AIB: Discovery of Fraud, and Magnitude of Losses
Discovery of the Fraud
Mr. Rusnak’s fraud scheme started unravelling in early December 2001. This happened when the back office supervisor came to know that the option trades were not being confirmed and the back office employee explained to him that they did not require confirmation because they offset each other and were with Asian counterparties.
The back office supervisor replied that all trades require confirmations. He also pointed out that the trades in question did not offset each other because the options had different expiration dates. He also directed the employee to confirm the two option trades, and all similar trades in the future.
Apart from this, in early December 2001, the Allfirst treasurer had directed that the currency-trading balance sheet position be reduced to below $150 million. By January the balance sheet position had fallen to $150 million but the treasurer noticed that in mid-january it had spiked to $200 million in one day. This increased his concerns about Mr. Rusnak's trading.
In January, the treasurer decided to close all Mr. Rusnak's positions and instructed the supervisor to do so.
Even after that they noticed that Mr. Rusnak had some small trading in options. On scrutiny they found these trades to have similar pattern with no confirmations. They then found that there were 12 such unconfirmed trades with the Asian counterparties. When they contacted the counterparties to confirm the trades they found that such trades did not exist at all.
They checked this with Mr. Rusnak who told that he will cross check with the brokers who handled these trades and will get the confirmations by next morning. By next morning, Mr. Rusnak had left twelve written confirmations on the back-office employee’s desk. The back-office personnel reviewed the confirmations and concluded that the confirmations looked bogus. Subsequent investigation revealed that Mr. Rusnak had created these confirmations. When the back office manager asked Mr. Rusnak to confirm the trades, he did not.
Mr. Rusnak failed to appear for work on Monday morning, February 4, 2002. At that point, Mr. Rusnak’s supervisor and the senior back-office manager reported the bogus transactions to Allfirst’s treasurer. The treasurer reported the problem to Allfirst senior management, who in turn informed AIB.
The Magnitude of Losses
The total loss figure from Mr. Rusnak’s trading as of February 8, 2002, the end of the week the fraud was discovered, was $691.2 million, which was the figure reported by Allfirst to the public on February 20. That amount consisted of $291.6 million in bogus assets, $397.3 in unrecognized liabilities, as well as $2.3 million in legitimate trading losses incurred in 2002.