John M. Rusnak, the Allfirst Financial Inc. currency trader who lost $691.2 million in what prosecutors called a "complex and sophisticated" scheme, was indicted Wednesday on federal bank fraud charges.
If convicted in one of the largest financial scandals in history, Rusnak could be sentenced to 30 years in prison and a $1 million fine. He is not charged with stealing money, but prosecutors said he reaped nearly $550,000 in bonuses as his fake trades falsely inflated bank profits.
The seven-count indictment alleges that Rusnak, 37, of Mount Washington, hid millions in losses over a five-year period by manipulating internal controls and entering fictitious trades and data into Allfirst's books and records.
To help avoid detection, the indictment says, Rusnak created a fictitious businessman with a mail drop at a Mail Boxes Etc. in New York to confirm a bogus currency trade with Allfirst's independent auditors.
"The charges are based on a deliberate pattern of deceit and deception," Maryland U.S. Attorney Thomas M. DiBiagio said at a news conference Wednesday at the federal courthouse in Baltimore. "I think everything about this case surprised me. This is a very complex, sophisticated crime with a very complex and sophisticated cover-up."
The indictment came four months after Baltimore-based Allfirst and its parent, Allied Irish Banks PLC of Dublin, Ireland, revealed the staggering losses and pointed the finger at Rusnak, who was hired as a trader in 1993.
The banks said in a statement Wednesday that they welcome the charges against Rusnak. From the outset, the banks said, they believed that they were "the victim of complex and sophisticated fraud, and these charges endorse that conclusion."
Rusnak has cooperated closely with the FBI and federal prosecutors, turning over his bank accounts, spending records and the hard drive to the laptop computer that he used at home for some of his trading activity.
The case appears likely to end in a plea agreement. Prosecutors and Rusnak's attorney, David B. Irwin, would not comment on the status of any negotiations, but both sides said that no deal had been reached.
Irwin said Wednesday that his client was nervous this week in expectation of the formal federal charges but was "doing much better than when I first met him" early this year.
Rusnak appeared briefly Wednesday before U.S. Magistrate Judge Beth P. Gesner. He did not enter a plea, but acknowledged that he understood the charges. An arraignment has not been scheduled, but Irwin said Rusnak could be back in court as early as next week.
Gesner agreed to release Rusnak without bail, a decision that Irwin called a relief to his client.
No one else has been charged in the case or was implicated in the 17-page charging document.
Rusnak, who has been at the center of the probe all along, was fired from Allfirst along with six co-workers and supervisors who failed to detect the losses. Those employees are: David M. Cronin, executive vice president and treasurer; Robert F. Ray, senior vice president of treasury funds management and Rusnak's immediate supervisor; Jan N. Palmer, senior vice president of investment operations; Larry Smith, a clerk in the bank's operations unit; Michael Husich, head of internal audit; and Lou Slifker, also with internal audit.
The bank has not suggested wrongdoing on their part.
Rusnak was indicted by a federal grand jury in Baltimore, empaneled specifically to hear evidence in the Allfirst case. DiBiagio would not say Wednesday whether the panel is still sitting, but stressed that the investigation is continuing.
The department will "turn over every rock and get to the bottom of every aspect of this case," DiBiagio said.
Rusnak used a number of methods to conceal losses and make it look as if he were booking profits for Allfirst, according to the indictment.
He created fake trades and entered them into the bank's profit and loss statements. The false entries hid the fact that he was operating over his trading limit, which allowed him to make more trades. The false entries also disguised that he was taking on high levels of risk and losing money.
Rusnak was able to make very large trades by setting up agreements with Citibank, Bank of America and Merrill Lynch. The accounts, called prime brokerage accounts, enabled him to make trades in the companies' names and allowed him to "conceal the details of his daily trading activity and to enter false and fictitious transactions into the books and records of the bank," the indictment says.
