"Rogue Traders and Risk Culture" - OpRisk North America PDF

Titre de la présentation
OpRisk North America 2012:
“Rogue Traders and Risk Culture”
Neil Roth
BNP Paribas
Oversight of Operational Permanent Control
March 22, 2012
Rogue Traders and Risk Culture
Table of Contents
Purpose 3
Definition of "Rogue Trader" 4
Profile #1: Dany Dattel 5
Profile #2: Nick Leeson 13
Profile #3: Toshihide Iguchi 20
Profile #4: Yasuo Hamanaka 31
Profile #5: John Rusnak 38
Profile #6: Jérôme Kerviel 45
Profile #7: Kweku Adaboli 55
Bad Traders, not Rogue Traders 60
Rogue Trader Heat Map 61
Fraud Diamond 62
Lessons Learned: Shoring Up Defenses 67
Epilogue - Profile #8: William Pullinger 68
Contact Information 72
Disclaimer 73
End of Presentation 74
March 22, 2012 2

Purpose
The purpose of this presentation is to examine the most infamous Rogue

Trading incidents of all time from an Operational Risk Management perspective.
By going into more detail than is typically available in Ops Risk books or news
reports, we’ll be able to get a more accurate view of the similarities and
differences between the frauds, and the role that Risk Culture played in
facilitating the losses.
March 22, 2012 3

Definition of “Rogue Trader”
A “Rogue Trader” is someone who trades either a specific product without

authorization, or an amount without authorization. Most rogue trades involve a
limit violation of some sort, where the trader has exceeded a specific $ amount.
In most cases, the rogue trader will attempt to conceal the unauthorized trades.
Rogue Trading is not in and of itself illegal - it’s a violation of company policies
and procedures. However, many of the things that accompany rogue trading
(such as accounting fraud, forged documents, destroyed records, etc.) are illegal.
When a rogue trader goes to jail, it’s usually because of these things.
March 22, 2012 4

1. The Rogues:
Dany Dattel
March 22, 2012 5

Dany Dattel
Alleged Rogue Trader: Dany Dattel

Company: Bankhaus Herstatt
Trading Losses: ($480,000,000)
• Iwan Herstatt founded Bankhaus Herstatt in 1956,

in Cologne, West Germany.
• Dany Dattel was born in 1940. In 1944, the Nazis
arrested his mother, and the two of them were
imprisoned in Auschwitz for several months
(the Labor camp, not the Death camp). As a young
man, he wanted to be an actor. But, ultimately, he
decided to pursue a career in finance.
• Dattel joined Bankhaus Herstatt in 1958, as a Dany Dattel
trainee on the foreign exchange trading desk.

• In 1967, he was named Head F/X Trader. The F/X desk was packed with state
of the art computers, monitors, and telephones. Iwan Herstatt nicknamed the
area "Space Station Orion“ and called Dattel’s team the "Golden Youth."
March 22, 2012 6

Dany Dattel
• The pinnacle of Dattel’s career was in 1973.

• With the Deutsche Mark pegged to the Dollar and the
Dollar pegged to Gold in the waning days of the “Gold
Standard,” the Dollar was convertible in Gold at
$44/ounce. Dattel noticed that the value of the Dollar was
around $70/ounce in “gray” Markets, while the Deutsche
Mark seemed to be stable.
• Dattel became convinced that the Dollar would plummet
versus the Mark when America left the Gold Standard,
and when F/X rates floated freely. Dattel spoke to his Iwan Herstatt
superiors, and got permission to make a huge bet against

the Dollar.
• In early 1973, the Nixon administration fully abandoned the Gold Standard.
• On February 28, 1973, Dattel sold $1 Billion for 3 Billion Marks, a rate of 1:3.
• Over the following months, the Dollar plunged versus the Mark.
• On May 31, 1973, Dattel closed out his position, buying back the $1 Billion for
2.5 Billion Marks, a profit of 500 Million Marks ($200 Million).
March 22, 2012 7

Dany Dattel
• The trade made Dattel a millionaire, and a star within

Bankhaus Herstatt. Some junior members of his team
bought Porsches.
• After his epic trade, Dattel was given carte blanche, and
Bankhaus Herstatt
his team traded more or less as they pleased, routinely
exceeding their trading limits.
• While these limit violations were technically rogue trades because they were
not authorized, Dattel did not conceal them, and reported the profits and losses
accurately.
• In September 1973, Dattel accumulated an enormous unauthorized position in
Marks versus Dollars. But Marks depreciated, resulting in big losses. Now,
rather than reporting the losses, Dattel decided to hide them, and try to trade
his way back to profitability. The new trades almost always lost money.
• This pattern continued through the early part of 1974. Dattel took increasingly
large positions, and would conceal the losses if the trades lost money.
• The stress got to Dattel, who kept a bowl of tranquilizers on his desk.
• On the street, rumors began to circulate that the bank was in trouble.
March 22, 2012 8
Dany Dattel
• Internal auditors approached him about rumors that he had lost huge amounts
of money in Marks versus Dollars. He told them that the position was hedged
with a winning position in Swiss Francs versus Marks. The auditors could not
see the hedge, and reported their findings to management.
• In March 1974, West German regulators sent auditors to evaluate Dattel’s
trading book. They found an unhedged long position of $3.2 billion Dollars
versus 8 billion Marks. This single position was four times larger than Bankhaus
Herstatt’s 2 billion Marks ($800 million) in operating capital.
• Regulators knew that if the Dollar plunged against the Mark, Bankhaus Herstatt
would be insolvent. They tried to find a buyer. Deutsche and Commerzbank
were approached, but wanted to know the extent of any losses first. The
regulators called Iwan Herstatt, but he denied knowing anything about the huge
position, and anything about concealed losses. Herstatt then met with Dattel.
• Dattel himself did not know the exact amount of the concealed losses. On June
11, 1974, he told regulators that the losses totaled ($25 Million). On June 16, he
revised the figure to ($208 Million). A few days later, he revised the figure again
to ($480 Million). When notified of this, Deutsche Bank and Commerzbank
pulled out of a possible deal to buy Bankhaus Herstatt.
March 22, 2012 9
Dany Dattel
• The regulators decided to close the bank. They chose a time in the afternoon
when West Germany was playing Yugoslavia in a World Cup soccer game,
thinking that most bank employees would not be at their desks, and that most
depositors would be temporarily distracted by the game.
• When the regulators closed the bank, Bankhaus
Herstatt had received the Mark legs of the foreign
currency transactions that were scheduled to
settle that day, but had not sent out the Dollar
legs that they owed.
• Twelve firms had sent Bankhaus Herstatt a total
of $620 million worth of Marks. These banks
were now de facto unsecured creditors of Confusion in Cologne as Bankhaus Herstatt is shuttered.
Bankhaus Herstatt.
• This caused mayhem in the world financial system. Rumors circulated that
some of the twelve banks were now insolvent. Their identities were not known,
so many banks stopped making payments to each other.
• Liquidity dried up, and the Clearing House Interbank Payments System
(CHIPS) stopped functioning for several days.
March 22, 2012 10
Dany Dattel
• It was months before confidence in the world banking system was restored.
• Criminal prosecutions in the wake of the failure of Bankhaus Herstatt began in
1979. Ultimately, six employees of Bankhaus Herstatt (including three of
Dattel’s traders) were found guilty of various charges, and served between 2-7
years each in prison. Iwan Herstatt himself was found guilty of breach of trust,
and sentenced to 2 years probation.
• Interestingly, Dany Dattel was never tried. As Dattel’s legal troubles mounted,
he began to act erratically. His attorney told the presiding judge that Dattel was
showing signs of KZ Syndrome, a dangerous form of Post Traumatic Stress
Disorder that has a high suicide rate. Dattel’s KZ Syndrome was supposedly
related to the time he spent as a child in Auschwitz. The judge agreed. Citing a
Denazification law from 1946 that sought to reduce the number of prison
suicides, he decided not to prosecute Dattel.
• In the aftermath of the event, a whole new category of risk came into being,
called “Settlement Risk.” Settlement Risk (also known as “Herstatt Risk”) is the
risk that one party in a transaction will default after the other party has met
their obligations.
March 22, 2012 11

