How Leeson's deceit went unchecked for months

This is the story, told for the first time in detail, of how Nick Leeson managed to bring down the Queen's bank. It is drawn from a private and confidential report prepared for the administrators of Barings in the immediate aftermath of the collapse.

What follows is based largely on conversations that investigators held with Tony Hawes, treasurer of Baring Securities Group Treasury, Tony Gamby, global head of settlements, and Brenda Grainger, head of futures and options settlement.

It shows that while Leeson acted with cunning and deceit, there was a parallel failure of management and control of breathtaking proportions. Leeson's trading activities went almost completely unchecked over a prolonged period of time and repeated expressions of concern were never properly acted on.

By 24 February this year, margin calls to meet Leeson's positions on the Singapore futures exchange had reached £306m.

The documents show that the requests for funds came at the end of each day's trading in Singapore from either Leeson or one of his staff. The requests were for round amounts, and were to cover the bank's and clients' trading positions.

The Singapore office would update client records in London via a data feed identifying clients by number. On the basis of this data the London settlements office would calculate the cash necessary to cover client margins.

The report shows that London appears to have assumed that any imbalance between cash requested by Leeson and client positions was to meet positions being run up in Singapore by another Barings business, Baring Securities Japan.

This was a false assumption because the Baring Securities Japan positions were actually funded by external banks and other parts of the Barings Group. The document reads: "There was no complete reconciliation to ensure funds remitted matched in total those required from clients or in respect of house positions."

The report continues: "The total unreconciled amount grew from £22m at 31 December 1993 to £306m as at 24 February 1995. The unreconciled balance in Barings books at the year end was £120m."

The investigators found meetings were held in late November or early December to discuss the concerns of Ron Baker, head of Barings' financial products group, and Mary Walz, head of equity financial products, that they were not getting sufficiently detailed answers to questions about Singapore's accounting records.

A report was commissioned from Jeremy Stunt, a senior Baring Securities executive.

According to the administrators' investigators, "The recommendations in the report, which appeared towards the end of December/early January, satisfied Baker and Walz on the question of funding costs. Hawes said, however, that the report had only dealt with the first half of the question and that a reconciliation of the client loans accounts was still required.

"As a result it was decided that Simon Jones (operations director, South Asia) and Leeson would undertake the required reconciliation task."

At the same time an executive, Gerald Ashley, was asked to go to Singapore to supervise the back office. However he declined to go.

Mr Hawes, "who was by then becoming increasingly concerned at the unreconciled position in Singapore", decided to visit Singapore on 6 February.

Mr Leeson had been misleading Simex, the Singapore market authority. "Each day Simex required Baring Futures Singapore to send a `large exposure' report listing client positions by code number."

The "initial margin" - the cash needed to back a client's futures and options trading position - "was calculated by a system called SPAN" and operated by Simex.

"Trades for the day were entered into BFS' (Baring Futures Singapore) CONTAC accounting system which should have been the source of the data required by SPAN.

"However instead of calculating the gross position, Leeson arranged for one client's position to be netted off against another's short position, thereby reducing the client margin calculated by SPAN.

"The principal netting was between the BSJ (Baring Securities Japan) Nikkei arbitrage client and a BFS errors account 88888 ...

"It was believed by BFS staff and directors to be a London account but it was never reported to London and it was shown in BFS books as one of their own.

"BFS accounting records generated customer statements in two parts. The white part was sent to the customer in most cases by fax. A blue copy was retained for office records. Leeson had given standing instructions to staff to shred the blue copy of a/c 88888 and to give him the top copy.

"At the end of each month it appears that Leeson would instigate a series of accounting entries to credit a/c 88888 with enough funds to reduce the large debit balance to a small amount, such as might be represented by genuine errors or London client balances.

"The contra was a series of fictitious receivables accounts - different ones were used at different month ends and at 31 12 94 the substantial balance was shown as a receivable due from Spear Leeds Kellogg.

"Entries would be reversed the next day or later if Leeson was out of the office... auditors queried the Spear Leeds Kellogg receivable and were shown a falsified confirmation. Later they were given manufactured evidence to show that it had been paid in the form of a credit to BFS' segregated client account at Citibank."

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Tax Manager / Accountant

£35 - £50k DOE: Guru Careers: A Tax Manager / Accountant (ACA / CA / CTA) is n...

Ashdown Group: Contracts Executive - City of London

£35000 - £37000 per annum + benefits: Ashdown Group: Contracts Executive - Cit...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree Group have been well esta...

Recruitment Genius: Call Centre Debt Collector - Multiple Roles

£21000 per annum: Recruitment Genius: This is an exciting opportunity to join ...

Day In a Page

Giants Club: After wholesale butchery of Idi Amin's regime, Uganda’s giants flourish once again

Uganda's giants are flourishing once again

After the wholesale butchery of Idi Amin's regime, elephant populations are finally recovering
The London: After 350 years, the riddle of Britain's exploding fleet is finally solved

After 350 years, the riddle of Britain's exploding fleet is finally solved

Archaeologists will recover a crucial item from the wreck of the London which could help shed more light on what happened in the vessel's final seconds
Airbus has patented a jet that could fly from London to New York in one hour

Airbus has patented a jet that could fly from London to New York in one hour

The invention involves turbojets and ramjets - a type of jet engine - and a rocket motor
10 best sun creams for kids

10 best sun creams for kids

Protect delicate and sensitive skin with products specially formulated for little ones
Tate Sensorium: New exhibition at Tate Britain invites art lovers to taste, smell and hear art

Tate Sensorium

New exhibition at Tate Britain invites art lovers to taste, smell and hear art
Ashes 2015: Nice guy Steven Finn is making up for lost time – and quickly

Nice guy Finn is making up for lost time – and quickly

He was man-of-the-match in the third Test following his recall to the England side
Ashes 2015: Remember Ashton Agar? The No 11 that nearly toppled England

Remember Ashton Agar?

The No 11 that nearly toppled England
Turkey-Kurdish conflict: Obama's deal with Ankara is a betrayal of Syrian Kurds and may not even weaken Isis

US betrayal of old ally brings limited reward

Since the accord, the Turks have only waged war on Kurds while no US bomber has used Incirlik airbase, says Patrick Cockburn
VIPs gather for opening of second Suez Canal - but doubts linger over security

'A gift from Egypt to the rest of the world'

VIPs gather for opening of second Suez Canal - but is it really needed?
Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Fashion editor, Alexander Fury, applauds a man who clearly has more important things on his mind
The male menopause and intimations of mortality

Aches, pains and an inkling of mortality

So the male menopause is real, they say, but what would the Victorians, 'old' at 30, think of that, asks DJ Taylor
Man Booker Prize 2015: Anna Smaill - How can I possibly be on the list with these writers I have idolised?

'How can I possibly be on the list with these writers I have idolised?'

Man Booker Prize nominee Anna Smaill on the rise of Kiwi lit
Bettany Hughes interview: The historian on how Socrates would have solved Greece's problems

Bettany Hughes interview

The historian on how Socrates would have solved Greece's problems
Art of the state: Pyongyang propaganda posters to be exhibited in China

Art of the state

Pyongyang propaganda posters to be exhibited in China
Mildreds and Vanilla Black have given vegetarian food a makeover in new cookbooks

Vegetarian food gets a makeover

Long-time vegetarian Holly Williams tries to recreate some of the inventive recipes in Mildreds and Vanilla Black's new cookbooks