Lack of confirmation starts ball rolling

THE DISCOVERY: The first eyebrow was raised in the trading debacle when a supervisor noticed two trade tickets that did not have confirmations attached. By the next month, Allfirst former head of treasury Mr David Cronin had decided to close Mr Rusnak's trading positions

"The beginning of the end of Mr Rusnak's scheme came in early December 2001," according to the AIB report.

"The direct supervisor of the back-office employee charged with confirming foreign exchange options visited the employee's office and noticed on the employee's desk two trade tickets that did not have confirmations attached."

When the supervisor asked for confirmations, the employee said the trades did not require confirmations because they offset each other and were with Asian counterparts.

The supervisor said all trades required confirmations. The supervisor also said the trades did not offset each other because they had different expiry dates.

The supervisor assumed the trades had been confirmed when the employee did not subsequently report any problem with them.

Around the same time, Allfirst treasurer Mr David Cronin instructed that the bank's currency trading balance sheet position (the net risk) be reduced to below $150 million (€170 million).

When Mr Cronin returned from a holiday in the Republic in January, he noticed the balance sheet position had fallen below the new target. But in mid-January it suddenly spiked upward in one day to more than $200 million.

Mr Cronin also noticed at that point the December 2001 turnover in foreign exchange trading was $25 billion. "That greatly surprised him."

From this moment on Mr Cronin was very concerned about what Mr Rusnak was up to.

In mid-January Mr Cronin suggested to Mr Bob Ray, who was directly supervising Mr Rusnak, the possibility of closing down Mr Rusnak's trading positions. He thought that closing Mr Rusnak down would reveal any problems that existed.

When, at a staff meeting on Monday January 28th, 2002, Mr Cronin said Mr Rusnak's positions were being closed, Mr Ray said he expected Mr Rusnak would quit.

On Wednesday January 30th, 2002, the back-office supervisor heard of Mr Rusnak's positions being closed. He checked with the back-office employee to see if Mr Rusnak was doing any trades. The employee showed the supervisor two deal tickets and the supervisor noticed once again that there were no confirmations attached.

When asked, the employee said he had not confirmed the deals because they offset each other and involved Asian counterparties. The supervisor had the employee do a review and 12 unconfirmed trades were found.

"The supervisor ordered the employee to call the Asian counterparties for confirmations that night. The counterparties contacted by the back-office employee informed him that they either did not have the currency options on their books or that they did not trade such options at all."

The next day the most senior back-office manager called Mr Rusnak to his office to discuss the matter. The trader said he would get confirmations by the next morning.

On Friday morning, Mr Rusnak left 12 written confirmations on the desk of the back-office employee. Back-office personnel reviewed the confirmations and thought they looked bogus. They were. Mr Rusnak had created them on his personal computer, even creating counterfeit logos for the bogus counterparties. He stored the documents in a file called "fake docs".

The senior back-office manager met with Mr Rusnak and Mr Ray. The manager told Mr Ray the trades would have to be confirmed by phone.

"Mr Rusnak became angry. He said he was making money for the bank and that if the back office continued to question everything he did, they would drive him to quit. Mr Rusnak left the office for a walk outside."

Mr Ray said it was a back-office job to track down the confirmations. Shown the confirmations produced by Mr Rusnak, he agreed they looked odd.

Mr Ray "echoed Mr Rusnak's complaint that scrutiny would prompt Mr Rusnak to quit" and "warned that if Mr Rusnak left the bank, the loss of his profitable trading would force job cuts in the back office".

After 10 minutes Mr Rusnak returned from his walk. He repeated his threat to leave the bank but apologised for having walked out. He would do whatever he could to help confirm the trades, he said.

It was daytime Friday in Baltimore. The Asian markets were closed and phone calls could not be made until Sunday night. Mr Rusnak promised to give the phone number of the broker who arranged the trades to the back-office employee in charge of confirmations.

"Not having heard from Mr Rusnak, the employee called Mr Rusnak at his home around noon on Sunday, February 3rd. Mr Rusnak said he wanted to call the broker first to advise him that the employee would be calling, and promised the employee that he would give him the broker's number at nine o'clock that night.

"Mr Rusnak never called. The back-office employee, his supervisor and the senior back-office manager stayed at the office until one or two o'clock the next morning, trying in vain both to reach Mr Rusnak and to confirm the purported option trades with the Asian counterparties.

"Mr Rusnak failed to appear for work on Monday morning, February 4th, 2002. At that point, Mr Rusnak's supervisor (Mr Ray) and the senior back-office manager reported the bogus transactions to Allfirst's treasurer (Mr Cronin).

"After the treasurer and Mr Rusnak's supervisor drove to Mr Rusnak's house in a final but futile effort to find Mr Rusnak, the treasurer reported the problem to Allfirst senior management, who in turn informed AIB."

There followed an immediate attempt by AIB and Allfirst personnel to determine what exactly Mr Rusnak had been up to and specifically how much money was at issue.

Transactions involving 71 counterparties were examined. Of these, 19 were Asian and all transactions allegedly involving them were found to be bogus. For 47 counterparties no bogus transactions were found. For five counterparties unrecorded real options were found.

The losses incurred before 2000 were found to be relatively small. As of December 31st, 1999, the cumulative loss was $89.8 million. (Mr Rusnak got a bonus of $122,441 in 1999.) The loss was hidden by fictitious assets (fictitious options) that he'd placed on the Allfirst books. By year's end 2000, the losses had grown to $300.8 million. Again the losses were hidden by fictitious assets. Mr Rusnak was paid a bonus of $78,000.

By the end of the following year, Mr Rusnak had spent several months funding his activities through the use of unrecorded real options. The losses had ballooned to $674 million, with $293.2 million of this being hidden by bogus assets and $380.8 million being hidden by unrecorded liabilities.

Mr Rusnak was due a bonus of $220,456 for his work in 2001, his highest bonus yet. He was due to receive this money on February 8th, 2002, four days after the truth behind his trading was discovered.

The total loss from Mr Rusnak's trading as of February 8th, 2002, the end of the week the fraud was discovered, was $691.2 million. On Wednesday, February 6th, AIB chief executive Mr Michael Buckley went on RTÉ radio to disclose the fact of the loss.