Dany Dattel
• It should be noted, however, that Bankhaus Herstatt did not fail because of
Settlement Risk. Regulators closed Bankhaus Herstatt because they had
insufficient capital relative to the size of their exposures.
• At the end of 1974, in response to the failure of Bankhaus Herstatt and the
ensuing chaos in the financial system, the G-10 countries formed the Basel
Committee on Banking Supervision, under the auspices of the Bank for
International Settlements (BIS).
• In 1988, the committee authored the Basel Capital Accord.
• Revised Capital Accords commonly known as “Basel II” and “Basel III” were
introduced in the subsequent decades.
March 22, 2012 12

2. The Rogues:
Nick Leeson
March 22, 2012 13

Nick Leeson
Rogue Trader: Nick Leeson

Company: Barings
Trading Losses: ($1,300,000,000)
• Nick Leeson was born in 1967 in Watford.

• Leeson wanted to go to college, but he failed the
qualifying exam in mathematics. So, he left school
and got a job with a bank in London.
• In 1989, he took a job in the back-office at Barings.
• In 1991, Barings'branch in Indonesia was
experiencing problems in their trade support area.
Leeson was sent to Indonesia as part of a trouble
shooting team. Nick Leeson
• Leeson' s performance as a member of the team impressed his superiors. So,

in 1992, when Barings began setting up a futures trading operation in
Singapore, Leeson was offered the opportunity to manage the back-office. He
accepted the offer, and relocated to Singapore with his wife Lisa.
March 22, 2012 14

Nick Leeson
• The Singapore office had a shortage of traders, so Leeson asked the Home
Office if he could be a trader. They agreed to the move. He remained in charge
of the back-office while he traded.
• Leeson’s first trading assignment was as an arbitrageur covering the Nikkei
index. He monitored the price of Nikkei futures in the financial markets in
Singapore and Osaka. If he saw a large enough price difference in the two
markets, he was supposed to simultaneously buy the less expensive contracts,
and sell an equal number of the more expensive ones. The Market Risk was
minimal, because Barings would be long and short an equal number of Nikkei
futures. The difference in the purchase and sales prices represented the profit
or loss for Barings.
• Soon after he began trading, one of his back-office clerks made an error which
cost Barings $32,000. Leeson didn‘t want this person to get into trouble, so he
booked the loss to error account 88888, and suppressed the entry so that it
would not appear in management reports. This worked – Leeson’s superiors in
London did not find out about the error. Ominously for Barings, Leeson now
knew how to hide losses.
March 22, 2012 15

Nick Leeson
• Leeson started speculating in the futures markets. Like any trader, he had
good and bad days. But, because Leeson always reported his profits while
rarely reporting his losses, his reported P&L was much better than his actual
P&L.
• Leeson’s reported P&L impressed his colleagues and his superiors, and he
started to get a reputation as a top trader. However, by the end of 1992,
Leeson had hidden losses totaling ($3.6 Million) in account 88888.
• In 1993, Leeson' s reputation continued to grow. He was the subject of
newspaper and magazine articles, and was seen as one of the most dynamic
young traders in Singapore.
• Barings gave Leeson more and more autonomy to trade. The Singapore
office’s profit ostensibly increased by $14 million in 1993, due almost entirely to
Leeson' s seemingly profitable trading book. What they did not know, was that
Leeson’s actual trading results were terrible.
• As his losses mounted, Leeson had to ask London for cash to cover margin
calls. Leeson told his superiors that the underlying trades were for customers.
When asked for documentation, he faxed them deposit tickets that he had
forged. Management believed him, and honored his requests.
March 22, 2012 16
Nick Leeson
• Desperate to recoup his losses, Leeson kept making bigger and bigger bets,
all the while hiding his losses in account 88888. By August 1994, the debit
balance in account 88888 was ($332 million). By the end of the 1994, the
balance was ($512 million). Barings was now on the precipice of financial ruin.
• At the end of 1994, Leeson’s deceptions were almost discovered by Coopers &
Lybrand, Barings’ external auditors. In order to cover some losses, Leeson
fabricated a $79 Million credit that had ostensibly been paid to Barings by
Spear Leeds. Coopers & Lybrand asked Leeson to contact Spear Leeds and
ask them to fax over a copy of the payment instructions. Leeson forged the
document and faxed it to the auditors. He was careful to change the “Fax
Number” field on the watermark of the fax so that it appeared to have been
sent from a fax machine at Spear Leeds. However, Leeson mistakenly did not
change the “Name” field on the watermark. Had the auditors looked more
closely at the fax, they would have noticed that it was not sent from “Spear
Leeds.” Rather, it was sent from “Nick and Lisa.” Meaning, it was sent from the
fax machine in the Leesons’ apartment.
• Coopers & Lybrand’s final report rated the controls in Barings’ Singapore office
to be “Satisfactory.”
March 22, 2012 17

Nick Leeson
• With the Nikkei at 19,000, Leeson became convinced that it would rise. So, he
bought 10,000 "straddles" on the Nikkei trading between 18,500 and 21,500.
Leeson’s trade was undone when, on January 17, 1995, a major earthquake
caused significant damage in Kobe, Japan. The Nikkei fell 7%, thereby making
the straddles unprofitable.
• Leeson then went all-in in what would prove to be the position that finally broke
Barings. He bought 20,000 futures contracts on the Nikkei @ $180,000 each,
for a nominal value of $3.6 Billion. Because of the immense size of the
position, if the markets moved sharply against him, Barings would not survive.
• At first, the trade was profitable. The Nikkei started climbing and by February
6, 1995, Leeson had made $200 Million on the contracts.
• But shortly thereafter, the Nikkei plummeted again. In the end, the losses on
this one trade totaled ($900 Million).
• Leeson was now often seen vomiting in the bathroom near the trading floor.
On February 23, at the end of the trading day, he left a note on top of his desk.
It said, "I'
m sorry."
March 22, 2012 18

