Allfirst officials knew trader exceeded limits

Sources at bank say management didn't realize size of losses

`Looked the other way'

February 26, 2002|By Bill Atkinson | Bill Atkinson,SUN STAFF

Supervisors and executives at Allfirst Financial Inc. knew for years that currency trader John M. Rusnak frequently exceeded his trading limits but never realized the extent of potential losses and took no action to rein him in, sources said yesterday.

Rusnak is at the center of an investigation into $691 million in losses that grew and went undetected by the bank for five years. Allfirst has said he overrode internal systems using a "clever and sophisticated operation."

But sources said yesterday that the alleged scheme was aided by a breakdown in management, which turned its head when the trader exceeded the bank's $2 million trading limit.

"He didn't get around the system, the system caught him all of the time," according to a source at Allfirst. Executives "looked the other way."

"These people knew he was over his limit. They knew very well about it," the source said. "They had no idea how much he could lose."

It was well known at the bank that Rusnak often violated the limit by as much as $1 million. Rusnak would either cajole or bully superiors into ignoring his violations, sources said.

Once Rusnak told a risk control officer, Svetlana Tslav, who was among those responsible for monitoring his trades, not to worry about the bank's limits.

"They walked around the hallways for about a year, and Lana would say, `Hey, John, you are over your limits today.' And John would say, `Don't worry, Lana, I will take care of you,'" a source within the bank said.

A woman at Tslav's residence last night said that Tslav was not at home or available for comment.

Allfirst has said it became suspicious of Rusnak in late January after questioning the trading risks he was taking. Bank executives said that foreign exchange losses soared as Rusnak gambled that the Japanese yen would rise in value.

When the yen instead plunged, the bank claims, he hid the losses by creating fictitious option trades and by overriding internal systems designed to detect irregularities.

In addition to Rusnak, four other employees have been suspended. Although the bank has not released their identities, the employees are:

David M. Cronin, executive vice president, treasurer; Robert F. Ray, senior vice president of Treasury Funds Management and Rusnak's immediate supervisor; Jan N. Palmer, senior vice president of Investment Operations; and Larry Smith, a clerk in the bank's operations unit.

The four were suspended with pay pending the outcome of Allfirst's internal investigation.

The bank has never suggested that any of them was involved in what it described as "sophisticated, well-thought-out fraud."

Several investigations are going on simultaneously at Allfirst. In addition to the bank's own investigation, the FBI, bank examiners from the state, the Federal Reserve Bank of Richmond and the Central Bank of Ireland have also been at Allfirst's headquarters on South Charles Street, combing through documents.

Allied Irish Banks PLC, the parent company of Allfirst, announced last week that an internal investigation discovered that the currency trading losses had been occurring for five years, forcing the bank to restate earnings since 1997.

But bank officials "knew these risks existed. They knew back to '97. Not until December did they [realize] the magnitude of it," a source at Allfirst said.

Questions, not sanctions

Those executives, sources said, included some in the currency trading unit as well as operations and risk control, which is designed to work at arm's length of the traders and to police their activities.

A source said yesterday that supervisors questioned Rusnak's trades "constantly," but they did not impose sanctions on his activities.

"The bottom line here was a lot of confusion between the desk and operations," the source said. "There were problems with trying to get things to balance out on the foreign exchange desk.

"I don't think the operations side of it was ever to the point where they understood foreign exchange [trading] well enough," the source said.

"Every day they would come upstairs ... right up to John and ask, `How did you come up with this? I see an entry here and I see an entry there, but how did you come up with that?'"

Rusnak's managers supported him during confrontations with operations supervisors.

Rusnak defended himself by telling his bosses that the "operations people just weren't smart enough to get it," a source said.

Outside help suspected

Michael Buckley, chief executive of Allied Irish, and other senior bank executives have suggested that Rusnak might not have acted alone.

"There are straws in the wind that might show he had help outside the bank, but we do not know if these were individuals or banks, or whether money changed hands," The Sunday Times in London quoted Lochlann Quinn, group chairman of Allied Irish, as saying.

The newspaper also said that Rusnak might have colluded with a currency dealer at Citibank. E-mails from Rusnak's computer show that he might have had help from the outside covering up his losses, the newspaper said.

"The trader at Citibank said to Rusnak: `This cannot go on much longer,'" the paper reported, citing a source close to the bank.

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