BT Securities, arising out of or relating to conduct
which occurred before the date of the Offer. Furthermore, the BT
Entities shall actively seek the cooperation of all employees,
agents and representatives of the BT Entities in any such
investigations or inspections. At the request of the
Commission's staff, the BT Entities shall appear and testify, and
shall use their best efforts to obtain the appearance and
testimony of their employees, agents and representatives, at any
investigative testimony, deposition, hearing or trial.
By the Commission.
/s/ Jean Webb
Jean Webb
Secretary
Dated: December 22, 1994
<PAGE>
<PAGE> A-1
Appendix A
The following is a list and description of derivatives
transactions entered into between Bankers Trust and Gibson
Greetings during the period November 1991 through March 1994:
1. The Plain Vanilla Swap Transactions
Bankers Trust and Gibson entered into the master swap
agreement on November 12, 1991. On the same day, Gibson and
Bankers Trust entered into two interest rate swaps, a two year
and a five year swap each with a notional amount of $30 million.
These contracts are referred to as the plain vanilla swaps.
The plain vanilla swap agreement provided that, commencing
on June 1, 1992 and thereafter semi-annually each first calendar
day of June and December, up to and including the termination day
of December 1, 1993, Bankers Trust and Gibson agreed to swap, on
a net basis, predefined payments. Gibson would pay Bankers Trust
a fixed payment of 5.91% times $30 million while Bankers Trust
would pay Gibson the 6-month London Inter-Bank Offered Rate
("LIBOR rate") times $30 million.
The other plain vanilla swap agreement provided that,
commencing on June 1, 1992 and thereafter semi-annually each 1st
calendar day of June and December, up to and including the
termination date of December 1, 1996, Bankers Trust and Gibson
agreed to swap, on a net basis, predefined payments. Bankers
Trust would pay Gibson a fixed payment of 7.12% times $30,000,000
while Gibson would pay Bankers Trust the 6-month LIBOR rate times
$30,000,000.
On January 22, 1992 the terms of the swap agreement were
amended to specify that Gibson would pay "late LIBOR" in exchange
for increasing Bankers Trust's fixed payment rate to 7.19%. On
July 7, 1992 the two parties canceled both plain vanilla swaps
with Bankers Trust making a payment of $260,000 to Gibson.
2. The Ratio Swap (Transaction 2963)
On October 1, 1992, Bankers Trust and Gibson entered into
the ratio swap with the following terms. Commencing on April 5,
1993 and thereafter semi-annually each 5th calendar day of each
October and April, up to and including the termination date of
October 5, 1997, Bankers Trust and Gibson agreed to swap, on a
net basis, predefined payments. Bankers Trust would pay Gibson a
fixed payment of 5.50% times $30,000,000 while Gibson would pay
Bankers Trust the 6-month LIBOR rate squared divided by 6% times
$30,000,000, i.e., [(LIBOR x LIBOR)/6%] x $30,000,000. The first
two payments on the contract were set from the outset at 1.581%
and 1.893%, respectively, based on annualized LIBOR rates of
3.08% and 3.37%.
<PAGE>
<PAGE> A-2
The ratio swap was amended three times to shorten the
termination date of the agreement before being canceled. On
February 19, 1993 the termination date of the contract was
changed to April 5, 1996 in exchange for entering into the
Treasury Linked Swap discussed below. On February 23 the
termination date was changed to April 6, 1995. On March 1, 1993
the termination date was changed to April 6, 1994. On April 21,
1993 the two parties canceled the contract with Bankers Trust
making a payment of $978,429.09 to Gibson.
3. The Periodic Floor (Transaction 10491-7916A)
On October 30, 1992 Bankers Trust and Gibson entered into
the periodic floor. Commencing on October 6, 1993 and thereafter
semi-annually each 6th calendar day of each October and April, up
to and including the termination date of October 6, 1997, Bankers
Trust and Gibson agreed to swap, on a net basis, predefined
payments. Bankers Trust would pay Gibson a floating payment of
6-month LIBOR plus .28% times $30,000,000 while Gibson would pay
Bankers Trust the 6-month LIBOR rate as long as the 6-month LIBOR
rate was not more than .15% points lower than the LIBOR rate on
the immediately preceding swap coupon calculation date.