Nick Leeson
• Leeson knew that he would be jailed for fraud

once his activities were uncovered. He wanted
to serve his time in the UK rather than
Singapore. So, he and his wife fled the country.
• Meanwhile, internal auditors uncovered his
frauds. On February 29, Barings declared
bankruptcy under the weight of ($1.3 Billion) of
trading losses incurred by Leeson. What was The World’s Most Wanted Man in police custody.
left of Barings was purchased by ING for £1.
• Leeson never made it back to the UK. On March 2, he was arrested in
Germany, and flown back to Singapore to face criminal prosecution.
• On December 1, 1995, Leeson pled guilty to two counts of fraud and forgery,
and was sentenced to 6.5 years in prison. He was released after serving four.
• Leeson published a book called “Rogue Trader.” The book was later turned
into a movie, with Ewan McGregor playing Nick Leeson.
• Leeson currently resides in Ireland. Until 2011, he was the CEO of the Irish
soccer team Galway United.
March 22, 2012 19

3. The Rogues:
Toshihide Iguchi
March 22, 2012 20

Toshihide Iguchi
Rogue Trader: Toshihide Iguchi

Company: Daiwa
• Toshihide Iguchi was born in Kobe, Japan in 1951. In 1971, he

moved to the U.S. He graduated from Southwest Missouri State
University in 1975.
• His first job after college was selling used cars. In 1976, his
father got him a job in the back-office at Daiwa Bank in
Manhattan.
• In 1984, he was promoted to Trader, and started trading U.S. Treasury Bonds.
• Daiwa’s NY office was small. Because of his back-office experience, Iguchi
was allowed to do all of his own bookkeeping and financial reporting while he
was trading. Daiwa had no firewall between the front and back-office.
• Iguchi’s problems began when he lost $200,000 on a bond trade. He
concealed the loss on Daiwa’s books, and then tried to recoup the money
through more aggressive trading. However, the new trades also lost money.
Undeterred, he kept increasing his bets, only to lose more money.
March 22, 2012 21
Toshihide Iguchi
• Daiwa’s custodian in the U.S. was Bankers Trust.

• When Iguchi lost money on a bond trade, he would secretly sell a bond that
they Daiwa had in inventory, and use the proceeds to pay the counterparty.
• When he received Daiwa’s monthly account statement from Bankers Trust
showing the sale of the bond, he would replace it with a fake one which
indicated that the securities were still in custody.
• If a customer tried to redeem a bond that Iguchi had already sold, he would get
the proceeds by selling another bond that Daiwa had in inventory at Bankers
Trust.
• Then, he would produce a series of fake confirms and forged documents that
made it seem to the customer that their bond had been the one that was just
sold.
March 22, 2012 22

Toshihide Iguchi
• Iguchi also traded futures contracts.

• While he was responsible for the settlements and bookkeeping of his own
bond trades, he did not have the same level of control over futures trades. This
meant that any losses he incurred on futures trades were much more likely to
be detected than losses on bond trades.
• When he lost money on a futures trade, he would execute a “basis trade” to
move the loss out of his futures trading account, and into his bond trading
account, where he could then secretly sell a bond from Daiwa’s inventory to
pay for the loss, while at the same time concealing both the trading loss and
the sale of the bond on Daiwa’s books.
• Basis trades bypass cash settlement in favor of the physical settlement of the
contract’s underlying asset. The terms of basis trades are flexible, in that their
values do not have to be set at the market price. Instead, they can be set
anywhere between the day’s high and low prices, as long as the terms are
agreed upon by both parties involved in the trade.
March 22, 2012 23

Toshihide Iguchi
Futures Trade:
• If Iguchi made money on a futures • Day’s Range = 100-110
contract, he would simply report it. • Purchase Price = 108
• End Price = 102
• However, if he lost money on a futures • Profit/Loss = -6 (102-108=-6)
----------------------------------------------
contract because it fell in price, he Basis Trade - Futures Side:
would do a basis trade with the dealer, • Value (set at Day’s High) = 110
and ask for the value to be set at the • Purchase Price = 108
• Profit/Loss = +2 (110-108=2)
day’s high.
Basis Trade - Bond Side:
• This is how the trades looked to Iguchi’s • Value (set at Day’s High) = 110
dealer: • End Price = 102
• Profit/Loss = -8 (102-110=-8)
-----------------------------------------------
Basis Trade - Net:
• Futures Side Profit/Loss = +2
• Bond Side Profit/Loss = -8
• Net Profit/Loss = -6 (2-8=-6)
• The Futures side of the basis trade was profitable, because the purchase price
was lower than the day’s high. The Bond side of the basis trade was
unprofitable, because the market price was lower than the day’s high price.
Note that the Net of the two basis trades is equal to the original value of
Iguchi’s futures trade. So, to the dealer, the machinations seemed legitimate.
March 22, 2012 24
Toshihide Iguchi
• However, to conceal his losses, Futures Trade:

• Day’s Range = 100-110
Iguchi would forge a trade • Purchase Price = 108
confirmation to change the value of • End Price = 102
the “Basis Trade - Bond Side” from • Profit/Loss = -6 (102-108=-6)
----------------------------------------------
the day’s high price to the current Basis Trade - Futures Side:
market price. • Value (set at Day’s High) = 110
• Purchase Price = 108
• This made the Bond side of the basis • Profit/Loss = +2 (110-108=2)
trade appear to be break-even on
Basis Trade - Bond Side (Forged):
Daiwa’s books, and made the Net of • Value (set incorrectly as the End Price) = 102
the two basis trades appear to be • End Price = 102
profitable: • Profit/Loss (Fake) = 0 (102-102=0)
----------------------------------------------
Basis Trade – Net (Fake):
• Futures Side Profit/Loss = +2
• Bond Side (Fake) Profit/Loss = 0
• Net Profit/Loss (Fake) = +2 (2-0=2)
March 22, 2012 25

Toshihide Iguchi
• The basis trades had another important benefit for Iguchi, in that they allowed
him to access Daiwa’s inventory of bonds anytime he needed to sell one to
raise funds to pay off a counterparty on a losing trade.
• Normally, Bankers Trust would not release a bond unless they received cash
for it. However, they would release a bond if they received a trade ticket
showing that the bond was used in an exchange for a futures contract as part
of a basis trade. Iguchi used these techniques year after year on thousands of
losing trades. Over time, his losses accumulated to historic proportions.
• Iguchi’s base salary was $40,000 a year. Another firm offered him a job with a
base salary of $150,000. However, Iguchi had to turn it down. By this time, he
had concealed hundreds of millions of dollars of losses, and knew that he
would go to jail if the frauds were discovered. As a result, Iguchi rarely missed
work.
• One day, a flood kept Iguchi from commuting to work. Fearing that his losses
would be discovered if his trades were settled by his coworkers, he called
brokers at other firms, and asked them not to settle his trades until he returned
to work. While this should have been a huge red flag to his coworkers, no one
at Daiwa wanted to directly challenge their star trader.
March 22, 2012 26
Toshihide Iguchi
• Year after year, Iguchi continued the pattern of covering up his losses, while
reporting his gains. At one point, he was single-handedly responsible for over
50% of the NY office’s trading profits. But, it was all a fiction.
• Regulators sensed that something was amiss with Iguchi, so they paid special
attention to him. However, they were never able to catch him doing anything
illegal.
• In one infamous incident in 1992, the Fed sent a team of auditors to inspect
Daiwa’s trading desk. At Iguchi’s prompting, while the auditors’ attention was
focused elsewhere, Iguchi and the other traders left the building. Then, stacks
of cardboard boxes and office supplies were piled on top of the desks in the
trading room, and all of the computers, monitors, and lights were turned off.
When the auditors entered the room, they were told that it was just a storage
room. The auditors were skeptical, but moved on.
• Commenting on this incident and other close calls, Iguchi would later say, “I
was sometimes frightened by my own surprisingly strong nerves.”
March 22, 2012 27

