Fraud statute considered in Allfirst case

Rusnak could face U.S. law successful in similar instances

Comes with stiff penalties

Decision on any step against bank trader may be months away

February 28, 2002|By Bill Atkinson and Michael James | Bill Atkinson and Michael James,SUN STAFF

Authorities investigating the Allfirst Bank scandal are considering prosecuting currency trader John M. Rusnak under a federal law that has been widely successful in bank fraud cases and carries penalties of 30 years in prison and a $1 million fine for each count, sources said yesterday.

Rusnak, at the center of an investigation into $691 million in losses at Allfirst Financial Inc., has not been charged. But sources said prosecutors are focusing on a statute that makes it illegal to file "false" entries into the books, reports and statements of a bank with the intent to "injure or defraud."

"I can understand why they would be looking at this section," said Andrew Jay Graham, a business and white-collar criminal trial lawyer at Kramon & Graham in Baltimore. "It carries a rather heavy duty penalty."

Rusnak, who has been suspended by the bank, is cooperating with federal authorities by providing details of how Allfirst's foreign exchange unit worked, his activities and whether others inside the bank knew of them, sources have said. Because of his cooperation, legal experts said, it is likely that authorities would seek a less severe sentence if he is convicted of, or pleads guilty to, fraud charges.

Allfirst, the U.S. subsidiary of Dublin, Ireland-based Allied Irish Banks PLC, said three weeks ago that the trader skirted internal controls and used a "clever and sophisticated operation" to hide his mounting losses that went undetected for five years.

Bank executives said foreign exchange losses soared as Rusnak gambled that the Japanese yen would rise in value. When the yen plunged, the bank claims, he hid the losses by creating fictitious option trades.

The FBI and the U.S. Attorney's Office are investigating Rusnak.

U.S. Attorney Thomas M. DiBiagio declined to comment yesterday on what charges Rusnak could face. "We have an ongoing investigation, and I can't comment on ongoing investigations," he said.

The state's top federal prosecutor indicated that a final decision on the charges could be months away. Special Agent Peter A. Gulotta Jr., a spokesman for the Baltimore FBI office, which is leading the probe, stressed that the investigation involving Allfirst is far from finished.

Rusnak's attorney, David B. Irwin, also declined to comment.

Sources said the government is focusing on Section 1005 of the U.S. Code, which makes it unlawful to file false statements or reports to defraud a financial institution or deceive a bank officer or bank examiner.

The statute "definitely applies" in the Allfirst case, said Andrew C. White, a criminal defense attorney in Baltimore who specializes in white-collar crime. Federal authorities, he added, "have used it to prosecute bank tellers and bank employees where they have made false statements to cover up theft. This statue has been used successfully in the past ... to attack a wide variety of fraud schemes perpetrated by bank employees."

Prosecutors, White said, need only show that Rusnak intended to deceive Allfirst officials and filed phony records.

Authorities have not made a final decision and could alter their investigation, sources said.

White said he doubted they will do so. "I can't find anything else that is going to hit on point," he said. "I would definitely use 1005, especially in a situation like this when you have clearly false reports and false transactions created to deceive Allfirst and its examiners."

Rusnak's cooperation might be his best defense, legal experts said yesterday. He has turned over to the FBI his bank accounts, spending records and the hard-drive to the laptop computer that he used at home for some of his trading, sources said. He also is freely discussing his activities at the bank, they have said.

"The extent and value to his cooperation" would be "factors" in determining a sentence if he were to be proved guilty, said Graham, the attorney.

Prosecutors will look at whether the scheme required advance planning and involved other people, as well as the size of the loss suffered by the bank, legal experts said yesterday. The $691 million loss at Allfirst is "an astronomical amount of money," White said.

Rusnak's cooperation arrangement with authorities is typical of high-profile, white-collar fraud cases; often a key player in a conspiracy strikes a deal with prosecutors to provide information.

In such cases, prosecutors will charge defendants with a crime under the terms of a criminal information, which means the case will not go before a grand jury and suggests that a defendant is negotiating a plea agreement with authorities. Federal sentencing guidelines allow for lesser sentences to be granted to those who acknowledge their roles in crimes and provide cooperation to prosecutors.

Federal authorities also are investigating whether anyone else at the company or outside the bank played a criminal role in the scheme. Top Allied Irish executives have said they believe that others might have been involved.

Citigroup Inc. and Bank of American Corp. confirmed this week that they are cooperating with federal authorities looking into Rusnak's ties to those banks, The New York Times reported.

In addition to law enforcement, Maryland bank examiners, the Federal Reserve Bank of Richmond and the Central Bank of Ireland are investigating the scheme. Allied Irish also launched an internal probe, the results of which are expected to be given to the board of directors March 9 in Ireland.

On Feb. 6, when Allfirst announced the losses, it suspended with pay four employees - David M. Cronin, executive vice president and 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 bank has not suggested wrongdoing on their part.

Sun staff writer Gail Gibson contributed to this article.

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