Bank trader goes missing after £500m 'fraud'

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The Independent Online

Allied Irish Banks said today that a missing foreign exchange dealer at its US subsidiary, Allfirst, is suspected of stealing $750 million (£537m) with phony options deals.

The massive loss sent the bank's shares tumbling on European exchanges.

"We are hugely disappointed that our Allfirst control procedures failed to uncover this situation at an earlier stage," said Allied Irish Chief Executive Michael Buckley. "The investigation now under way will determine not only how it arose but also how we can guard against any recurrence."

The suspected fraud at the Baltimore–headquartered Allfirst Bank would be the biggest connected to a rogue trader since Singapore dealer Nick Leeson destroyed Barings Bank by piling up $1.4 billion (£1bn) in concealed losses in the mid–1990s.

Mr Buckley said the trader, John Rusnak,a father of two in his mid–40s from Pennsylvania on a salary of $85,000 (£60,000), could well have been working in collusion with others, possibly in Allfirst's control department or outside the firm.

Mr Buckley said middle–ranking Allfirst managers had confronted the trader by telephone last weekend when the magnitude of the fabricated trading documents was discovered following several weeks of investigation.

"We've had a fairly sophisticated fraud done on the basis of conspiracy, with the possibility of internal and external collusion that got round some of the control mechanisms in place," he said in Dublin.

Allied Irish's director for finance and risk, Gary Kennedy, said "alarm bells went off" when the trader didn't return calls on Sunday night, then didn't arrive for work Monday morning. He said the bogus trades dated back to early 2001 and included one shortly after Christmas.

But it wasn't until Monday night, they said, that Allfirst executives telephoned their Dublin bosses with the news. Buckley said he sent senior AIB managers on the first plane from Dublin on Tuesday morning, ordered several Allfirst staffers to be suspended, and asked the FBI to hunt down the trader.

The FBI visited the man's Pennsylvania home but only his wife was at home, Mr Buckley said. He laughed when a reporter suggested the trader might be on a cruise liner already.

"We don't have any definitive proof of collusion and we're going to have to carry our investigation further, face to face with the trader, to determine what happened," he said.

Allfirst has already suspended all foreign–exchange dealings except for over–the–counter retail transactions, he said.

While Allied Irish insisted its finances remained secure, the revelation increased fears of sloppy accounting in major businesses and dragged down shares of most leading British and Irish banks on the London and Dublin stock exchanges.

AIB is the biggest company on the Irish exchange, accounting for 12 per cent of the total market's value. Its shares suffered similar losses on the London Stock Exchange.

London banks immediately suspended foreign–exchange dealings with Allied Irish as the Dublin–headquartered bank struggled to explain how its auditors could miss such a large–scale fraud.

"An individual dealer entered into a variety of spot and forward foreign exchange trades, which were apparently offsetting foreign currency option positions also entered into by the same dealer," Allied Irish said in a statement.

While foreign–exchange traders normally purchase options contracts to hedge potential losses on actual foreign–exchange deals, the bank said, the trader had executed purchases of foreign currencies but produced fictitious purchases of options contracts.

"They were artificially entered into the Allfirst systems," the statement said.

Analysts said the size of the missing funds suggested the trader conducted fictional purchases at least 1,000 times that amount, or $750 billion, 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, lead analyst at NCB Stockbrokers in Dublin.

Analysts added that the scale of the fraud would cripple Allied Irish's longheld ambition to develop its U.S. operations, the group's largest risk outside Ireland.

Allied Irish, which is also a major player in banks in Poland, first invested in U.S. banks in 1983 with a minority stake in First Maryland Bancorp. Allied Irish eventually took control and merged First Maryland with another firm, Dauphin Deposit Corp., which it bought in 1997, to create Allfirst.

Allied Irish said Allfirst, which employs about 6,000 people, is one of the 50 largest banks in America and has about 250 branches and outlets concentrated in Maryland and Pennsylvania.

Mr Buckley said the financial group's financial future was secure and it would stick by Allfirst. Unlike the ill–fated Barings, he said, the bank generated little revenue as an investment house.

"We're not trying to disguise the fact that it's a heavy blow," he said. "But on the other hand, what drives our operating performance is our commercial and retail banking business, which accounts for 90 percent of our profits. We are resolute in our determination to make back, or make good, the damage that has been done here."

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