On August 4, 1993, the two parties canceled the periodic
floor transaction and entered into the time swap and amended the
knock-out call described below.
4. Spread Lock 1 (Transaction 10619-8044A)
On January 11, 1993 Bankers Trust and Gibson entered the
spread lock transaction. Commencing on May 15, 1995 and
thereafter semi-annually each 15th calendar day of May and
November, up to and including the termination date of November
15, 2001, Bankers Trust and Gibson agreed to swap, on a net
basis, predefined payments. Bankers Trust would pay Gibson a
fixed payment equal to $30,000,000 times the sum of the "Mid-
Market Swap Spread" and the "On-The-Run Treasury Rate" while
Gibson would pay Bankers Trust a fixed payment of $30,000,000
times the sum of the "Spread Lock," set at 38 basis points, and
the "Off-The-Run-Treasury Rate." By the terms of the agreement,
the rates that Bankers Trust and Gibson would pay each other are
determined and fixed on November 15, 1994. These fixed rates are
used to calculate the payments that each party would be
responsible for making on each of the payment dates from May 15,
1995 through November 15, 2001. Instead of making the payments
on each of those payment dates, however, the parties agreed at
the initiation of the contract to cash settle the swap on the
second business day following the effective date of November 15,
1994.
This swap agreement was amended on nine occasions before
being canceled on January 14, 1994. The first amendment, on
April 16, 1993, changed the terms of the formula to be based on
10-year Treasury rates. The next three amendments, occurring on
May 19, 1993, May 27, 1993 and June 10, 1993 amended the spread
lock from
<PAGE>
<PAGE> A-3
38 basis points to 36 basis points, to 51 basis points and to 56
basis points, respectively.
On September 22, 1993, Bankers Trust and Gibson amended the
spread lock 1 and spread lock 2 in exchange for linking an
option, wedding band 3, to the spread lock structure. The
amendments adjusted spread lock 1 and spread lock 2 to 50 and 48
basis points respectively.
The payout obligations on spread lock 1 were determined by
the wedding band 3 formula. Wedding band 3 specified that
"Spread Lock" shall mean the sum of (i) .50 percent (50 basis
points) and (ii) a "Spread" (as defined below) determined in
accordance with the following provisions:
(a) if LIBOR1 is always greater than 3.00% and always less
than 5.00%, "Spread" means zero; or
(b) if LIBOR1 is less than or equal to 3.00% or greater than
or equal to 5.00%, "Spread" means an amount determined in
accordance with the following formula:
(LIBOR2 - 3.75%) (.85)
where:
"LIBOR1" means the rates for deposits in U.S. Dollars for a
period of 6 months which appears on Telerate Page 3750 as of
11:00 A.M., London time, on each London Business Day from,
and including, September 24, 1993 to, and including
September 24, 1994.
"LIBOR2" means the rates for deposits in U.S. Dollars for a
period of 6 months which appears on Telerate Page 3750 as of
11:00 A.M., London time, on September 24, 1994.
The swap agreement was amended four more times, on October
15, 1993, November 29, 1993, December 17, 1993 and January 7,
1994.
On January 14, 1994 the two parties canceled the contract in
consideration for entering into another swap contract between
Gibson and Bankers Trust. The termination of this spread lock
transaction is discussed further in the analysis of the time swap
below.
5. The Treasury Linked Swap (Transaction 3240)
On February 19, 1993, Bankers Trust sold Gibson a derivative
transaction sometimes referred to as the "Treasury-Linked Swap."