Toshihide Iguchi
• As it turned out, the extreme stress of his situation eventually overwhelmed

him. He contemplated suicide, but was talked out of it by his priest.
• By the summer of 1995, Iguchi could no longer keep up the deception. He
said, “After 11 years of fruitless effort to recoup losses, my life was filled with
fear, guilt, and deception. I saw that no one was coming to stop this. There
was no end in sight.” So, he decided to turn himself in to management.
• On July 13, 1995, Iguchi sent a letter to Daiwa President Akira Fujita, detailing
his losses, and all of the illegal activities he had engaged in to conceal them.
• In order to conceal his activities, Iguchi had forged an incredible 30,000 trade
tickets, confirms, reports, and other documents.
• His losses were staggering. Daiwa’s books indicated that they had $4.6 billion
in bonds on deposit with Bankers Trust. But the actual figure was $3.5 billion –
Iguchi had racked up over ($1.1 billion) in trading losses since 1984, and had
cashed in the bonds to pay for the losses. All told, Iguchi sold $733 million in
bonds from Daiwa’s own portfolio, and $377 million that belonged to their
customers.
March 22, 2012 28

Toshihide Iguchi
• When Iguchi sent his letter to Daiwa, they were legally obligated to report the
fraud to the regulators immediately.
• However, Daiwa wanted to wait until after they reported their next Quarterly
numbers, so they didn‘t contact the Fed and the SEC until September 18,
which was two months later.
• The Fed and the SEC contacted the FBI, and Iguchi was arrested on
September 24.
• Iguchi cooperated with the investigators.
• When he was deposed, Iguchi told the judge that
after he had confessed to Daiwa senior
management, “…they asked me to continue
concealing the losses.”
• When asked about this, officials at Daiwa’s
headquarters in Osaka confirmed that this was true.
They justified it to the investigators by saying that
they did this “…in order to keep him from escaping.”
Iguchi on the cover of Time Magazine
March 22, 2012 29

Toshihide Iguchi
• In February 1996, Iguchi pled guilty to fraud and forgery. He was sentenced to
four years in prison.
• Daiwa pled guilty to 16 criminal charges, including falsifying books and records,
conspiracy, wire fraud, and obstructing a Fed examination. They were barred
permanently from doing business in the U.S.
• In the wake of the scandal, most of Daiwa’s senior management resigned,
including the Chairman, the President, and the Deputy President.
• While in prison, Iguchi wrote and published a book called “The Confession”
about his years at Daiwa, which became a best seller in Japan.
March 22, 2012 30

4. The Rogues:
Yasuo Hamanaka
March 22, 2012 31

Yasuo Hamanaka
Rogue Trader: Yasuo Hamanaka

Company: Sumitomo
• Yasuo Hamanaka joined Sumitomo as a trainee in the

Credit department.
• He joined the Nonferrous Metals department as a
trader in 1981, and did very well, and was named
Head Copper Trader in 1986, when he was 38.
• Over time, he accumulated enough political power
within Sumitomo that he was allowed to settle his own
trades, and do his own bookkeeping.
Yasuo Hamanaka
• He developed a reputation in copper trading circles for his aggressiveness,

and his willing to take huge risks.
• He was nicknamed “Mr. Copper” and “Mr. 5%” because he had direct control
over 5% of the world’s copper supply. Ultimately, he became the most
influential copper trader in the world.
March 22, 2012 32

Yasuo Hamanaka
• From 1986-1989, Sumitomo’s Copper Trading desk racked up huge losses

from purchases and sales of physical copper, and the trading of copper futures.
However, Hamanaka hid the losses.
• He maintained a secret book in which he recorded all of his fraudulent
activities.
• Hamanaka’s frauds were almost uncovered in 1991,
when an American broker allegedly received a letter
from Hamanaka asking him to backdate a fake trade.
The broker gave the letter to London Metal Exchange
(LME) CEO David King.
• King contacted Sumitomo about Hamanaka.
• When questioned, Hamanaka denied any Copper ingots
wrongdoing, and Sumitomo took no action against

their star copper trader.
March 22, 2012 33

Yasuo Hamanaka
• Hamanaka devised a long-term strategy to corner the Copper market,

manipulate prices, and reap large profits on both copper physicals and futures.
• To launch his plan, Hamanaka needed the ability to accumulate an enormous
number of copper futures contracts without being seen as a speculator, as this
would draw regulatory scrutiny.
• Hamanaka entered into an arrangement
whereby Sumitomo would buy copper from Sumitomo
Global Minerals & Metals Corp. Global
would then purchase large numbers of
warrants redeemable in physical copper
Su copp
mb al
from producers in Zambia, who were in on
s
Za ysic
ian
m i er
the deception.
to m f r o
h
ck ells p
ob mG
• What the street didn’t know was
to
uy
e r mo s
(3) (1)
s p loba
that Sumitomo would then sell
ba
co mito
hy l
sic
the physical copper they had
Su
pp
l a
purchased from Global back to
(2)
the Zambians, thus completing a
Global buys warrants redeemable in
triangle of transactions. Zambians physical copper from Zambians Global
March 22, 2012 34

Yasuo Hamanaka
• Sumitomo opened cash and trading accounts with Merrill Lynch. Using
Sumitomo’s financial clout, Hamanaka was able to establish $600 Million in
credit facilities with Merrill Lynch and several other A-list banks.
• Hamanaka also opened a “B” account at Merrill Lynch for Global. With Merrill
Lynch’s consent, Global was allowed to utilize the credit lines that Merrill Lynch
had approved for Sumitomo. Global was given power-of-attorney, and could
theoretically trade any way they saw fit. Of course, neither Merrill Lynch nor any
of Sumitomo’s other creditors were aware of the true nature of the relationship
between Sumitomo and Global.
• With all of the angles worked out, Hamanaka went live with his strategy.
• By September 1995, Sumitomo owned warrants on 50% of the physical copper
that was traded on the LME. By November 1995, that figure increased to 90%.
He also owned by far the biggest futures position in the world. The copper
market was now cornered.
• For several years, the strategy was seemed to be profitable for Sumitomo.
However, all the while, Hamanaka was hiding a mountain of losses.
March 22, 2012 35

