Allfirst trader indicted for fraud over AIB losses

By Susan Falvella-Garraty

BALTIMORE — John Rusnak, the currency trader indicted last Wednesday for racking up over $691 million in losses for Allied Irish Bank’s American subsidiary, has become the public face of a company that U.S. government banking watchdogs considered “in trouble” even before Rusnak’s dealings were revealed.

A former Federal Deposit Insurance Corporation analyst revealed on condition of anonymity that Allfirst, one of the largest banks in the mid-Atlantic states, was thought to have weak management oversight.

“There were many concerns about Allfirst and some of its business practices, and, quite frankly, I was surprised that it was not taken over or given stronger warnings to get their act together,” the analyst said.

The FDIC monitors the health of banks in the United States and insures customers’ accounts. If the agency finds a bank is putting depositor’s money at undue risk, it can “take over” and supervise the bank operations.

Last week, a federal grand jury indicted the 37-year-old Rusnak on seven counts of fraud. Prosecutor Thomas DiBiagio told reporters during a brief news conference in Baltimore that it was just an incredible case.

“I think everything about this case surprised me — the magnitude of the loss, the extent of the fraud, the sophistication of the actual transactions, the sophistication of the coverup,” he said, describing the largest bank fraud case since the Nick Lesson scandal lost British Barings Bank more than a billion dollars in 1995.

“Not only did the defendant’s fictitious trades hide his losses, they also appeared to generate profits,” DiBiagio said. Rusnak conducted much of his business through a Mailboxes Etc. location in Manhattan.

Paul Geary, senior editor for Hoovers Online, a business analyst information service, observed that AIB’s very public airing of its failure to catch Rusnak’s losses should be a warning to other European banks looking to gain a presence in the American market.

“AIB’s experience parallels the Arthur Anderson corporate situation where the company was victimized by a small number of people who were doing bad things,” Geary said. “Andersen’s now losing clients every single day, and AIB can’t be absolved because they claim they weren’t aware of Rusnak was doing.”

The U.S. prosecutors and an FBI representative refused to confirm or deny speculation that Rusnak’s “pattern of deceptive conduct” to cover up his trading losses was aided by other Allfirst employees or other bank traders here in the U.S. What was apparent on Wednesday when Rusnak was indicted on seven counts of fraud in Baltimore was the rather mild treatment he received by law enforcement and prosecutors.

Rusnak had to surrender his passport, but after his indictment by a federal grand jury at the U.S. attorney’s office in downtown Baltimore, he was not forced to put up bail and told he may travel to several other adjacent states while he awaits trial. The trial is expected to take place in the next six to eight weeks.

Rusnak’s attorney stressed that his client arrived at the proceedings on his own accord, and that they were cooperating to a certain extent to authorities. It would be welcome news to AIB officials if other indictments were handed down in the case. Analysts have linked the ability for AIB to receive insurance compensation for the losses on whether Rusnak acted alone — and therefore AIB should have been able to monitor its own employee’s actions — versus if other were involved in other banks or institutions it would mitigate AIB’s complete culpability for monitoring the transactions.