The Treasury-Linked Swap had a term of eight months. Under the
terms of the transaction, Gibson was required to pay the London
Interbank Offered Rate ("LIBOR") and would receive LIBOR, plus
200 basis points, on a $30 million notional amount. At maturity,
Gibson was required to pay Bankers Trust $30 million, and Bankers
<PAGE>
<PAGE> A-4
Trust would pay the lesser of $30.6 million or an amount
determined by the following formula:
103 X 2-year T yield
$30,000,000 X 1 - 4.88% - 30-year T price
100
6. The Spread Lock 2 (Transaction 10803-8228A)
On May 6, 1993 Bankers Trust and Gibson entered into the
second spread lock. Commencing on May 15, 1995 and thereafter
semi-annually each 15th calendar day of May and November, up to
and including the termination date of November 15, 2001, Bankers
Trust and Gibson agreed to swap, on a net basis, predefined
payments. Bankers Trust would pay Gibson a fixed payment equal
to $30,000,000 times the "All-In Rate" while Gibson would pay
Bankers Trust a fixed payment of $30,000,000 times the sum of the
"Spread Lock," set at 31.5 basis points, and the "Off-The-Run-
Treasury Rate." By the terms of the agreement, the rates that
Bankers Trust and Gibson would pay each other are determined and
fixed on November 15, 1994. These fixed rates are used to
calculate the payments that each party would be responsible for
making on each of the payment dates from May 15, 1995 through
November 15, 2001. Instead of making the payments on each of
those payment dates, however, the parties agreed at the
initiation of the contract to cash settle the swap on the second
business day following the effective date of November 15, 1994.
This swap agreement was amended on eight occasions before
being canceled on January 14, 1994. The first amendment, on May
19, 1993, changed the terms of the formula to be based on 10 year
Treasury rates and adjusted the spread lock to 34 basis points.
The next two amendments, occurring on May 27, 1993 and June 10,
1993 amended the spread lock from 34 basis points, to 49 basis
points and to 54 basis points, respectively.
On September 22, 1993, Bankers Trust and Gibson amended the
spread lock 1 and spread lock 2 in exchange for incorporating
wedding band 3 into the spread lock structure. The amendments
adjusted the spread locks to 50 and 48 basis points respectively.
The payout obligation on spread lock 2 was determined by the
wedding band 3 formula. Wedding band 3 specified that "spread
lock" shall mean the sum of (i) .48 percent (48 basis points) and
(ii) a "Spread" (as defined below) determined in accordance with
the following provisions:
(a) if LIBOR1 is always greater than 3.00% and always less
than 5.00%, "Spread" means zero; or
(b) if LIBOR1 is less than or equal to 3.00% or greater
than or equal to 5.00%, "Spread" means an amount determined
in accordance with the following formula:
(LIBOR2 - 3.75%) * .85
<PAGE>
<PAGE> A-5
where:
"LIBOR1" means the rates for deposits in U.S. Dollars for a
period of 6 months which appears on Telerate Page 3750 as of
11:00 A.M., London time, on each London Business Day from,
and including, September 24, 1993 to, and including
September 24, 1994.
"LIBOR2" means the rates for deposits in U.S. Dollars for a
period of 6 months which appears on Telerate Page 3750 as of
11:00 A.M., London time, on September 24, 1994.
The swap agreement was amended four more times, on October
15, 1993, November 29, 1993, December 17, 1993 and January 7,
1994.
On January 14, 1994 the two parties canceled the contract in
consideration for entering into another swap contract between
Gibson and Bankers Trust. The termination of this spread lock
transaction is discussed further at the time swap analysis.
7. Knock Out Call Option (Transaction 10904-8329A)
On June 10, 1993, Bankers Trust sold Gibson another
derivative transaction sometimes referred to as a "Knock-Out Call
Option." BT Securities' representatives marketed the knock-out
call option to Gibson as part of a strategy to reduce Gibson's
exposure on the Treasury-linked trade, described above, by
reducing its notional amount. The transaction required Bankers
Trust to pay Gibson on settlement date an amount calculated as
follows:
(6.876% - Yield at Maturity of 30-year Treasury security) X
12.5 X $25,000,000.
If at any time during the life of the knock-out call option,
the yield on the 30-year U.S. Treasury security dropped below
6.48% the option expired, or was "knocked out," and became
worthless. The option was not exercisable until maturity.
