UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES ACT OF 1933 Release No. 7269 / February 29, 1996 SECURITIES EXCHANGE ACT OF 1934 Release No. 36906 / February 29, 1996 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 766 / February 29, 1996 ADMINISTRATIVE PROCEEDING File No. 3-8965 : In the Matter of : ORDER INSTITUTING PROCEEDINGS : PURSUANT TO SECTION 8A OF : THE SECURITIES ACT OF 1933 MITCHELL A. VAZQUEZ : AND SECTIONS 15(b) AND 21C OF : THE SECURITIES EXCHANGE ACT : OF 1934, AND FINDINGS AND Respondent. : ORDER 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 Mitchell A. Vazquez ("Vazquez") 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 Vazquez violated Section 10(b) of the Exchange Act and Rule 10b-5, and caused violations of Section 13(a) of the Exchange Act, and Rules 13a-1 and 12b-20; and (iii) to determine whether any order should be issued as to Vazquez pursuant to Section 15(b)(6) of the Exchange Act. II. In anticipation of the institution of these administrative proceedings, Vazquez 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, Vazquez 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"). III. The Commission finds the following:1 A. RESPONDENT Mitchell A. Vazquez, 27, resides in Greenwich, Connecticut. Vazquez was employed as a registered representative of BT Securities Corporation ("BT Securities") from September 1991 until July 1994. Vazquez worked marketing derivatives to customers of BT Securities, including Gibson Greetings, Inc. ("Gibson"). In his dealings with customers of BT Securities, Vazquez was the most junior BT Securities employee assigned to the handling of those customers' accounts. B. OTHER RELEVANT ENTITIES BT Securities is a corporation organized under the laws of the State of Delaware. BT Securities is registered with the Commission as a broker-dealer pursuant to Section 15(b) of the Exchange Act. Bankers Trust Company ("Bankers Trust") is a banking corporation organized under the laws of the State of New York. Bankers Trust was the counterparty to each derivative that Vazquez sold to 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. For some purposes, the results of operations of Bankers Trust, BT Securities and other companies are reported on a consolidated basis by BTNY. Gibson is a corporation organized under the laws of the State of Delaware with its headquarters in 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 1 The findings herein are made pursuant to Vazquez' Offer of Settlement and are not binding on any other person or entity named as a respondent in this or any other proceeding. ==========================================START OF PAGE 2====== 12(g) of the Exchange Act and quoted on the Nasdaq stock market. C. FACTS This matter involves violations of the reporting and antifraud provisions of the federal securities laws in connection with transactions in derivatives sold by Vazquez to Gibson.2 1. Background From November 1991 to March 1994, representatives of BT Securities, including Vazquez, proposed, and Gibson entered into, approximately 29 derivatives transactions, including amendments to existing derivatives, and terminations of derivatives or portions thereof. Over time, the derivatives BT Securities sold to Gibson 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. Gibson, however, did not have the expertise or computer models needed to value the derivatives it purchased from BT Securities. Instead, as Vazquez 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.3 2. Provision of Inaccurate Valuations to Gibson Vazquez recklessly provided 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 2 The facts on which this order is based are set forth in greater detail in In re BT Securities Corporation, SEC Rel. No. 33-7124, 34-35136 (December 22, 1994), and in In re Gibson Greetings, Inc., Ward A. Cavanaugh, and James H. Johnsen, SEC Rel. No. 34-36357, AAER 730 (October 11, 1995). 3 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. ==========================================START OF PAGE 3====== derivatives from BT Securities. In addition, the valuations provided by Vazquez 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. On two occasions when Gibson sought valuations for the specific purpose of preparing its financial statements, Vazquez participated in providing Gibson with valuations that differed by more than 50% from the value generated by the computer model and recorded on Bankers Trust's books. Vazquez sent to Gibson letters containing the valuations for 1992 and 1993. 3. Offer and Sale of Securities to Gibson Vazquez was one of the day-to-day contacts with Gibson in connection with derivative transactions referred to as a Treasury-Linked Swap4 and a Knock-Out Call Option5. Vazquez helped structure the transactions involving those two derivatives and provided Gibson with some of the valuations of its derivatives. Vazquez recklessly made material misstatements and omissions to Gibson in connection with these transactions. The misrepresentations involved, inter alia, the unrealized gains and losses associated with those and other derivatives. As a result, Gibson engaged in derivatives transactions to BT Securities' financial advantage and which caused Gibson to incur losses. The Treasury-Linked Swap, the Knock-Out Call Option, and the amendments to those derivatives were securities within the meaning of the federal securities laws. D. LEGAL DISCUSSION 1. Causing Misstatements by Gibson in Financial Statements As set forth above, Vazquez participated in providing Gibson with valuations which materially understated Gibson's losses from derivatives transactions. Gibson used the values in its financial statements, and those statements materially understated 4 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. 5 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. ==========================================START OF PAGE 4====== the company's losses from derivatives activities. As set forth above, Vazquez thus caused violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 12b-20. 2. Offer and Sale of Securities The Treasury-Linked Swap and the Knock-Out Call Option, along with the amendments to those derivatives, were securities under the federal securities laws. As set forth above, Vazquez made material misrepresentations and omissions in the offer and sale of these derivative securities to Gibson. In offering and selling these securities, Vazquez violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5. IV. FINDINGS Based on the foregoing, the Commission finds that Vazquez willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5, and that Vazquez caused violations of Section 13(a) of the Exchange Act, and Rules 13a-1 and 12b-20. V. OFFER OF SETTLEMENT Vazquez has submitted an Offer of Settlement in which, without admitting or denying the findings herein, he consents to the Commission's issuance of this Order, which makes findings, as set forth above, and orders Vazquez to 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, 13a-1 and 12b-20; to pay a penalty of $50,000 pursuant to both this Order and an Order to Cease and Desist and Order of Assessment of a Civil Money Penalty Issued Upon Consent Pursuant to the Federal Deposit Insurance Act, as Amended, of the Federal Reserve Board; and to be barred from association with any broker, dealer, investment company, investment advisor or municipal securities dealer. VI. ORDER Accordingly, IT IS HEREBY ORDERED THAT: A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, Vazquez cease and desist from committing or causing any violations 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, 13a-1 and 12b-20; ==========================================START OF PAGE 5====== B. Pursuant to Section 21B of the Exchange Act, Vazquez shall, within two business days of the issuance of this Order, pay a civil money penalty in the amount of $50,000 to the United States Treasury.6 Vazquez shall simultaneously furnish copies of documents evidencing such payment to Thomas B. Lawson, Assistant Director, Division of Enforcement, Securities and Exchange Commission, Mail Stop 4-8A, 450 5th Street N.W., Washington, D.C. 20549. C. Pursuant to Section 15(b)(6) of the Exchange Act, Vazquez be, and hereby is, barred from association with any broker, dealer, investment company, investment advisor or municipal securities dealer; provided, however, that Vazquez may apply to the appropriate self-regulatory organization or where there is none, to the Commission, to become associated with such entities after a period of four years from the date of this Order. By the Commission. Jonathan G. Katz Secretary 6 The $50,000 paid pursuant to this Order will also satisfy Vazquez' payment obligation under a related Order to Cease and Desist and Order of Assessment of Civil Money Penalty Issued Upon Consent Pursuant to the Federal Deposit Insurance Act, as Amended, entered into between Vazquez and the Board of Governors of the Federal Reserve System. ==========================================START OF PAGE 6======