U.S. trader suspected of defrauding Irish bank of $750 million

Associated Press WriterBALTIMORE (AP) -- A Baltimore-based trader is suspected of defrauding Allied Irish Banks of $750 million, officials of Ireland's biggest company said Wednesday in an announcement that sent its shares tumbling on world markets.

The suspected fraud at the bank's 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.

Allfirst CEO Susan Keating identified the trader as John Rusnak of Baltimore.

"He was a solid performer," she told reporters. "Clearly the controls broke down. We don't fully understand how those broke down."

She said five employees in the bank's treasury department had been suspended, including Rusnak. She said that if Rusnak showed up at Allfirst, he would be fired.

"Our internal control system, if properly followed, would have been able to detect this," Allfirst Chairman Frank Bramble said. "There is a possibility of collusion in this, but we don't know that."

Attorney David Irwin, who said he represents the trader, said Rusnak hasn't been charged with anything, "is not a fugitive" and is somewhere in Maryland. He refused to say exactly where.

Rusnak is 37 and a U.S. citizen, Irwin said. Allied Irish officials also said the trader is a father of two with a salary of $85,000.

The FBI confirmed that it was investigating the case.

Allied Irish Chief Executive Michael 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. 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 on Tuesday morning and 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."

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

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

On Wall Street, Allied Irish shares fell by about 16 percent in midday trading to $19.75. The price 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.

------EDITOR'S NOTE -- Associated Press Writer Shawn Pogatchnik contributed to this report from Dublin, Ireland.