Allied, the former parent company of Baltimore-based Allfirst Financial Inc., sued Citibank and Bank of America last week, seeking to recover about $500 million in compensatory damages – the share of the losses it attributed to the banks’ alleged wrongdoing.
The lawsuit comes at a bad time for Citibank. Salomon Smith Barney, a subsidiary of Citibank’s New York-based parent, Citigroup Inc., was fined recently by the Securities and Exchange Commission for issuing biased stock research to win lucrative investment banking work. Citigroup is also mired in the collapse of Enron Corp., the failed Houston energy company.
“I think the courts will find in favor of Allied Irish,” said Richard X. Bove, an analyst at Hoefer & Arnett Inc., a stock brokerage and investment bank in Tampa, Fla. “I don’t think they are going to get 50 cents on the dollar. I think they will get something.”
“Clearly, what Allied Irish did was totally inappropriate,” said Bove, who expects a private settlement within six to nine months. “They didn’t know what they were doing, … their controls were inadequate, their management policies were third-rate. The point is: Can they get some of the money back from Citi and Bank of America? I think the answer is yes.”
More Top Picks Google Pixel Watch Review
Bert Ely, a banking consultant at Ely & Co in Alexandria, Va., also expects a settlement. “The question is, what is the settlement going to be?” he said. “If Allied gets anything, it will be a lot less than they are suing for. I think they have an uphill fight.”
Allfirst stunned the business world Feb. 6, 2002, announcing that it lost millions at the hands of John M. Rusnak, a currency trader from Baltimore who covered up losses by doctoring computer and other internal bank records over a five-year period without being detected.
The debacle resulted in sweeping changes in Allfirst’s executive suite, the firing of seven employees and the sale of the Baltimore bank to Buffalo-based M&T Bank Corp.
Rusnak is now serving a 7 1/2 -year prison sentence at the Federal Correctional Institution at Fort Dix, N.J.
The lawsuit, filed Friday in U.S. District Court in the Southern District of New York, presented details of his fraud. It alleges that employees of Bank of America and Citibank “joined Rusnak’s scheme” by:
The Allied Irish lawsuit names three individuals at the two banks who were Rusnak contacts but does not accuse them of any specific acts of wrongdoing.
Officials with Citibank and Bank of America said Allied Irish’s lawsuit is without merit.
“We behaved properly in our dealings with this company in accordance with our obligations and responsibilities,” Shirley A. Norton, a spokeswoman for Bank of America, a Charlotte, N.C.-based bank, said yesterday. “We believe the lawsuit is without merit, and we expect to prevail in this dispute.”
According to the lawsuit, Rusnak opened a “prime brokerage account” with Citibank and Bank of America in September 2000. The account allowed him to use borrowed money to sharply increase the amount of currency he traded and his scope of trading without anyone at Allfirst knowing.
The lawsuit alleges that Citibank and Bank of America contacts “agreed to operate the accounts in ways that systematically concealed the actual risks and results of Rusnak’s trading from Allfirst.”
On Sept. 7, 2000, Rusnak proposed that Bank of America send daily trade confirmations to Allfirst in a format he created. Eight days later, he made the same request of Citibank.
Rusnak’s recap format omitted crucial elements, such as profit and loss information, the price of his open position in each currency, the risk in the position or its current value.
“The prime brokers’ failure to disclose this information helped Rusnak misrepresent his actual risks, mark-to-market positions, and profit and loss numbers, essential elements of his scheme,” the lawsuit states.
Rusnak also persuaded his contacts at Bank of America and Citibank not to tell anyone at Allfirst about Web sites operated by the banks that tracked his trades and positions. According to the lawsuit, Rusnak told Bank of America: “I don’t want my back office to have access to the website or any of the trade details.”
The banks also agreed not to confirm each Rusnak trade, in violation of standard prime brokerage procedures and industry practice. When trade information was mistakenly released to Allfirst, Rusnak snapped:
“These confirms have to stop,” he wrote Citibank in an e-mail. “My back office manager is very unhappy thinks these are fake trades or something unethical, its gonna cause an audit here. Please geet [sic] them stopped.”
In addition, the banks agreed not to require Rusnak to put up collateral, or margin, if his trading losses exceeded his gains, “even though Allfirst frequently ‘owed’ them more than $100 million each,” the lawsuit says.
This helped Rusnak “hide his ongoing trading losses from Allfirst and to defraud Allfirst into believing that his trading at the prime brokers was profitable,” according to the lawsuit.
But Rusnak’s problems continued to mount, and by February 2001 he had racked up more than $200 million in trading losses, according to the lawsuit.
To keep Allfirst from discovering the losses, Rusnak asked Citibank and Bank of America to provide him more than $200 million in “disguised funding” through bogus option trades in February and March 2001.
“Thus, the disguised funding injured Allfirst by helping Rusnak hide his ongoing trading losses, allowing him to extend and expand his rogue trading scheme,” the lawsuit says.
While independent analysts agree that Allied Irish is likely to recover some fraction of the $500 million, they are sharply critical of the company’s failure to police or discover its trader’s misdeeds for five years.
“If Allied Irish would focus on how they manage their business … it perhaps would be time better spent,” said Lou Burnett, managing partner of Secura Burnett Co., a financial services consulting group in Washington and San Francisco.
More Top Picks Best Nursing Rocking Chairs
“Much more of the responsibility has got to fall back on Allfirst and Allied,” said Ely, the banking consultant. “It was their guy. … That is a big stretch that all of the loss should be shifted back to Citi and Bank of America.”
<!– ART CREDITKIM HAIRSTON : SUN STAFF PHOTOS
ART CREDIT–> <!– CUTLINE TEXTAllfirst said last year that it lost $691.2 million at the hands of a rogue currency trader. The debacle resulted in the firing of seven employees and the sale of the Baltimore bank to M&T Bank Corp.
CUTLINE TEXT–> <!– ART CREDIT
ART CREDIT–> <!– CUTLINE TEXTBaltimore currency trader John M. Rusnak covered up losses for years by doctoring records.
CUTLINE TEXT–>