Citigroup gets a black eye in Rusnak caper

JUST WHEN you thought it was safe to walk down Wall Street again without two Dobermans to repel the white-collar muggers, Allied Irish Banks brings new allegations of misdeeds against Bank of America and Citigroup.

OK, the purported transgressions took place a few years ago, before the big New York financial houses were cleansed and absolved by St. Eliot. It's only the revelations of supposed wrongdoing that are new.

But the claims made by Allied Irish last week in a lawsuit in U.S. District Court in Manhattan, if true, offer new evidence that Wall Street operatives always have and always will act in the interests of 1) themselves and their bonuses 2) their firms and 3) their customers. In that order.

Both Citigroup and Bank of America say the case is without merit. The complaint claims that both banks helped John Rusnak hide hundreds of millions in currency-trading losses at Baltimore-based Allfirst Financial, which once was owned by Allied Irish and has since been sold.

The implied motive: to keep Allfirst as a customer and rack up huge trading commissions. At one point, according to the complaint, Rusnak threatened to fire BOA if he didn't get new financing at favorable terms and said via e-mail that it was "easy to figure out the P/L [profit/loss] consequence if we pull the entire relationship."

Rusnak pleaded guilty to federal fraud charges last year and was sentenced to 7 1/2 years in prison after losing $691 million making bad bets on the Japanese yen and other currencies.

Allied Irish has said that Rusnak began concealing his losses years before he was caught, and several supposed e-mail messages included in the lawsuit indicate that Rusnak's contacts at Citi and BOA knew he was hiding information from his Allfirst bosses. Even though BOA had a Web site that summarized trades and account balances, Rusnak allegedly asked BOA employees to send him separate versions of the same information.

"I understand I can download the info from Web site," Rusnak is said to have written one of his BOA interlocutors, "but ... I don't want my back office to have access to the Web site or any of the trade details."

If the case ever comes to trial, defense attorneys and witnesses may come up with plausible legitimate reasons for Rusnak to have hoodwinked his back office - the clerks who monitored and processed his trades.

But I can't think of any. Such a request should have rung bells but, if it did, apparently nothing happened. Rusnak made a similar request to Citi, according to the lawsuit.

Other actions by Rusnak should have raised suspicion. He supposedly asked Citi to stop mailing trade confirmations to his colleagues and, when letters kept arriving that conflicted with what he had reported to his own bosses, he became almost frantic.

"These confirms have to stop," he allegedly said in an e-mail to Citi. "My back office manager is very unhappy" and "thinks these are fake trades or something unethical."

Too bad that manager didn't follow up. The confirmations soon stopped, according to the lawsuit. Some of Rusnak's currency trades made no sense if, in fact, his aim was to earn money for Allfirst. The lawsuit says he repeatedly dealt in options that expired within hours, which Allied Irish says was unusual and intended to hide losses. In another instance, Rusnak allegedly had Citi and BOA execute futures trades that were light-years from the prevailing market price and cost Allfirst millions of dollars.

But while the action filed last week does not cast Citi and BOA in a flattering light, neither does it make the Allfirst managers look like geniuses. It echoes the internal Allied Irish report last year that found "inexperience, poor training, poor supervision and, in some cases, laziness" among the people who were monitoring Rusnak.

For example, brokers generally send monthly account statements to the finance and audit departments of their customers. It's a basic way for people outside the trading desk to keep an eye on activity. According to the suit, this never happened with the Rusnak accounts. Someone at Allfirst with any familiarity of Wall Street and compliance procedures might have picked up on this. Even so, the allegations in the complaint are another shiner for Wall Street, and especially for Citigroup, whose Salomon Smith Barney unit just agreed to pay $400 million to settle allegations that it recommended bad stocks to boost investment banking revenue.

Citigroup Chairman Sanford I. Weill worked in Baltimore in the late 1980s, when he ran Commercial Credit Corp. He must have rubbed elbows with people from Alex. Brown & Sons, whose motto was: "Customer first, firm second, employee third." Maybe Weill remembered the slogan. But he seems to have mixed up the order.

Related topic galleries: Citigroup Incorporated, Punishment, Bank of America Corp., Banking, Allied Irish Banks Plc

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