Irish bank hit by $750M scam
By Jaime Hernandez
BALTIMORE Ireland's biggest bank yesterday accused a currency trader at its Baltimore subsidiary of stealing $750 million in what could be the largest such scam since a rogue employee brought down England's Barings Bank in the mid-1990s.
The Irish bank Allfirst has offices in Baltimore, where the accused "rogue" employee was making $85,000 a year. The bank says he stole $750 million, possibly with accomplices, through bogus foreign-exchange options contracts.
"My client is not a fugitive," attorney Bruce Lamdin said. "We hope that things will take their natural course from here. That's up to the U.S. attorney's office."
News of the scam sent financial stocks lower across Europe, led by Allied Irish. Analysts said that if such a conservative, well-run bank could suffer such a breach of security, almost any bank could.
Five treasury workers at the bank have been suspended, including Rusnak. Allied Irish said people outside the bank may also have been involved in the scam.
"We are hugely disappointed that our Allfirst control procedures failed to uncover this situation at an earlier stage," Allied Irish chief executive Michael Buckley said in Dublin. "The investigation now under way will determine not only how it arose but also how we can guard against any recurrence."
Buckley said it was not clear whether Rusnak pocketed some or all of the missing money.
Bank officials described Rusnak as a married father of two who has worked at Allfirst for seven years. They said he was paid $85,000 a year, a modest amount for a currency trader with his experience.
Officials at the U.S. attorney's office said they were investigating Rusnak and the FBI confirmed that it was looking into missing money at Allfirst.
Rusnak has not shown up for work this week and bank officials said he would be fired if he did. Lamdin, the attorney, said Rusnak is in Baltimore, but is avoiding his home because of the reporters and photographers camped outside.
The case has stirred memories of Nick Leeson, the Singapore trader who destroyed Barings Bank by piling up $1.4 billion in concealed losses. The case prompted banks worldwide to tighten internal checks and balances.
Allied Irish insisted the damage is not comparable.
"It is a heavy blow, but I want to make the point very clearly that it's a blow we will recover from," Buckley said.
Allied Irish said the scam involved forged purchasing records for options contracts, starting early last year and ending just after Christmas.
According to Buckley, midlevel Allfirst managers confronted Rusnak by telephone last weekend when the magnitude of the forgery was discovered. Allied Irish said "alarm bells went off" when the trader did not return calls Sunday night, then failed to arrive for work Monday.
Currency dealers normally buy options contracts to hedge their bets on whether a specific currency will gain or lose value. If they buy a currency that loses value, the bank's losses would typically be offset by an option contract bet on a movement in the opposite direction.
But in this case, the bank said, Rusnak did not buy options contracts to hedge many of his foreign-exchange deals. It said he forged records of options purchases, either to conceal losses or skim the fees paid for the options.
Analysts said the amount of the missing funds suggested the trader had bought phony contracts with a value of at least 1,000 times that amount, or $750 billion. This is a huge sum for a bank largely involved in retail banking, not capital markets.
"How could such a large volume of activity be missed to create such a large profit? I don't know. It does seem bizarre," said John Kelly, an analyst at NCB Stockbrokers in Dublin.
Ireland's finance minister, Charlie McCreevy, said worldwide confidence in the nation's long-thriving economy had taken a blow. Earlier this week, another Irish bellwether, Elan Pharmaceuticals, drastically revised its earnings forecasts and saw its stock plummet following allegations of deceptive accounting to conceal losses.
The revelation also added to Enron-sparked fears of sloppy accounting.
On Wall Street, Allied Irish stock fell by about 16 percent yesterday to close at $19.71. The price dropped by similar amounts on the Irish and London stock exchanges.
Allied Irish first invested in U.S. banks in 1983 with a minority stake in First Maryland Bancorp. It eventually took control and merged First Maryland with another American bank to create Allfirst.
Allfirst employs about 6,000 people and has about 250 branches and outlets, concentrated in Maryland and Pennsylvania.