Lawsuits take aim at ex-bosses of Allfirst

Two shareholder suits are first to allege fraud at former bank's top levels

February 06, 2005|By Laura Smitherman | Laura Smitherman,SUN STAFF

Three years after one of the largest bank frauds in history foreshadowed the end of Allfirst Financial Inc., the "rogue" trader at the center of that scandal is the only person from the former Baltimore bank who has faced a day in court.

That might change in the coming months.

This week, two lawsuits from shareholders who contend that higher-ups at the bank should have known about and policed the $690 million trading scandal will be merged into a 70-page complaint in federal court in New York. The civil suit marks the first time that anyone at the bank has been accused of fraud other than John M. Rusnak, the currency trader who was sentenced to 7 1/2 years in January 2003 after pleading guilty to criminal charges.

Though the plaintiffs face a number of legal hurdles, the case has the potential to re-examine the inside story at Allfirst, about how much bank executives knew or should have known about Rusnak's activities.

"A lot of people concluded this was a lone-wolf case and the higher-ups were victims. But those executives were actively hiding their heads in the sand," said Don Enright, an attorney representing the shareholders. "We are confident that we can show these executives were aware that something was very wrong with their currency trading operations and ignored the problem for years."

On the morning of Feb. 6, 2002, ashen-faced executives of Allied Irish Banks PLC, one of Ireland's largest banks, announced that they had been informed of a huge fraud at their U.S. banking operation based in Baltimore.

They hired Eugene A. Ludwig, a former U.S. comptroller of the currency, to investigate. His report a month later concluded that Rusnak had acted alone in amassing and covering up hundreds of millions of dollars in losses over five years with bad trades of the U.S. dollar against the Japanese yen. But Ludwig said at the time that he had only weeks to investigate what was described as the fourth-largest bank fraud in history. He said he didn't consider his report "definitive."

Less than eight months after the scandal broke, Allied Irish sold its majority stake in Allfirst to M&T Bank Corp. The purchase gave Buffalo-based M&T, with many of its 470 branches in upstate New York and Pennsylvania, a foothold in the Baltimore-Washington market. M&T built its identity quickly after landing a 15-year, $75 million naming rights deal for the Ravens football stadium.

Although it sold Allfirst in 2003, Allied Irish retained legal liability in the Rusnak affair. The company and other defendants in the class action suit will likely seek to have it dismissed before any executive is deposed or summoned to testify.

Nothing to add

Many of them didn't want to talk about the ordeal.

"None of our management team have anything new to add or, indeed, any wish to revisit or `rake over' the story three years after the event," Trevor McEvoy, an Allied Irish spokesman, wrote in an e-mail.

The lawsuit names Allied Irish and former Allfirst executives, including Frank P. Bramble, chairman; Susan M. Keating, chief executive officer; Robert L. Carpenter, controller; David M. Cronin, treasurer; and Jerome W. Evans and Maurice J. Crowley, chief financial officers.

Attorney Robert Mazur, who represents Allied Irish and all of the executives except Cronin, declined to comment on the lawsuit. Cronin's attorney, Mark Gately, said his client is innocent of any wrongdoing.

Bramble and Keating couldn't be reached to comment.

Shareholders in the class-action suit allege the executives knowingly or recklessly disregarded clues to Rusnak's scheme, enabling the company to report higher profits to investors. Allfirst revised years of financial statements after disclosing that it had caught Rusnak.

Rogues' gallery

Rusnak is one of a handful of so-called "rogue traders," whose covert activities cost their banks hundreds of millions of dollars.

Toshihide Iguchi, a bond trader in the New York office of Japan's Daiwa Bank, was jailed after admitting to covering up more than $1 billion in losses starting in the mid-1980s. Nearly 50 executives agreed to pay $2 million to settle a shareholder lawsuit that alleged they should have stopped the fraud.

In 1998, Joseph Jett, a former Kidder, Peabody & Co. trader, was found guilty in a civil court of recording $350 million in phantom profits to boost his performance-based bonuses. A New York State judge dismissed a lawsuit that accused directors at Kidder's parent General Electric Co. of lax oversight. GE later agreed to settle a class action suit and pay shareholders $19 million.

The trader with whom Rusnak is most often compared is Nicholas W. Leeson, a trader at Britain's Barings Bank. He cost Barings $1.4 billion in 1995 by incorrectly guessing which way the Tokyo stock market would move. The loss collapsed the 242-year-old bank.

Leeson served four years in prison and makes a living as a guest speaker. He wrote a memoir, Rogue Trader, which was made into a film starring Ewan McGregor.

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