How Allfirst Trader Fudged Data

By Sean Gallagher  |  Posted 2002-03-14 Print this article Print

Online update: Lack of integration allowed a currency trader to pass bogus data to Allfirst's back office, parent company AIB reports.

Allied Irish Bank on Thursday spelled out its accusations against former Allfirst Financial currency trader John Rusnak in the wake of a scandal that lost the AIB subsidiary $691 million.

AIB's report of an internal investigation accuses Rusnak of "manipulating the weak control environment in Allfirst's treasury; notably, he found ways of circumventing changes in control procedures throughout the period of his fraud."

It also concludes that there was no internal collusion with Rusnak. Eugene Ludwig, former U.S. Department of the Treasury Comptroller of the Currency, led the investigation.

Allied Irish Banks officials said that Rusnak passed bogus trading data to employees in the back office, giving them different values for trades than the actual values entered into his Reuters trading desk software. Since the back-office employees didn't have access to the Reuters system data, they couldn't check the accuracy of the information passed to them.

Rusnak is also alleged to have provided forged Bank of America transaction slips to cover some of his trades.

The report details how Rusnak was able to exploit the configuration of Allfirst's back office software. He allegedly created bogus option trades with a one-day expiration period: "Mr. Rusnak's bogus options were designed to exploit weaknesses in the control environment around him. Allfirst prepared no reports listing the expiring one-day options. And so no one at Allfirst paid any attention to them.

"In part, this was due to the fact that the system being used by Allfirst for options did not automatically alert supervisors if such options were not exercised."

This gambit was aided by the fact that the back office didn't bother to check for confirmations of these trades. Rusnak initially used forged confirmation documents but stopped doing so in September 1998 when he "apparently managed to persuade an individual in the back office not to seek to confirm the purported pairs of options," says the report.

"There was no need for confirmations, he apparently argued, because there was no net transfer of cash," the report continues. "Perhaps this practice suited the convenience of the back-office staffer; the bogus options were purportedly with the Tokyo or Singapore branches of major international financial institutions, and to have made confirming telephone calls would have required the employee to work in the middle of the night."

AIB was apparently first made aware of Rusnak's trading activities by Bank of America last May, when an official at BofA brought Rusnak's complaints by e-mail about the terms of an options trade to their attention. In the e-mail, Rusnak made it clear that he was using the trade—which was in essence a $200 million loan—to finance further currency trading. As a result, AIB CEO Michael Buckley questioned Allfirst's executive vice president and treasurer, David Cronin, about the volume of Allfirst's currency trading.

Cronin reportedly reassured him that everything was in order. According to reports in the Irish Times, Rusnak told the FBI Cronin had him review the reply to Buckley before he sent it. Cronin started requesting profit-and-loss statements from the currency trading desk a month later.

As a result of the investigation, Cronin has been fired, as have Robert F. Ray, senior vice president of treasury funds management and Rusnak's immediate supervisor; Jan N. Palmer, senior vice president of investment operations; and Allfirst's Head of Internal Audit, Michael Husich.

Larry Smith, a clerk in the bank's operations unit, has also been dismissed. Smith, according to a report in the Financial Times, told the FBI that he was told at one point by Ray and Cronin not to bother to confirm any trades with Asian banks—the banks with which the majority of Rusnak's bad trades were made in bets on the value of the yen.

In addition, Allfirst Chairman Frank Bramble will take early retirement as a result of the scandal. Rusnak has already been fired and continues to cooperate with the FBI in its fraud investigation.

Sean Gallagher is editor of Ziff Davis Internet's enterprise verticals group. Previously, Gallagher was technology editor for Baseline, before joining Ziff Davis, he was editorial director of Fawcette Technical Publications' enterprise developer publications group, and the Labs managing editor of CMP's InformationWeek. A former naval officer and former systems integrator, Gallagher lives and works in Baltimore, Maryland.

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