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Md.'s largest bank, Allfirst Financial, loses $750 million

Daily Record, The (Baltimore), Feb 7, 2002 by Daily Record Staff Business Writer

John Rusnak -- one half of Allfirst Financial Inc.'s two-person foreign exchange unit, a unit one top executive yesterday called an "irrelevant part of the overall profit stream" -- defrauded Maryland's largest bank and its parent company out of $750 million, officials announced yesterday.

Rusnak's actions are drawing comparisons to the $1.4 billion Nick Leeson copper trading scandal that brought down England's Barings Bank in the mid-1990s. Frank Bramble, Allfirst's chairman, dismissed the analogy at a news conference yesterday, asserting that the $750 million loss wouldn't come close to toppling Ireland's largest bank - - Allfirst's parent, Allied Irish Banks.

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A resident of Mt. Washington along with his wife and two children, Rusnak, an Allfirst employee since 1993, is the subject of an FBI criminal investigation centering on suspected bank fraud and embezzlement. The investigation was launched after he failed to show up for work Monday.

Rusnak's attorney, David Irwin, said yesterday that he had been in touch with authorities. The FBI declined to confirm or deny that Rusnak had surrendered since no warrant was issued

News of the scandal hit the European markets first as the first reports came out of AIB headquarters in Dublin. The company's stock took a 16 percent dive after officials announced it would nearly cut by one half its earnings in 2001. Similarly in the United States, its stock dropped just over 16 percent on the New York Stock Exchange.

"This announcement could not have come at a worse time with investors concerned about accounting irregularities and weak internal controls," said Eamonn Hughes, a banking analyst at ABN Amro. "The stock will be heavily punished in the short term on the back of this announcement and there will now obviously be a credibility issue hanging over the company for some time."

Rusnak, said to have had a fairly "modest" limit on his trading activities that concentrated on dollar-yen trading, was transacting foreign exchange deals, which should have been offset by currency option contracts. But he somehow was able to override Allfirst's internal controls and enter fictitious option contracts, leaving the bank exposed.

"The fraud was perpetuated over time with this trader operating within his limit," Bramble said.

Yet, analysts estimate Rusnak must have entered fake contracts valued at $750 billion to rack up $750 million in losses for the bank. The scandal was uncovered when authorities aggregated the transactions --numbered "not as big as hundreds" -- rather than evaluating them individually, Bramble said.

"The fictitious transactions created gave illusions of hedging," Bramble said.

When confronted about lowering the exposures, Rusnak apparently told a member of treasury management that any such move would hamper his investment strategies.

Officials are still scratching their heads, wondering how he managed to carry off the ruse, characterized by Bramble as a "sophisticated and well thought out fraud on this individual's part" and "very cleverly done over some period of time.

Besides Rusnak, Allfirst officials suspended four other employees, including the executive vice president/treasurer, the senior vice president responsible for Treasury Funds Management, the senior vice president for Investment Operations and a staff member.

At the same time, the bank suspended all foreign exchange trading operations except for customer service obligations.

Bramble attempted to play down the loss, saying the trading area is "a decimal point at best. It's an irrelevant part of the overall profit stream for Allfirst."

Still, Michael Buckley, AIB's chief executive, was quoted in the Irish Times, saying, "It's a very heavy blow to the bank. This was a complex and a very determined fraud. We will be writing off the money in our 2001 accounts."

Timeline

Rusnak was described by Allfirst CEO Susan Keating as "an employee who was, up until Monday, in good standing and who performed well" and "a solid performer." He apparently began his alleged misadventures last year.

As the year-end audit got underway, questions started to pop up about the foreign currency trading arena. Treasury management started to query Rusnak about his transactions.

By Monday, after a week of interrogations, Rusnak disappeared, although he apparently contacted attorney David Irwin, who, in turn, was in touch with the FBI and U.S. Attorney's office.

No one knows whether Rusnak personally benefited from his transactions. He earned about $85,000 a year with Allfirst.

Pat Ryan, AIB's group treasurer who flew into Baltimore from Dublin to take over the bank's money matters, said these types of scandals can be used for personal gain or to save face by covering up one mistake after another until the situation gets out of control.

"Some do it for profit; others get caught in the pride issue," said Ryan. "It starts with small mistakes and then snowballs."

But no one wanted to liken the scandal to Leeson's debacle which destroyed Barings Bank and Cost Japan's Sumitomo Corp. $2.6 billion. "Nick Leeson brought down the bank. This trader didn't bring down the bank," Bramble said.

Md.'s largest bank, Allfirst Financial, loses $750 million

Daily Record, The (Baltimore), Feb 7, 2002 by Daily Record Staff Business Writer

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