Case Study: John Rusnak $700 Million Allfirst Allied Irish Bank Fraud Case 2002
The $700 Million Case of John Rusnak Bank Fraud Case at Allfirst/Allied Irish Bank
John Rusnak is the man behind the famous Allfirst/ Allied Irish Bank fraud case of 2002. Prior to his appointment as a trader at Allfirst Bank in Maryland, Rusnak was an employee of Fidelity and Chemical Bank. He had a good track record in foreign exchange and trading hence his appointment to a similar position at Allfirst Bank.
Rusnak was at first a very good trader but he believed too much in the yen and this is how he ended up losing focus on the markets and ultimately spiraling out of control. He lost a total of $691 million dollars in rogue trading which cost the Allfirst Bank a lot more.
The Main Issues in the Rusnak $700 Million Bank Fraud Case
Allfirst bank was part of the biggest Irish Bank, Allied Irish Bank and was doing favorably well in the markets. By the time of the scandal, Allfirst had 260 branches in USA, mostly in Maryland, Washington D.C., Delaware, Pennsylvania and Virginia. At the time, Allied Irish bank had 31000 employees, 6,000 of which were based in the U.S. Majority of the U.S. workforce were employed at Allfirst.
In 1993, the Allfirst Bank sought to venture into real forex trading. The bank would shift from merely hedging to actually trading and aimed at earning real profits from this venture. To this effect, the bank hired John Rusnak because he was believed to be adept at matching options especially in forward contracts.
Rusnak was bullish on the yen and thus placed high bets on it in his trading. He believed that during the Japanese bubble burst, the yen had fallen quite hard and come back strongly hence it could not fall any further. In fact, in his view, the yen would always come back stronger than the dollar. So confident was Rusnak in his belief in the yen that he began trading without putting hedges on his trading. In forward contracts, a trader usually purchases foreign exchange for a cheaper value than the market prices, while hedging his position with a combination of put and call options. Rusnak however was so bullish that he failed to do this.
At first he succeeded in making profits and this gave him confidence. However, there were changes made to the Asian trading market and this upset the Asian currencies. As a result, the Japanese yen fell and Rusnak made heavy losses. In order to cover up this, he came up with fake documents and entries which enabled him to continue trading without his bank noticing the losses he was making. It was not until he asked for a huge sum of money to trade that his superiors begun suspecting the rogue trader. Subsequently, his secret was uncovered and he had to come out clean.
The consequences of John Rusnak’s Bank Fraud Case
On his part, John Rusnak was sentenced to seven and a half years in prison with a fine of $1million. He served 6 years after which he was released on good behavior. His case can still be resurrected depending on his consistency in paying his fine and also how much money he will make in future.
Allfirst was blamed for its laxity in the foreign exchange trading business because analysts said the treasury department and Rusnak’s superiors ought to have discovered the losses much earlier and contained them before they got to $700 million. Additionally, Allfirst was sold to another bank and around 1000 employees lost their jobs. The Allied Irish Bank Group stated that this move was not as a result of the losses made by the rogue trader but that it had been eminent and negotiations had began way before the losses were discovered.
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