8. The Time Swap (Transaction 3320)
On August 4, 1993 Bankers Trust and Gibson entered into a
time swap agreement in order to amend the knock out call option.
The time swap commenced payments on February 6, 1994 and
thereafter semi-annually each 6th calendar day of August and
February, up to and including the termination date of August 6,
1995, Bankers Trust and Gibson agreed to swap, on a net basis,
predefined payments. Bankers Trust would pay Gibson a floating
payment of equal to $30,000,000 times the 6-month LIBOR rate plus
1.00 percent, while Gibson would pay Bankers Trust a floating
payment of $30,000,000 times the 6-month LIBOR rate plus N x .05
percent, where N is the number of days in a calculation period
that the 6-month LIBOR rate fell outside of a designated range
for that calculation period.
<PAGE>
<PAGE> A-6
The calculation periods and designated ranges for the purpose of
the calculations were;
August 6, 1993 - February 6, 1994 3.1875% - 4.3125%
February 6, 1994 - August 6, 1994 3.2500% - 4.5000%
August 6, 1994 - February 6, 1995 3.3750% - 5.1250%
February 6, 1995 - August 6, 1995 3.5000% - 5.2500%
The swap agreement was amended six times before being
canceled. The first two amendments, occurring on August 12, 1993
and August 25, 1993 increased the multiplier in the option
payment calculation from 5% to 6.5% and from 6.5% to 9.2%,
respectively. On September 10, 1993 and October 26, 1993 the
bands of the options were changed. On November 29, 1993 the
final 6 month period from February 6, 1995 to August 6, 1995 was
eliminated from the agreement and the termination date amended to
February 6, 1995. On December 17, 1993 the termination date was
again amended to reflect August 6, 1994 and the calculation
period August 6, 1994 to February 6, 1995 eliminated. The swap
agreement was terminated on January 14, 1994 in a transaction
that included terminating the spread locks and amending wedding
band 3 in exchange for entering into the LIBOR linked swap and
wedding band 6.
9. Wedding Band 3 (Transaction 3338)
On September 22, 1993, spread lock 1 and spread lock 2 were
imbedded with an option, referred to by Bankers Trust and Gibson
as wedding band 3. The wedding band 3 option has previously been
described as part of the descriptions of spread lock 1 and spread
lock 2.
10. LIBOR Linked Pay Out (Transaction 11213-8638A)
On January 14, 1994 Bankers Trust and Gibson entered into a
swap agreement with the following terms. On the specified
payment date, the second business day following August 15, 1995,
Bankers Trust and Gibson agreed to swap, on a net basis, a
predefined payment. Bankers Trust would make a payment to Gibson
based on the following terms.
If LIBOR1 is always less than 5.75%, the payment shall be
the positive amount, if any, equal to $25,000,000 x
[(spread/.00335+.125) -1].
If LIBOR1 is ever greater than or equal to 5.75%, the
payment shall be the positive amount, if any, equal to
$25,000,000 x [(spread/.00335)-(LIBOR2/4.25%)]. LIBOR1
refers to the daily value of 6-month LIBOR between
January 14, 1994 and August 15, 1995, while LIBOR2, refers
to the 6-month LIBOR rate on August 15, 1995.
The swap agreement described above is based on a swap spread
involving the 10-year U.S. Treasury rate and 6-month LIBOR rates.
<PAGE>
<PAGE> A-7
11. Wedding Band 6
On January 14, 1994 Bankers Trust and Gibson entered into a
swap agreement with the following terms. Gibson agreed to make a
payment to Bankers Trust on September 24, 1994 defined by the
following formula:
If LIBOR1 for any day during the term of the transaction is
less than or equal to 3.00% or greater than or equal to
5.00% and LIBOR2 is greater than 3.75%, the floating amount
shall be equal to the product of (i) $119,700 and (ii) the
number of basis points by which LIBOR2 exceeds 3.75%.
