The scheme that produced almost $700 million in losses for Allfirst Financial Inc., first thought to have occurred primarily in a 12-month period, actually went undetected for five years, officials acknowledged yesterday.
Allied Irish Banks PLC, the parent of Allfirst, reduced its losses from its originally stated $750 million to $691.2 million yesterday, and was forced to restate earnings for five years, dating to 1997.
The surprising developments represented a dramatic shift in the 2-week-old case and were seen as a blow to the bank's management, which somehow did not uncover the scheme, enabling the losses to mount.
There was a "serious breakdown in controls," said Michael Buckley, chief executive of Allied Irish Banks. Buckley added that he believes that more than one person might have been involved with John M. Rusnak, 37, of Baltimore, the currency trader who officials accuse of running the scheme.
"It would have been very difficult for him to do what he did without some collaboration of other people," Buckley said. "But the investigation is designed to pin down exactly how this happened and to whose benefit this was."
Rusnak is cooperating with federal authorities in the investigation by providing details of how Allfirst's foreign exchange unit worked, a highly placed source said yesterday.
The information Rusnak is providing is helping investigators piece together how the debacle occurred at the bank, and whether anyone else played a role in the huge losses.
Key to the federal probe is whether Rusnak made extra income by falsifying his trading records. If that is the case, "it would show that he is culpable ... by the sheer fact that he received extra money in his paycheck that was a direct result of fraud," the source said.
What Rusnak may be given in return for his cooperation remains unclear. Under some circumstances, prosecutors will charge defendants with a crime under the terms of a criminal information, which means the case will not go before a grand jury and suggests that a defendant is negotiating a plea agreement with authorities.
Federal prosecutors have refused to comment on the case.
The revelations yesterday were further evidence that the controls put in place by Allfirst's management broke down completely.
"It is unbelievable," said Lewis Sosnowik, a vice president of bank securities at Koonce Securities Inc., based in Bethesda. "It just blows my mind. It doesn't look to me like there was any kind of constant supervision" of Allfirst's foreign exchange operations.
Buckley acknowledged as much. "There is no question that there was a serious breakdown in controls in Allfirst's treasury," he said. "The fact that it was a very protracted breakdown does make it all the more serious, no question about that."
Buckley made his comments from company headquarters in Dublin, Ireland, during a conference call with reporters, analysts and investors to announce earnings for 2001. The magnitude of the scandal sheared year-end profit by about 50 percent, to $421.2 million. Without the huge currency trading loss, Allied's profit would have been $867.7 million.
The trading scandal caused Allfirst to incur a $36.8 million loss last year. The bank would have made $200.5 million if not for the loss. But the bank also had to restate earnings for the previous four years.
Allied Irish stunned financial markets Feb. 6 when it announced its allegation that Rusnak lost millions in foreign exchange markets. At the time, the company said that most of the losses had occurred in roughly a 12-month period.
But the depth of the alleged trading scheme was discovered when Allied Irish named Eugene A. Ludwig, a former top U.S. banking regulator, to lead an internal investigation.
Ludwig's review is continuing. He is expected to release a report to Allied Irish's board March 9.
Buckley said that the duration of Rusnak's activities indicates that the trader "acted in a most incredibly devious ... and determined way. This individual systematically identified each control point and systematically found a way around each control point."
Gary Kennedy, Allied Irish's group financial director, said that Rusnak was paid up to $1 million in the past five years in salary and bonuses.
Rusnak's attorney, David B. Irwin, has maintained that his client stole no money. "It's obvious he didn't steal any money from the bank," Irwin said. "If there are questions about his trading practices, that will all come out in the wash."
Allfirst said it became suspicious of Rusnak in late January after questioning the risks he had been taking. It discovered that foreign exchange losses mushroomed as Rusnak gambled that the Japanese yen would rise in value. When the yen plunged, the bank claims, he hid the losses by creating fictitious option trades and by overriding internal systems designed to detect irregularities.
As the losses mounted, Rusnak needed cash, so he wrote options at rates highly favorable to clients to generate premium income, Kennedy said.
In return, the bank received cash, which Rusnak used to replenish the bank's funding desk without recording the transactions, Kennedy said.
Allied Irish executives said that Ludwig's "very intense" investigation has shown that about 55 percent of the total losses were incurred in 2001 and this year and about 30 percent in 2000.
Buckley declined to comment on whether he would step down as a result of the scandal. It is also unclear what will happen to the two top Allfirst executives, Frank P. Bramble, chairman, and Susan C. Keating, its president and chief executive. Some observers think they could be terminated.
"The bloodletting is going to be on the local level," said Sosnowik, of Koonce Securities. "The guys who were running this thing in the States laid down on their job - this will be the sentiment by the people in Dublin. They are not going to blame themselves."