Even if federal and state investigators find that John M. Rusnak didn't personally profit from dealings that might have cost Allfirst Bank hundreds of millions of dollars, experts say the Baltimore currency trader's actions are likely to draw criminal prosecution.
Allfirst said Wednesday that Rusnak lost $750 million in bad trades over the past year, then created fake records to cover up the losses. Four other Allfirst executives have been suspended while the investigation continues; it is unclear if more than one person was involved.
Authorities say Rusnak has not been charged.
"It's not a crime to make bad business decisions; [Rusnak's alleged] conduct itself does not appear to be criminal," said Orin S. Kerr, a law professor at George Washington University and a former federal prosecutor. "It's the coverup, not the initial lack of judgment."
There are a myriad of statutes that could be used in a criminal prosecution, such as the violation of the federal bank fraud statute. It is aimed at a person who "knowingly executes, or attempts to execute, a scheme or artifice to defraud a financial institution ... . by means of false or fraudulent pretenses, representations, or promises."
The penalty is a fine of not more than $1 million or up to 30 years in prison, although Kerr said the actual sentences handed down are usually far lighter.
"Making false entries in a federally insured institution isn't exactly something you can walk away from," said Laurie Holtz, senior partner at the forensic accounting firm Rachlin Cohen & Holtz in Miami.
The U.S. Attorney's Office and the FBI are investigating.
In recent years, prosecutors have given much more attention to fraud cases, said Dana Hermanson, an associate professor of accounting and director of research at the Corporate Governance Center at Kennesaw State University in Georgia.
It's hard to get much momentum for prosecution of "softer" financial fraud, he said, such as misrepresenting inventories or overestimating the amount of payments that are expected to come in from clients.
"But when it's fake documents throughout the system to cover bad bets, or misstatements of the company's financials," he said, "that's when the gloves come off and you're much more likely to see criminal charges."
Out of 200 fraud cases involving about 600 people over a decade, only 27 people went to jail as a result of the schemes, according to a study by Hermanson. But, he said, the Securities and Exchange Commission has since made an effort to work more closely with federal prosecutors to pursue more criminal cases.
The Allfirst incident has drawn comparisons to other prominent fraud cases.
The most notable is that of Nicholas W. Leeson, a trader at Britain's Barings Bank who lost $1.4 billion in 1995 by incorrectly guessing which way the Tokyo stock market would move. The bank collapsed and he plead guilty to charges of fraud and forgery. He was sentenced to 6 1/2 years in prison and served four.
In a similar case later that year, the head of the New York division of Japan's Daiwa Bank admitted to covering up trades that came to just more than $1 billion in losses over 10 years. The trader, Toshihide Iguchi, was sentenced to four years in prison.
The case of Joseph Jett also resurfaced in light of the Allfirst situation. Jett is the former Kidder, Peabody & Co. trader who was found guilty in a civil court of trying to inflate his bonuses by falsifying documents to make profits look bigger than they were. He was fined $200,000 and ordered to repay more than $8 million in bonuses.
If investigators don't find that Rusnak's actions constituted a "nasty" fraud that enriched him greatly, the SEC may decline to press criminal charges and could instead handle it with a civil suit, as was the case with Jett, said Charles Elson, director of the center for corporate governance at the University of Delaware.
For criminal charges, "they've got to show some kind of fraud or evil intent - intent to do damage to somebody else and enrich oneself," Elson said.
If Rusnak indeed defrauded Allfirst but can show that others higher up knew about it or even participated - and he cooperates with authorities - he might avoid criminal charges or be treated less harshly by prosecutors, said Dick Wiebusch, a senior partner at the Boston law firm Hale and Dorr LLP and a former federal prosecutor.
"His best situation is that somebody knew about it and there is somebody else he could point to," Wiebusch said. "His worst possible situation is that no one knew and he did it all by himself and was a complete failure at it."