The fraud was “carefully planned and meticulously implemented … over a lengthy period, and involved falsification of key bank records and documents”, the AIB report says. Rusnak (pictured, right) manipulated and circumvented “the weak control environment” and his trading activities “did not receive the careful scrutiny they deserved”. For an extended period, his trading was not monitored.
More damningly, the report makes clear that, even in the absence of fraud, risk managers, senior management and internal auditors did not appreciate the nature of Rusnak’s trading: “the mere scope of Mr Rusnak’s trading activities and the size of the positions he was taking warranted a much closer risk-management review.”
Rusnak is said to have “sold himself” as an arbitrage-style trader who could make money by running a large option book hedged in the cash market.
But the report found that much of his trading was, in fact, “linear, directional trading (bets that the market would move in a particular direction)”.
When he lost a lot of money by buying yen – which promptly declined in value – he hid his losses and the size of his positions by using bogus options, which also gave the appearance that his positions were hedged and seriously distorted the bank’s value-at-risk (VaR) computer models.
What Rusnak did was to log the simultaneous sale and purchase of two deep-in-the-money put options for identical premiums to the same counter-party – so the cash position netted out – even though the option he wrote was supposed to expire on the day it was purportedly written, but the other would expire about a month or so later. This made no sense as the two options should have had different premiums – and it was inexplicable that the counter-party should allow the option they bought to expire unexercised.
But Allfirst’s reporting system had no interest in one-day options. Shockingly, Rusnak persuaded an individual in the back office that it wasn’t necessary to get confirmation of the bogus transactions because there was no impact on the cash position. In any event, the settlements clerk would have had to stay in the office until late at night to phone the alleged counter-party in Tokyo or Singapore. An internal audit check in August 2000 sampled only one foreign exchange option trade, even though half of the 63 trades on the book at that time were bogus.
The report notes that Rusnak’s bonus scheme provided for a 30% share of any net trading profits in excess of five times his $112,000 salary.
He was due to receive a $220,000 bonus four days after the fraud was exposed; the bonus was not paid.
The report makes clear that the 30 days given them by AIB did not allow the investigators to conduct as thorough a review as may be necessary, nor did they have any power of subpoena over any of the “witnesses” interviewed.
But even though it’s couched in caveats, the report includes a number of recommendations. In particular, it says that AIB’s trading activities should be limited to those markets where it had “a real competitive advantage”, that the proper personnel should supervise trading, position size should be limited, and that AIB should use stress testing and analysis over and above VaR.
The 60-page AIB investigation, which was carried out by Promontory Financial Group and law firm Wachtell, Lipton, Rosen & Katz, is available from the investor relations section at www.aibgroup.com.