John Rusnak bank fraus suspect

DUBLIN, Ireland - Ireland's biggest company, Allied Irish Banks, said yesterday that a missing foreign-exchange dealer at its U.S. subsidiary was suspected of defrauding it of $750 million. The loss sent the bank's shares tumbling on world markets.

The suspected fraud at the Baltimore-based subsidiary, Allfirst Bank, would be the biggest connected to a rogue trader since Singapore dealer Nick Leeson destroyed Britain's Barings Bank by piling up $1.4 billion in concealed losses in the mid-1990s.

The Allfirst trader wasn't identified by name, but was described as a father of two in his mid-40s with a salary of $85,000, Allied Irish Chief Executive Michael Buckley said.

"We are hugely disappointed that our Allfirst control procedures failed to uncover this situation at an earlier stage," said Buckley. "The investigation now under way will determine not only how it arose but also how we can guard against any recurrence."

Buckley said he had asked the FBI to help track down the missing trader, who could have been working in collusion with others in the phony options scam.

"We are investigating a matter at Allfirst Bank with suspected financial loss," said Barry Maddox of the FBI's Baltimore field office.

Maddox said no arrest warrants have been issued, and he declined to comment further.

Chris O'Neill, 47, said the FBI came to his Baltimore house Tuesday night to ask about the whereabouts of a neighbor who had worked at the bank. O'Neill said he didn't know where he was.

FBI spokesman Peter Gulotta Jr., also in Baltimore, confirmed that an investigation was underway but said, "No one has been charged in the matter."

Buckley told journalists and European analysts that midlevel Allfirst managers had confronted the trader by telephone last weekend when the magnitude of the fabricated trading documents was discovered following several weeks of investigation.

Allied Irish's director for finance and risk, Gary Kennedy, said "alarm bells went off" when the trader didn't return calls Sunday night, then didn't arrive for work Monday morning. He said the bogus trades dated back to early 2001 and included one shortly after Christmas.

But it wasn't until Monday night, they said, that Allfirst executives telephoned their Dublin bosses with the news. Buckley said he sent senior AIB managers on the first plane from Dublin Tuesday morning, ordered several Allfirst staffers to be suspended.

Allfirst has suspended all foreign-exchange dealings except for over-the-counter and retail transactions, Buckley said.

While Allied Irish insisted its finances remained secure, Buckley acknowledged that the loss was "a heavy blow."

The revelation added to Enron-style fears of sloppy accounting in major businesses. Shares of most leading British and Irish banks fell the London and Dublin stock exchanges.

On Wall Street, Allied Irish shares fell by about 16 percent in midday trading to $19.75. The share had dropped by similar amounts on the Irish and London stock exchanges.

AIB is the biggest company on the Irish exchange, accounting for 12 percent of the total market's value.

Foreign-exchange traders normally buy options contracts to offset, or hedge, potential losses on foreign-exchange deals. However, the bank said the trader had made phony purchases of options contracts to hedge actual losses on foreign currency deals.

"They were artificially entered into the Allfirst systems," the statement said.

Analysts said the amount of the missing funds, which presumably included money the bank paid for the fake options contracts, suggested the trader had bought phony contracts with a value of at least 1,000 times that amount, or $750 billion. This is a huge sum for a bank largely involved in retail banking, not capital markets.

"How could such a large volume of activity be missed to create such a large profit? I don't know. It does seem bizarre," said John Kelly, lead analyst at NCB Stockbrokers in Dublin.

Analysts added that the scale of the fraud would cripple Allied Irish's longheld ambition to develop its U.S. operations.

Allied Irish first invested in U.S. banks in 1983 with a minority stake in First Maryland Bancorp. It eventually took control and merged First Maryland with another firm, Dauphin Deposit Corp., which it bought in 1997, to create Allfirst.

Allied Irish said Allfirst, which employs about 6,000 people, is one of the 50 largest banks in America and has about 250 branches and outlets concentrated in Maryland and Pennsylvania.