Yasuo Hamanaka
• In Q1 2006, the world supply of copper increased at an annualized rate of 7%,

while the demand remained stable. In normal market conditions, these
circumstances would usually cause prices to fall. However, because Hamanaka
had choked off the supplies, copper prices actually increased by 40% on the
LME.
• The irrational price movements on the copper market caught the attention of
legendary short seller George Soros. Determined to attack the price of copper,
Soros allegedly assembled a consortium of hedge funds, all of whom started
shorting copper aggressively.
• A battle royale ensued. Hamanaka used the financial might of Sumitomo to buy
huge quantities of it on the LME to try to prop up prices. After several weeks,
Sumitomo’s vast resources proved to be too much for even Soros to overcome,
and Soros ceased his efforts, giving an impressive victory to Hamanaka.
• For his part, Hamanaka was reportedly delighted with the outcome, although he
had taken to chain smoking on the trading floor to help him cope with the stress.
March 22, 2012 36

Yasuo Hamanaka
• In the end, an errant piece of mail led to Hamanaka’s downfall. When he traded
on the LME, he arranged for the paperwork to be sent directly to himself.
However, the paperwork for one of his unauthorized trades was inadvertently
sent to Sumitomo’s Finance department. At around the same time, a clerk at
Sumitomo discovered unauthorized accounts at Merrill Lynch, and reported
them to senior management. Sumitomo started an investigation.
• On May 9, 1996, Sumitomo demoted Hamanaka from his role as Head Copper
Trader. On June 5, 1996, Hamanaka confessed what he had done, and gave
management his secret trading book.
• On June 14, 1996, Sumitomo’s president told shareholders about ($1.8 Billion)
in previously undisclosed losses that were incurred by Hamanaka.
• To reduce their exposures, Sumitomo had to sell off much of the inventory that
Hamanaka had accumulated. There were few buyers, causing prices to drop
sharply. Sumitomo lost an additional ($800 Million) selling off Hamanaka’s
excess copper inventory, bringing the total losses associated with Hamanaka’s
unauthorized activities to ($2.6 Billion).
• Yasuo Hamanaka was arrested and tried. He pled guilty to the charges, and
was sentenced to eight years in prison.
March 22, 2012 37
5. The Rogues:
John Rusnak
March 22, 2012 38

John Rusnak
Rogue Trader: John Rusnak

Company: Allfirst/Allied Irish
Trading Losses: ($691,000,000)
• John Rusnak was born in 1964. He graduated from

Bucknell University in 1986, after which he went to work
for Chemical Bank and Fidelity.
• In 1993, he joined First Maryland Bancorp as a Foreign
Exchange trader.
• First Maryland merged with Dauphin Deposit Corp. and
was renamed “Allfirst Financial,” which was ultimately
acquired by Allied Irish Bank (AIB).
John Rusnak
• Rusnak’s career at Allfirst was undistinguished at first. He earned a good base

salary of $85,000, a modest bonus, and was considered to be a steady
performer for the first four years that he worked there.
March 22, 2012 39

John Rusnak
• Rusnak’s downfall began in 1997, when he incurred large losses betting that the
Yen would strengthen versus the Dollar. Afraid of the fallout, he entered fictitious
options trades on Allfirst’s systems that made it appear that his losing trades
were hedged, and forged trade confirms.
• Emboldened by his success in covering up the loss, Rusnak doubled down on
the Yen to try to get even. Once again, his trades lost money.
• He continued trading and losing money, then concealing the losses by entering
winning trades on the system. This pattern continued for months, until Rusnak
had lost millions, and then tens of millions, and ultimately hundreds of millions of
Dollars.
• Rusnak’s Value at Risk (VaR) limit was supposed to be $2.5 Million for any
single currency position. Allfirst’s VaR model estimated potential losses by
generating 1,000 hypothetical F/X spot trades for a trader’s portfolio, and then
calculating the resulting Profit or Loss. The VaR of a position was equivalent to
the tenth-worst outcome produced by the simulation.
• Allfirst’s model had a major flaw - the underlying data was taken from the traders
own spreadsheets, not from independent sources.
March 22, 2012 40

John Rusnak
• Rusnak knew how his VaR was calculated, so he altered his spreadsheets to
exploit this flaw. At the height of his activity, Rusnak had over $1 Billion in
unhedged Yen positions versus the Dollar. Yet, he was never flagged for a limit
violation.
• His losses were staggering. From 1997-1999, Rusnak concealed ($130 million)
in losses. In 2000, he concealed another ($211 million). And in 2001, he
concealed another ($270 million).
• As the losses grew, so did the size of the offsetting fake trades. The fake trades
were so large and so profitable for Allfirst that Rusnak thought that it was only a
matter of time until his activities were discovered.
• Rusnak wasn’t exactly a master criminal. In 2001, an
external auditor wanted to confirm a (fake) trade. When
Rusnak was asked for the counterparty’s contact info, he
told them “2472 Broadway in Manhattan.” This was
actually a Mailboxes Etc. storefront, where Rusnak rented
a box under the name “David Russell.” A few days later,
Rusnak went to the store, retrieved the letter, forged the 2472 Broadway circa 2001
confirm, and replied to the auditor. The ruse worked. 41
March 22, 2012 41

John Rusnak
• Rusnak started using “historic rate rollovers” to defer reporting his losses.
• Historic rate rollovers allow existing currency positions to be rolled forward using
historic rates instead of current market rates.
• Allfirst’s Internal Auditors saw that Rusnak was using historic rate rollovers in
epic amounts, but didn’t really question him about it.
• However, historic rate rollovers use the Balance Sheet.
• In short order, Rusnak’s was single-handedly using 10% of Allfirst’s Balance
Sheet. Allfirst’s Treasurer ordered him to stop using the rollovers.
• Rusnak still needed vast amounts of money to meet margin calls and pay for his
losses. But, he couldn’t ask anyone for it directly, so he had to come up with
another way to get his hands on some cash.
March 22, 2012 42

John Rusnak
• In February 2001, Rusnak started selling “deep in the money options.” With
deep in the money options, the strike price of the option in the future is
extremely low relative to the current market price in the case of a Call, and
extremely high in the case of a Put. This means that buyers of deep in the
money options are very likely to make large profits. For the seller, the main
benefit of deep in the money options is instant liquidity - they receive money
immediately, in exchange for a high likelihood of having to pay a lot more
money at the exercise date, which is in the future.
• Rusnak raised $300 Million by selling deep in the money options to Citibank,
Deutsche, Bank of America, and Bank of New York. The exercise dates
weren' t until February 2002, so Rusnak was able to continue his unauthorized
trading for another year. But, he was still not able to recoup his losses.
• When the deep in the money options came due, Rusnak had to pay the four
banks ($380 Million), an ($80 Million) premium over the sale price of the
options. This additional loss of ($80 Million) brought Rusnak’s total losses to
($691 Million). Rusnak was finally literally and figuratively out of options.
March 22, 2012 43

John Rusnak
• On February 3, 2002, bank officials called the counterparties on several of

Rusnak’s suspicious trades. The counterparties denied knowing the trades.
• On February 4, Rusnak didn' t show up for work. Bank officials went to his
house, but he wasn’t there.
• On February 5, Allfirst alerted the FBI. Rusnak was arrested, and indicted on
seven counts of fraud.
• On January 18, 2003, he pled guilty to fraud, and promised to cooperate fully
with the authorities. He was sentenced to 7.5 years in prison.
• In the wake of the scandal, six Allfirst officials resigned, and two were fired.
• Parent company AIB’s shares were hit hard, tumbling 16% on the day the
scandal was made public.
• AIB decided to cut all ties with Allfirst, and eventually sold Allfirst to M&T Bank.
March 22, 2012

6. The Rogues:
Jérôme Kerviel
March 22, 2012 45

Jérôme Kerviel
Rogue Trader: Jérôme Kerviel

Company: Société Générale
• Jérôme Kerviel was born in 1977 in Pont-l'Abbé, Brittany.