In March, Citigroup Inc. fired two traders who did business with Rusnak, but the company declined to say why they were terminated. It said the dismissals were not connected to foreign exchange trading.
Rusnak's appetite for trading was voracious, prosecutors say, and to fund it, he sold $300 million in "deep in the money" options, which they referred to as "synthetic loans," to four money center banks and a larger brokerage house. The options enabled him to generate large cash payments to the bank, but proved to be an even larger liability when they came due.
To conceal the transactions, Rusnak removed the outstanding liabilities from the banks' books, which helped him hide losses.
He also rented a mailbox around Jan. 20, 2001, and created a fictitious businessman, David Russell, to provide Allfirst's independent auditors with a false confirmation of a fake option contract that Rusnak had entered into the bank's books.
"He was a very, very smart young man who knew his business," DiBiagio said.
He said investigators believe that most of the lost money was "diffused in the market."
Wednesday's indictment charges Rusnak with one count of bank fraud and six counts of making "false entries" in bank records under a federal law that has been widely used in bank crimes. To prove the charges, prosecutors must show that Rusnak intended to deceive Allfirst executives and that he filed phony records.
If Rusnak is convicted, his cooperation with prosecutors could play an important mitigating role at sentencing.
The charges carry a maximum prison term of 30 years, but how much time would actually be served is determined by complex federal sentencing guidelines.
Those guidelines give a considerable break to defendants such as Rusnak who have no criminal record and who quickly acknowledge their roles in crimes and help investigators. But the guidelines also would weigh the extensive planning that went into the crime and the staggering amount of the loss.
Rusnak's case has been assigned to Chief U.S. District Judge Frederic N. Smalkin, a Reagan appointee who has served on the federal bench in Baltimore since 1986. The case is being prosecuted by one of the city's senior federal prosecutors, Stephen M. Schenning, who served as U.S. attorney in 2001.
Assistant U.S. Attorney Steven M. Dunne is working with Schenning on the case. Dunne is a former litigation partner at the Baltimore offices of Wilmer, Cutler and Pickering and a former clerk for Supreme Court Justice David H. Souter.
If convicted in one of the largest financial scandals in history, Rusnak could be sentenced to 30 years in prison and a $1 million fine. He is not charged with stealing money, but prosecutors said he reaped nearly $550,000 in bonuses as his fake trades falsely inflated bank profits.
The seven-count indictment alleges that Rusnak, 37, of Mount Washington, hid millions in losses over a five-year period by manipulating internal controls and entering fictitious trades and data into Allfirst's books and records.
To help avoid detection, the indictment says, Rusnak created a fictitious businessman with a mail drop at a Mail Boxes Etc. in New York to confirm a bogus currency trade with Allfirst's independent auditors.
"The charges are based on a deliberate pattern of deceit and deception," Maryland U.S. Attorney Thomas M. DiBiagio said at a news conference Wednesday at the federal courthouse in Baltimore. "I think everything about this case surprised me. This is a very complex, sophisticated crime with a very complex and sophisticated cover-up."
The indictment came four months after Baltimore-based Allfirst and its parent, Allied Irish Banks PLC of Dublin, Ireland, revealed the staggering losses and pointed the finger at Rusnak, who was hired as a trader in 1993.
The banks said in a statement Wednesday that they welcome the charges against Rusnak. From the outset, the banks said, they believed that they were "the victim of complex and sophisticated fraud, and these charges endorse that conclusion."
Rusnak has cooperated closely with the FBI and federal prosecutors, turning over his bank accounts, spending records and the hard drive to the laptop computer that he used at home for some of his trading activity.
The case appears likely to end in a plea agreement. Prosecutors and Rusnak's attorney, David B. Irwin, would not comment on the status of any negotiations, but both sides said that no deal had been reached.
Irwin said Wednesday that his client was nervous this week in expectation of the formal federal charges but was "doing much better than when I first met him" early this year.