Otherwise Gibson owes nothing. LIBOR1 means, for any day,
the 6-month LIBOR rate for that date. LIBOR2 means the
6-month LIBOR rate on the termination date of the agreement.
The swap agreement was amended on February 7, 1994 to change
one of the multipliers from $119,700 to $79,800.
The agreement was canceled on March 4, 1994. In exchange
for terminating these transactions, Gibson entered into Swap
Transaction S10044.
12. Swap Transaction S10044
On March 4, 1994 Bankers Trust and Gibson entered into the
last of their swap agreements with the following terms to put a
$27.5 million cap on Gibson's loss.1 Bankers Trust and Gibson
agreed to swap on June 9, 1995, on a net basis, predefined
payments. Bankers Trust agreed to pay Gibson an amount equal to
the total amount owed by Gibson to Bankers Trust as combined
consideration for the Reversal/Cancellation of Bankers Trust
Transaction Ref. No. 3338 and the Amendment of Bankers Trust
Transaction Ref. No. 11213-8638A. Both payments are for value
March 4, 1994 and shall be canceled against each other. Gibson
agreed to pay Bankers Trust either (1) if LIBOR on June 7, 1995
is less than or equal to 3.90%, the amount of $3,000,000 or (2)
if LIBOR on June 7, 1995 is greater than 3.90%, an amount equal
to the sum of $3,000,000 and the product of $72,500 and the
number of basis points by which LIBOR exceeds 3.90%, provided,
however, that, for these purposes, LIBOR cannot exceed 5.90%.
1 These swaps were canceled as a result of the BT
Securities/Gibson settlement announced November 23, 1994.
Exhibit 99.5
Corporate Communications Division, 280 Park Avenue, New York Mailing
Address: P.O. Box 318, New York, N.Y. 10008-0318
Bankers Trust New York Corporation
- ----------------------------------------------------------------
News Release
For Release:
BT SECURITIES CORPORATION ANNOUNCES
SETTLEMENT AGREEMENTS WITH THE SEC AND CFTC
New York, December 22, 1994 -- BT Securities Corporation, a
subsidiary of Bankers Trust New York Corporation, has entered into
settlement agreements with the Securities and Exchange Commission and the
Commodity Futures Trading Commission concluding the agencies' investigation
of the firm's derivative business.
The findings contained in an order issued by the SEC and the CFTC
relate exclusively to transactions with one client, Gibson Greetings, and
focus primarily on the actions and statements of one employee, who is no
longer with BT Securities. "Harm to our client was addressed in a
financial settlement," said Bankers Trust Chairman Charles S. Sanford, Jr.
"These settlement agreements resolve the regulatory issues that have
been under review by the SEC and the CFTC," said Mr. Sanford. "We have
introduced new procedures designed to prevent the reoccurrence of a similar
problem and to provide a level of disclosure and pricing transparency that
will benefit our clients."
The settlement agreements resolve all corporate liability of BT
Securities and all affiliated Bankers Trust entities to the SEC and CFTC
arising from conduct involving the offer, sale or valuation of derivative
products. Without admitting or denying the regulators' findings, BT
Securities agreed to pay an aggregate civil penalty of $10 million. BT
Securities cooperated fully in these reviews by providing information,
documents and taped conversations among BT Securities employees, their
clients and their coworkers.
"The loss of even one client relationship is unacceptable to us,"
Mr. Sanford said. "With our actions, Bankers Trust has put things right,
not only in this instance, but in a lasting and fundamental way. Our
entire firm joins together in reaffirming a commitment to excellence in
the service of our clients."
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For additional information, contact Douglas Kidd, Bankers Trust,
(212) 454-3532.