He received a bachelor' s degree in Finance from the
University of Nantes, and then graduated in 2000 from
University Lumière Lyon with a Master of Finance.
• He joined Société Générale in August 2000. For five years,
he worked in the Middle and Back Offices, including areas
that were responsible for trade support. Over time, he
gained a sophisticated understanding of Société
Générale’s systems, procedures, and controls.
• In 2005, Kerviel moved to the front office, where he was a Jérôme Kerviel
junior trader on the Delta One desk.

• He was assigned to arbitrage discrepancies between equity derivatives and
cash equity prices.
March 22, 2012 46

Jérôme Kerviel
• Kerviel’s unauthorized speculation began shortly after he joined Delta One,

when he took unauthorized positions in shares of Allianz. The trades made
money. According to Kerviel, his bosses criticized him for taking the positions
without authorization, but then increased his trading limits.
• Kerviel became bolder, and started taking unauthorized positions in Options,
Futures, and Forwards in addition to Equities.
• Kerviel escalated his unauthorized positions in Equities, reaching a total of
$200 Million in August 2006.
• In January 2007, he accumulated a short position in DAX futures totaling $1.2
Billion. This increased to $3.6 Billion in February, $7.8 Billion in March, and
$42 Billion in July.
• He unwound the position in August, and then built up a new even larger
portfolio of DAX and EUROSTOXX futures in September, reaching $45 Billion.
He also had a portfolio of unauthorized directional Equities positions.
• Kerviel unwound all of his unauthorized positions by the end of 2007. His
unauthorized trading in 2007 realized a profit of $2.2 Billion.
March 22, 2012 47

Jérôme Kerviel
• From January 2-18, 2008, Kerviel built up a new long position on index futures,
reaching a stratospheric $72 Billion. This far exceeded Société Générale’s
Market Cap, and was not hedged.
• The position was discovered on January 20, 2008. The size of the position put
Société Générale at risk, so it was decided to unwind it. The position was
unwound from January 21-23, incurring losses of ($8.9 Billion).
• Taking into account Kerviel’s trading profits of $2.2 Billion in 2007 and trading
losses of ($8.9 Billion) in 2008, the net result of Kerviel’s unauthorized trading
was a monumental loss of ($6.7 Billion). This amount exceeded the combined
rogue trading losses incurred by Yasuo Hamanaka ($2.6 Billion), Nick Leeson
($1.3 Billion), Toshihide Iguchi ($1.1 Billion), John Rusnak ($691 Million), and
Dany Dattel ($480 Million).
• On January 24, 2008, Société Générale announced that they had lost
($6.7 Billion) due to “exceptional fraudulent trading activities.” After the
announcement, their stock plummeted, knocking ($18 Billion) off their market
cap.
March 22, 2012 48

Jérôme Kerviel
• On January 26, 2008, Kerviel was taken into police custody. He was formally
charged with “Abuse of Confidence” and “Illegal access to Computers,” and
then released.
• As details of the case started to become public, Société Générale engaged in
an ill-advised war of words with Kerviel. CEO Daniel Bouton described his
unauthorized activities as a “mutant virus,” and called Kerviel “a terrorist.”
Kerviel fired back, saying that management was aware of his activities, but
turned a blind eye as long as they thought he was making a profit.
• Many people in France became sympathetic towards
Kerviel. They thought of him as an anti-hero who was
just doing what his bosses wanted him to do, only to
be made a fall guy when markets turned against him.
• Around Paris, some people could be seen wearing
shirts that were openly supportive of him, saying
things like “I am Jérôme Kerviel’s Girlfriend” and
“When I grow up I want to be like Jérôme Kerviel.”
Pro-Kerviel T-shirt
March 22, 2012 49

Jérôme Kerviel
March 22, 2012 50

Jérôme Kerviel
March 22, 2012 51

Jérôme Kerviel
• In May 2008, Société Générale undertook a comprehensive analysis of the

breakdowns of controls that allowed Kerviel to trade without authorization.
They learned that Kerviel was flagged 74 times by the bank’s systems and
controls, and that 64 of the 74 alerts were linked to unauthorized activities.
• They learned that Kerviel used three main techniques to conceal his activities:
1. Taking an Unauthorized Position: He would enter fictitious transactions to
conceal the actual position and the Market Risk incurred. He would later
cancel the fictitious transactions before confirmations, settlements, or
controls were generated, and then replace them with a cascade of new
fictitious transactions whose Settlement Dates were far into the future.
Kerviel entered 947 transactions of this type.
2. Unwinding an Unauthorized Position: He entered fictitious pairs of
Purchases & Sales at off-market prices that offset his Earnings. The pairs
were made in identical quantities, so they wouldn’t create a new position
on the system. Kerviel entered 115 transactions of this type.
3. Unrealized Earnings: These were calculated on a monthly basis. To offset
Unrealized Earnings, he posted intra-month positive or negative provision
flows. Kerviel entered 9 transactions of this type.
March 22, 2012 52
Jérôme Kerviel
• Société Générale did a comprehensive analysis of the deficiencies in their

control environment that enabled Kerviel unauthorized activities. They also
hired PricewaterhouseCoopers to do an independent analysis. Here were the
major findings:
• Fragmentation of controls between several units, compounded by a lack of
aggregated reporting.
• Inadequate resources allocated to control functions in general.
• Inadequate resources allocated specifically towards fraud prevention and
detection.
• Insufficient response to corrective actions identified by Audit.
• A lack of seniority in the back and middle office staffs that ultimately
diminished their effectiveness.
• Systems that did not process transactions effectively. Back office staff
could not adhere to some controls that were in place, due to a reliance on
manual processing.
March 22, 2012 53

Jérôme Kerviel
• In May 2010, Kerviel published a book entitled

“L'engrenage: Mémoires d’un Trader (Downward Spiral:
Memoirs of a Trader).” In it, he alleged that his superiors
knew of his trading activities. The book was a bestseller
in France.
• His trial began on June 8, 2010. On October 5, 2010, he
was found guilty and sentenced to five years of prison,
with two years suspended, full restitution of the money he
lost, and a permanent ban from working in the financial
services industry. Kerviel’s Book
March 22, 2012 54

