## Facts

- The Securities and Exchange Commission (SEC) instituted a public administrative proceeding against BT Securities Corporation (BT Securities), a registered broker-dealer and a wholly owned subsidiary of Bankers Trust New York Corporation.
- The matter involved BT Securities’ derivatives business with Gibson Greetings, Inc. (Gibson), a public company that filed periodic reports with the SEC.
- BT Securities entered into a series of derivative transactions with Gibson, including treasury-linked swaps and “knock-out” call options.
- The derivatives did not trade in any market; values were determined using a pricing computer model used by Bankers Trust Company (the derivatives counterparty).
- Gibson relied on Bankers Trust/BT Securities for valuation information about the derivatives.
- During the relevant period, BT Securities gave Gibson derivatives values that differed from the values generated by the computer model and that substantially understated Gibson’s losses.
- On two occasions, Gibson requested valuations from BT Securities while preparing its Form 10‑K; BT Securities knew the valuations would be used in Gibson’s SEC filings.
- On both occasions, BT Securities provided valuations that understated Gibson’s losses by more than 50%.
- Gibson incorporated the valuation information into financial statements filed with the SEC, resulting in filings that materially understated Gibson’s derivatives-related losses.
- BT Securities submitted an Offer of Settlement; it consented to the SEC’s findings and order for purposes of the proceeding without admitting or denying the findings.

## Issues

1. Whether BT Securities willfully violated Securities Act § 17(a) and Exchange Act § 10(b) and Rule 10b‑5 by providing materially misleading valuations in connection with derivative transactions the SEC treated as securities.
2. Whether BT Securities caused Gibson to violate Exchange Act § 13(a) and related reporting rules (Rules 12b‑20 and 13a‑1) by supplying valuation information that Gibson used in SEC-filed financial statements.
3. Whether BT Securities failed reasonably to supervise within the meaning of Exchange Act § 15(b)(4)(E).

## Decision

- The SEC instituted and simultaneously settled the administrative proceeding by accepting BT Securities’ Offer of Settlement.
- The SEC found (for purposes of the proceeding) that certain derivatives sold to Gibson were securities under the federal securities laws.
- The SEC found BT Securities willfully violated Securities Act § 17(a) and Exchange Act § 10(b) and Rule 10b‑5 by providing valuation information that materially understated Gibson’s losses.
- The SEC found BT Securities caused violations of Exchange Act § 13(a) and Rules 12b‑20 and 13a‑1 because Gibson used BT Securities’ valuations in SEC filings that materially understated derivatives losses.
- The SEC found BT Securities failed to supervise as provided by Exchange Act § 15(b)(4)(E).
- The SEC censured BT Securities and ordered it to permanently cease and desist from committing or causing violations of Securities Act § 17(a) and Exchange Act §§ 10(b) and 13(a) and Rules 10b‑5, 12b‑20, and 13a‑1.
- The SEC imposed a $10 million civil monetary penalty and required remedial undertakings, including retention of an independent consultant to review and report on relevant policies and procedures.

## Legal Principles

- Providing valuation information that materially misstates losses on instruments treated as securities can violate Securities Act § 17(a) and Exchange Act § 10(b) and Rule 10b‑5 when the information is communicated in connection with the transaction and is material to the counterparty.
- When a broker-dealer supplies valuation information to an issuer knowing the issuer will use it in SEC filings, materially false valuation information can constitute “causing” the issuer’s violations of Exchange Act § 13(a) and related rules requiring accurate and complete periodic reporting (Rules 12b‑20 and 13a‑1).
- A broker-dealer may be sanctioned for failure to supervise under Exchange Act § 15(b)(4)(E) when its supervisory structure does not reasonably prevent or detect securities-law violations arising from communications with customers about valuations.
- In a settled SEC administrative action, the Commission may impose a censure, a permanent cease-and-desist order, a civil penalty, and compliance undertakings (including an independent consultant review) to address misconduct and supervisory deficiencies.

## Conclusion

In this settled SEC administrative proceeding, the Commission found that BT Securities provided Gibson Greetings with derivative valuations that departed from model-based values and substantially understated losses—information BT Securities knew would be used in Gibson’s Form 10‑K—resulting in materially misleading SEC filings; the SEC censured BT Securities, entered a permanent cease-and-desist order, imposed a $10 million penalty, and required remedial undertakings including an independent consultant review.


In the Matter of BT Securities Corporation, 58 S.E.C. Docket 1145, 1994 SEC LEXIS 4041 (1994)