Rusnak appeared briefly Wednesday before U.S. Magistrate Judge Beth P. Gesner. He did not enter a plea, but acknowledged that he understood the charges. An arraignment has not been scheduled, but Irwin said Rusnak could be back in court as early as next week.
Gesner agreed to release Rusnak without bail, a decision that Irwin called a relief to his client.
No one else has been charged in the case or was implicated in the 17-page charging document.
Rusnak, who has been at the center of the probe all along, was fired from Allfirst along with six co-workers and supervisors who failed to detect the losses. Those employees are: David M. Cronin, executive vice president and treasurer; Robert F. Ray, senior vice president of treasury funds management and Rusnak's immediate supervisor; Jan N. Palmer, senior vice president of investment operations; Larry Smith, a clerk in the bank's operations unit; Michael Husich, head of internal audit; and Lou Slifker, also with internal audit.
The bank has not suggested wrongdoing on their part.
Rusnak was indicted by a federal grand jury in Baltimore, empaneled specifically to hear evidence in the Allfirst case. DiBiagio would not say Wednesday whether the panel is still sitting, but stressed that the investigation is continuing.
The department will "turn over every rock and get to the bottom of every aspect of this case," DiBiagio said.
Rusnak used a number of methods to conceal losses and make it look as if he were booking profits for Allfirst, according to the indictment.
He created fake trades and entered them into the bank's profit and loss statements. The false entries hid the fact that he was operating over his trading limit, which allowed him to make more trades. The false entries also disguised that he was taking on high levels of risk and losing money.
Rusnak was able to make very large trades by setting up agreements with Citibank, Bank of America and Merrill Lynch. The accounts, called prime brokerage accounts, enabled him to make trades in the companies' names and allowed him to "conceal the details of his daily trading activity and to enter false and fictitious transactions into the books and records of the bank," the indictment says.
In March, Citigroup Inc. fired two traders who did business with Rusnak, but the company declined to say why they were terminated. It said the dismissals were not connected to foreign exchange trading.
Rusnak's appetite for trading was voracious, prosecutors say, and to fund it, he sold $300 million in "deep in the money" options, which they referred to as "synthetic loans," to four money center banks and a larger brokerage house. The options enabled him to generate large cash payments to the bank, but proved to be an even larger liability when they came due.
To conceal the transactions, Rusnak removed the outstanding liabilities from the banks' books, which helped him hide losses.
He also rented a mailbox around Jan. 20, 2001, and created a fictitious businessman, David Russell, to provide Allfirst's independent auditors with a false confirmation of a fake option contract that Rusnak had entered into the bank's books.
"He was a very, very smart young man who knew his business," DiBiagio said.
He said investigators believe that most of the lost money was "diffused in the market."
Wednesday's indictment charges Rusnak with one count of bank fraud and six counts of making "false entries" in bank records under a federal law that has been widely used in bank crimes. To prove the charges, prosecutors must show that Rusnak intended to deceive Allfirst executives and that he filed phony records.
If Rusnak is convicted, his cooperation with prosecutors could play an important mitigating role at sentencing.
The charges carry a maximum prison term of 30 years, but how much time would actually be served is determined by complex federal sentencing guidelines.
Those guidelines give a considerable break to defendants such as Rusnak who have no criminal record and who quickly acknowledge their roles in crimes and help investigators. But the guidelines also would weigh the extensive planning that went into the crime and the staggering amount of the loss.
Rusnak's case has been assigned to Chief U.S. District Judge Frederic N. Smalkin, a Reagan appointee who has served on the federal bench in Baltimore since 1986. The case is being prosecuted by one of the city's senior federal prosecutors, Stephen M. Schenning, who served as U.S. attorney in 2001.
Assistant U.S. Attorney Steven M. Dunne is working with Schenning on the case. Dunne is a former litigation partner at the Baltimore offices of Wilmer, Cutler and Pickering and a former clerk for Supreme Court Justice David H. Souter.