Investors sue officers of Allfirst

Shareholder action says bank knew of Rusnak risk-taking

As much as a year ago?

Trader, parent firm are also listed as defendants in suit

March 07, 2002|By Julie Bell and William A. Patalon III | Julie Bell and William A. Patalon III,SUN STAFF

A shareholder lawsuit filed in connection with large trading losses at Allfirst Financial Inc. alleges that certain bank officers either knew currency trader John M. Rusnak was putting more of the bank's money at risk than the bank's guidelines permitted or recklessly failed to supervise him.

The lawsuit, filed in U.S. District Court for the Southern District of New York by a law firm that specializes in class action litigation, names six current or former officers of Baltimore-based Allfirst as defendants. Also named are Rusnak and Allfirst's parent company, Allied Irish Banks PLC of Dublin, Ireland.

The law firm, Washington-based Finkelstein, Thompson & Loughran, said it plans to add allegations later, including that one Allfirst officer had known for some time that Rusnak was exceeding his risk limits at the bank.

"We have received information from a source with firsthand knowledge of Allfirst's operations indicating that an officer of Allfirst had knowledge as much as a year ago that Mr. Rusnak was exceeding his risk-exposure limitations," said Donald J. Enright, an attorney with the firm. He declined to name the officer.

The source's information also indicates that the excessive exposure Rusnak "was reporting internally was routinely and substantially understated," Enright said.

The bank has put the trading losses at $691.2 million.

The Sun, quoting unnamed sources at the bank, reported last month that some Allfirst supervisors and executives knew for years that Rusnak frequently exceeded his trading limits but never realized the extent of potential losses and took no action to rein him in.

Allfirst spokesman Philip H. Hosmer declined to comment on the lawsuit, saying it's Allfirst's policy not to discuss pending litigation.

Hosmer confirmed that Michael Buckley, Allied's chief executive, is in Baltimore for a series of meetings, some of them related to the investigation. Hosmer declined to discuss the purpose of the meetings or say how long Buckley intended to remain.

"Mr. Buckley is here. He's here for a series of meetings, and is here for a short period of time," Hosmer said.

Several investigations are looking at how Rusnak's trading either escaped notice or were ignored for five years. The FBI, bank examiners from Maryland, the Federal Reserve Bank of Richmond, Va., and the Central Bank of Ireland have all been at Allfirst's South Charles Street headquarters.

In addition, Allied Irish Banks hired former top U.S. banking regulator Eugene A. Ludwig to conduct its own investigation.

Ludwig is expected to fly to Dublin over the weekend. But it is still unclear when he will deliver the report to Allied Irish's board of directors. Allied's board is expected to meet Tuesday. Once directors receive the report, Ludwig will make a formal presentation and address the findings of his monthlong investigation.

Allfirst, an Allied subsidiary, has said that Rusnak ran a scheme that caused the $691.2 million in losses. Allfirst said it became suspicious of Rusnak, 37, of Baltimore, in late January after questioning the trading risks he was taking.

Bank executives have said the 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 that made it appear he had hedged his bets. The bank said he also overrode internal systems designed to detect irregularities.

The 19-page shareholders' lawsuit was filed on behalf of investors who purchased Allied Irish Bank securities between Jan. 1, 2001, and Feb. 6, 2002, the date on which Allfirst announced what it then estimated was $750 million in losses related to Rusnak's trading.

As a result, AIB's American depositary shares fell to $19.77, a 16 percent drop from the previous day's close of $23.55 on the New York Stock Exchange, the suit noted.

The shares, however, have since recovered as reports circulated that Allied or Allfirst were takeover targets. Shares closed yesterday at $22.25, down 34 cents.

American depositary shares of foreign companies are instruments that are traded like stocks on U.S. exchanges. They give U.S. investors an alternative to buying shares in foreign companies on overseas markets.

The suit seeks unspecified compensatory damages and reimbursement for plaintiff's expenses. It names Allfirst Chairman Frank P. Bramble, Chief Executive Officer Susan M. Keating, Controller Robert L. Carpenter, Treasurer David M. Cronin, former Chief Financial Officer Jerome W. Evans, current CFO Maurice J. Crowley and Rusnak.

It claims Rusnak's "scheme resulted from an extraordinary and reckless lack of supervision and controls by Allfirst. [Foreign exchange] trader Rusnak and other, as yet unidentified individuals used phantom gains on artificially created trades to offset losses made on real trades."

The suit uses allegations contained in recent newspaper accounts to back up its claims, saying they are later to be proven in court.

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