7. The Rogues:
Kweku Adoboli
March 22, 2012 55

Kweku Adoboli
Alleged Rogue Trader: Kweku Adoboli

Company: UBS
• Kweku Adoboli was born in Ghana in 1980. His

family moved to the UK in 1991.
• He attended private schools, and graduated
from the University of Nottingham in 2003 with a
degree in Computer Science and Management.
• In 2006 he joined UBS as a trainee in the
Equities division, and ultimately joined the Delta
One desk.
• On September 15, 2011, UBS announced that
they had discovered a massive fraud in their Kweku Adoboli
London office.
• Because the legal proceedings associated with the event are currently
ongoing, UBS has decided not to provide their own comprehensive analysis
yet.
March 22, 2012 56
Kweku Adoboli
• On September 6, Adoboli cryptically posted “I need a miracle” on his Facebook

page.
• On September 14, Controllers approached Adoboli about massive
unauthorized trades due to settle on September 22 in his trading book. Adoboli
then turned himself in to his boss, John Hughes.
• Hughes alerted senior management, who notified the Swiss Financial Market
Supervisory Authority (FINMA) and the UK Financial Services Authority (FSA).
• UBS CEO Oswald Grubel then appointed a task force named “Project Bronze”
to close or hedge Adoboli’s open positions.
• On September 15, UBS informed the London police of the suspected fraud at
1am. The police arrested Kweku Adoboli at 3:30am.
• Overnight, Project Bronze closed or hedged 70% of Adoboli’s positions. At
5:30am, UBS senior management met in Zurich to discuss the crisis.
• At 7:30am, UBS publically announced the discovery. Losses were estimated at
($2 billion), making this one of the biggest rogue trading events in history.
• UBS stock ended the day down 11% from the previous day’s closing price,
knocking ($5 Billion) off their Market Cap.
March 22, 2012 57
Kweku Adoboli
• On September 16, Project Bronze finished closing or hedging the rest of

Adoboli’s positions.
• On September 18, UBS issued a communiqué that increased the estimated
losses to ($2.3 billion). The communiqué said that an unnamed trader
concealed “unauthorized speculative trading” in EuroStoxx, DAX and S&P 500
index futures by creating fictitious hedging positions in internal systems over a
three month time period. It also assured shareholders that all of the
unauthorized positions were now closed or hedged, and that UBS remained
well capitalized.
• On September 19, UBS announced the formation of a committee to investigate
the incident. FINMA and the FSA also launched their own investigations.
• On September 24, Oswald Grubel stepped down as CEO, and was replaced
by Sergio Ermotti on an interim basis.
• On October 20, Court proceedings began in London.
• 1/30/12: Kweku Adoboli pled “Not Guilty” to two counts of False Accounting,
and two counts of Fraud. UK prosecutors contend that his false accounting
dates back to at least 2008.
March 22, 2012 58

Kweku Adoboli
• Anonymous UBS sources told Reuters that Controllers had been focused on
Adoboli since July 2011. They suspected that he was using fake offsetting
trades with other parts of the bank to make it seem as if his long positions were
hedged, and keep within his trading limits. These “internal futures” at UBS do
not require confirmations.
• When Adoboli became aware of the attention he was receiving from
Controllers, he allegedly switched to using forward settling trades that used
Exchange Traded Funds (ETFs).
• Many of these trades had Settlement Dates two months after the Trade Dates.
This bought Adoboli time to continue to manipulate UBS’s systems. As the
Settlement Dates of the trades approached, Adoboli would allegedly cancel
those trades, and replace them with new trades that also had Settlement Dates
far in the future.
• Since his arrest, Adoboli has been largely silent, although his lawyer said that
Adoboli was “sorry beyond words.”
• Kweku Adoboli’s trial is scheduled to begin in London in September 2012.
March 22, 2012 59

Two Who Didn’t Make the List: Bad Traders, not Rogue Traders
• Brian Hunter
Hunter was a star energy trader with Amaranth Advisors. In 2005, he was
given a bonus of $75 Million for trading profits of almost $1 Billion. In 2006,
with the approval of Amaranth’s senior management, he bet almost the entire
capital base of Amaranth on an unhedged natural gas futures position.
Ultimately, the position lost ($6.5 Billion), putting Amaranth out of business.
Hunter is frequently called a “Rogue Trader.” However, this is inaccurate,
because his trades were done with the knowledge of his management. It is
more accurate to call Hunter a “bad” trader than a “Rogue Trader.” As of 2012,
he continues to trade.
• Boaz Weinstein
Weinstein was a star derivatives trader with Deutsche. From 2006-2007, his
team made a profit of $1.5 Billion, and Weinstein was reportedly paid more
than Deutsche’s CEO. However, in a calamitous 2008, his prop trading team
lost ($1.8 Billion). Weinstein left Deutsche in 2009 to start his own hedge fund.
Weinstein is also sometimes called a “Rogue Trader.” This is inaccurate, as his
trades were done with the knowledge of his superiors. Like Hunter, it is more
accurate to call Weinstein a “bad” trader than a “Rogue Trader.”
March 22, 2012 60
Rogue Trader Heat Map
Dany Nick Toshihide Yasuo John Jérôme Kweku William

Dattel Leeson Iguchi Hamanaka Rusnak Kerviel Adoboli Pullington
Gender Male Male Male Male Male Male Male Male
Age 30s 20s 30s-40s 30s-40s 30s 20s-30s 20s-30s 30s-40s
Nationality West Germany UK Japan Japan USA France UK UK
Product/Desk F/X Derivatives Fixed Income Commodities F/X Delta One Delta One Treasury
Location Home Office Branch Office Branch Office Home Office Branch Office Home Office Branch Office Home Office
Gender 100% were Male

Age 3 were in their 30s-40s / 2 were in their 20s-30s / 2 were in their 30s / 1 was in his 20s
Nationality 3 were British / 2 were Japanese / 1 was West German / 1 was American / 1 was French
Product/Desk 2 were in Delta One / 2 were in F/X / 1 was in Commodities / 1 was in Derivatives / 1 was in Fixed Income / 1 was in Treasury
Location 50% worked in the Home Office / 50% worked in a Branch Office
• The diversity of results on the Heat Map clearly illustrates that Rogue Traders
do not fit neatly into one well defined profile.
March 22, 2012 61
Predicting Employee Fraud: The Fraud Diamond
• The “Fraud Diamond” is well established among criminologists as a means of

evaluating which employees present the highest risk of committing frauds. The
four points of the Fraud Diamond are Opportunity, Motivation, Rationalization,
and Capability.
Opportunity
Potential for
Capability Employee Fraud Motivation
Rationalization
March 22, 2012 62

• An Opportunity is a circumstance that allows an employee to carry out a

fraud. The failure to establish and enforce adequate procedures to impede and
detect fraudulent activity also increases the number of opportunities for frauds
to occur.
Opportunity
Potential for
Employee Fraud
March 22, 2012 63

• Motivation is the incentive or pressure felt by the employee to commit a fraud.

