Chance exposed trader's scheme

Allfirst report says laziness, deceit led to $691.2 million loss

Trader's scheme unveiled by chance, report says

March 15, 2002|By Julie Bell and Bill Atkinson | Julie Bell and Bill Atkinson,SUN STAFF

It was happenstance that led to John M. Rusnak's undoing at Allfirst Financial.

His five-year currency trading scheme didn't begin unraveling because of the bank's staff of auditors or risk managers, a report released yesterday said, but because a supervisor glanced down and saw two trading tickets that didn't make sense.

"This is a corporate mugging; the mugger was Rusnak," said Eugene A. Ludwig, former U.S. comptroller of the currency, who conducted a monthlong internal investigation into the losses at the request of Allfirst's parent, Dublin-based Allied Irish Banks PLC.

Ludwig's 57-page report lays out a tale of incompetence, laziness and deceit leading to $691.2 million in losses for the bank. The report shows how the table was set for the scheme in July 1993, when Allfirst's Robert F. Ray persuaded Rusnak to leave his currency trading job at Chemical Bank in New York.

Ray, a former bond trader with little foreign exchange experience, and his boss, Allfirst Treasurer David M. Cronin, were intrigued with Rusnak because he portrayed himself as an experienced trader who could make money for the bank, the report said. Rusnak said he would do so by using options to make sophisticated currency bets.

Cronin, a former currency trader from Allied Irish, had big plans for currency trading at Allfirst. He wanted to make the smaller bank a major "niche" player in a global market.

Rusnak seemed to fit in well at Allfirst. Some saw him as "strong and confident," a "good family man," the report said, though others viewed him as "arrogant and abusive."

Rusnak's methods of trading turned out to be simpler than he had portrayed, the report said. He made straightforward bets on the direction of the yen and began running up losses when some of the bets turned out to be wrong.

After sustaining heavy losses around 1997, Rusnak began to disguise them by using fictitious option trades that appeared to hedge his bets, the report said.

Rusnak was able to make extremely large trades because he set up agreements with big money-center banks. The accounts, called prime brokerage accounts, "effectively permitted Allfirst to make trades in the prime brokers' names," the report said.

Such arrangements were unusual for a small trading operation like Allfirst's. Using them, Rusnak became a voracious trader. He traded at night and from his home in Mount Washington. He traded while on vacation, which the report noted is prohibited in most trading operations because it provides an opportunity for a trader to perpetrate continuing fraud.

`Wined and dined'

The heavy trading made Rusnak a celebrity of sorts among brokerage houses that wanted to do business with him.

"The brokers and traders heavily entertained Mr. Rusnak with meals, hotel stays, golf trips, Super Bowl tickets and other travel," the report said. "He apparently liked to be wined and dined, and the brokers obliged."

Rusnak traded so heavily that on a single day in May 2001, he "executed four transactions - two with Citibank and two with Bank of America - that involved a total of about $1.6 billion in notional value," the report said.

Avoiding exposure

Such heavy trading should have alerted Rusnak's superiors to potential problems, the report said, but he was able to conceal losses through a number of stratagems and lack of supervision.

For one thing, his trading manager left the bank in the fall of 1999. From then on, his direct supervisor was Ray, whose "knowledge of foreign exchange was limited," the report said.

Ray devoted little time to overseeing the trading operations, the report said. His time was devoted instead to his many other responsibilities, which included overseeing the bank's portfolio of investments and ensuring that its books balanced at the end of every day.

Stunningly, Rusnak was able to skirt one of the standard controls employed by banks or brokerage houses that operate trading desks - the trade confirmation. Every trade was supposed to be confirmed by someone in the bank's back office who worked independently from the trader.

"But Mr. Rusnak was somehow able to bully or to cajole the operations staffer responsible for confirming Mr. Rusnak's trades into not confirming all of them," the report said.

He even persuaded a back- office employee that certain option trades in Asia did not have to be confirmed, something the report noted that the clerk might have found convenient. Because of the time difference, confirming Asian trades would have required the back office employee to be at work in the middle of the night.

Rusnak also found ways to circumvent risk-control officers, who use a statistical model to help estimate the maximum range of loss a trader might suffer in a given portfolio. To calculate the risk, the control officers needed access to current foreign currency rates and to a listing of Rusnak's current holdings.

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