It could be a financial need, such as high medical bills, or gambling losses. Or,
it could be the desire for material goods or a lifestyle that was not otherwise
attainable. Other motivations are the desire to be seen as excelling at work, or
the need to cover up losses.
Potential for
Employee Fraud Motivation
March 22, 2012 64

• Rationalization is a frame of mind or ethical character that allows an

employee to act fraudulently and to justify their actions. Rationalization
involves an employee reconciling his or her behavior with social standards and
commonly accepted notions of decency and trust.
Potential for
Employee Fraud
Rationalization
March 22, 2012 65

• Someone with the Capability to commit a fraud has the intelligence and
wherewithal to recognize and exploit internal control weaknesses. That person
also needs to have the self-confidence to believe that they can pull off a fraud
without getting caught.
Potential for
Capability Employee Fraud
March 22, 2012 66

Lessons Learned: Shoring Up Defenses
• All employees should receive comprehensive Anti-Fraud training on at least an

annual basis.
• Management in Trading and in the areas that monitor and control trading
should receive specialized training in the detection of Rogue Trading.
• People who monitor the traders should be made aware of which traders used
to work in sensitive areas of the bank (IT, Compliance, Settlements, etc.).
• The Two-Week Block Vacation policy that most firms have in place should be
rigorously enforced.
• Market Risk and Compliance personnel should be empowered to take action
against traders who repeatedly violate their trading limits.
• A phone tip-line or email address should be established to enable employees
to report suspected fraudulent activity anonymously, without fear of reprisals.
• Greater communication among Compliance, Internal Audit, Risk Management
and the Governance areas should be encouraged wherever possible when
rogue trading (or any other fraudulent activity) is suspected.
March 22, 2012 67

8. Epilogue - The Rogues:
William Pullinger
March 22, 2012 68

Introduction
Rogue Trader: William Pullinger

Company: Union Bank of London
Trading Losses: ($260,000,000)*
• Joined Union Bank of London (UBL) the year it was founded.

• Started out as a clerk in the Treasury Department. Was known as “The Man
Who Never Took a Vacation.” Promoted to Head of Cashiering after 16 years.
• Was solely responsible for reconciling activity in UBL'
s main account with the
Bank of England, where they had over $1 Billion* in cash and securities on
deposit. Was also responsible for all associated accounting entries.
• Started unauthorized trading in UBL’s name, using his own money. Eventually
traded much larger amounts, but used UBL’s money.
• He regularly traded with four counterparties. He arranged for them to send all
confirms directly to his attention, rather than to the usual back-office address.
He told the counterparties that he was trading on behalf of a wealthy investor
who preferred to remain anonymous, and insisted that Pullinger handle all of
his trades personally.
______________________
* Present Day Value
March 22, 2012 69
Introduction
• His rogue trades were successful at first. He withdrew his profits from the
bank, and bought real estate, racehorses, and other trappings of wealth.
• Inevitably, he started losing money. He paid for losses by withdrawing funds
from UBL’s account with the Bank of England. He increased his bets to try to
recoup his losses. Unsuccessful, he bet progressively larger amounts to try to
get even. His losses mounted. Over time, his losses trading in British financial
markets totaled ($75 Million*).
• Through an intermediary, Pullinger started trading huge amounts of money in
foreign financial markets. However, lost even more money. Pullinger ultimately
lost ($185 Million)* in markets outside of Britain, including ($50 Million*) in
Mexico, and ($20 Million*) in Turkey. All told, after five years of rogue trading,
his losses totaled ($260 Million*).
• A funeral obliged him to be away from the office for several days. His
unauthorized activities were discovered, and he was arrested. Pullinger pled
guilty, and was sentenced to 20 years in prison in Australia. He died on a penal
ship while in transit to Australia.
• Depositors ran on UBL. The Bank of England announced they would backstop
UBL. This calmed down depositors, ending the crisis.
March 22, 2012 70
Introduction
The year was:
1860
March 22, 2012 71

Contact Information
For further information, please contact:
Neil Roth
BNP Paribas
Oversight of Operational Permanent Control
51 West 52nd Street – 36th Floor
New York, NY 10019
Phone: 212-471-6374
Cell: 914-214-1152
Email: neil.roth@us.bnpparibas.com
March 22, 2012 72

Disclaimer
This document has been prepared by BNP PARIBAS for informational purposes only. Although the information in this document has been obtained from sources which BNP
PARIBAS believes to be reliable, we do not represent or warrant its accuracy, and such information may be incomplete or condensed. This document does not constitute a
prospectus or solicitation and is not intended to be and must not be the sole basis for any evaluation of the securities discussed herein. All estimates and opinions included in
this document constitute our judgment as of the date of the document and may be subject to change without notice. Changes to assumptions may have a material impact on
any recommendations made herein.
BNP PARIBAS or its affiliates may, from time to time, have a position or make a market in the securities mentioned in this document, or in derivative instruments based
thereon, may solicit, perform or have performed investment banking, underwriting or other services (including acting as adviser, manager or lender) for any company,
institution or person referred to in this document and may, to the extent permitted by law, have used the information herein contained, or the research or analysis upon which
it is based, before its publication. BNP PARIBAS or its affiliates will not be responsible for the consequences of reliance upon any opinion or statement contained herein or for
any omission.
This document is confidential and is being submitted to selected recipients only. It may not be reproduced (in whole or in part) to any other person without the prior written
permission of BNP PARIBAS. Any U.S. person receiving this presentation and wishing to effect a transaction in any security discussed herein, must do so through a U.S.
registered broker dealer. BNP PARIBAS Securities Corp., a subsidiary of BNP Paribas Financial Services, is a member of the NASD and SIPC, and a U.S. registered broker-
dealer with the U.S. Securities and Exchange Commission.
© 2012 BNP PARIBAS. All rights reserved.
March 22, 2012 73

End of Presentation
March 22, 2012 74

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Titre de la présentation

OpRisk North America 2012:

“Rogue Traders and Risk Culture”

March 22, 2012 2

The purpose of this presentation is to examine the most infamous Rogue

March 22, 2012 3

Definition of “Rogue Trader”

A “Rogue Trader” is someone who trades either a specific product without

March 22, 2012 4

March 22, 2012 5

Alleged Rogue Trader: Dany Dattel

• Iwan Herstatt founded Bankhaus Herstatt in 1956,

trainee on the foreign exchange trading desk.

March 22, 2012 6

• The pinnacle of Dattel’s career was in 1973.

superiors, and got permission to make a huge bet against

March 22, 2012 7

• The trade made Dattel a millionaire, and a star within

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Rogue Trader: Nick Leeson

• Nick Leeson was born in 1967 in Watford.

• Leeson' s performance as a member of the team impressed his superiors. So,

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• Leeson knew that he would be jailed for fraud

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Rogue Trader: Toshihide Iguchi

• Toshihide Iguchi was born in Kobe, Japan in 1951. In 1971, he

• Daiwa’s custodian in the U.S. was Bankers Trust.

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• Iguchi also traded futures contracts.

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• However, to conceal his losses, Futures Trade:

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• As it turned out, the extreme stress of his situation eventually overwhelmed

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Rogue Trader: Yasuo Hamanaka

• Yasuo Hamanaka joined Sumitomo as a trainee in the

• He developed a reputation in copper trading circles for his aggressiveness,

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• From 1986-1989, Sumitomo’s Copper Trading desk racked up huge losses

wrongdoing, and Sumitomo took no action against

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• Hamanaka devised a long-term strategy to corner the Copper market,

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• In Q1 2006, the world supply of copper increased at an annualized rate of 7%,

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Rogue Trader: John Rusnak

• John Rusnak was born in 1964. He graduated from

• Rusnak’s career at Allfirst was undistinguished at first. He earned a good base

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