John Rusnak is indeed one of the biggest Forex Trading name. The Allfirst Bank fraud is among the biggest Forex trading frauds ever committed by a Trader. The fraud was disclosed to the world in February 2002 when the Allfirst Bank called FBI to inform about their rogue trader and $700 million money fraud. However, the complete fraud didn’t came as a surprise provided the fact that Rusnak was making bogus entries years before getting caught. If you are curious about one of the biggest Forex trading frauds, here is everything you would ever like to know.
Who was John Rusnak?
John Rusnak came into picture in 1993 when the Allfirst Bank decided to generate more profit with Forex trading against its simple hedging endeavours. John came from an excellent trading background with names like Fidelity and Chemical Bank promising better success for Allfirst Bank’s investments. The hiring process was completed under the head of treasury funds management, Mr. Ray. Rusnak always promoted himself as a trader who would engage in arbitrage and could make profits with a proper understanding of the price discrepancies between currency options and currency forwards.
During his tenure in Allfirst Bank, Rusnak received the support Mr. Ray who even defended him against several risk assessment personnel and back office confirmations. Rusnak enjoyed an excellent salary package with an annual bonus of 30 percent of the overall bonus he could generate for the bank. On an overall, his colleagues and other important position holders in the bank considered him as a man of knowledge and entertained him duly.
Forex Trading Scams: Start of Rusnak Fraud
What was John Rusnak’s trading strategy?
John Rusnak was always dependent on arbitrage offered between different foreign exchange opportunities and profits generated by investing in the spot and forward markets.
Despite of the smart strategy proclaimed by Rusnak, he invested in directional trading and preferred simple currency forwards for profits. Another mistake he committed was to purchase foreign exchange products carrying “high deltas” (underwater products with high premiums).
What were the primary bogus options used by John Rusnak?
According to the experts, John Rusnak suffered a huge lose during 1997 when his bet on Japanese Yen felt short with a steep decline in the value of Yen. As a result, Rusnak was forced to create bogus options to reflect a hedgy position.
Most of the bogus options used by Rusnak were clever enough to deceive the control environment of the Allfirst Bank.
- One of the first bogus options used by Rusnak was to add two bogus trades simultaneously within the system. These trades would cancel out each other with no cash in or out of the system.
- In addition to it, Rusnak was able to convince back-office staff for automatic transaction confirmations. In fact, Rusnak got the power to create false assets for Allfirst Bank as per his requirements.
- Prime Brokerage Accounts: Rusnak went on to establish prime brokerage accounts with different financial institutions like Citibank and Bank of America to increase the scope of his real trading. Rusnak convinced his superiors that these accounts would help the company generate better profits and reduce back-office operations significantly.
According to Investopedia.com, Prime Brokerage is
“A special group of services that many brokerages give to special clients. The services provided under prime brokering are securities lending, leveraged trade executions, and cash management, among other things. Prime brokerage services are provided by most of the large brokers, such as Goldman Sachs, Paine Webber, and Morgan Stanley Dean Witter.”
- Use of Allfirst’s Balance Sheet: Prime brokerage accounts allowed Rusnak to grow his trading activities and use of the Allfirst’s balance sheet. However, in 2001, the bank treasury department experts grew suspicious because of the high balance sheet usage by Rusnak and comparatively lower returns.
- Manipulation of the Value at Risk Metric: Allfirst bank was using Value at Risk (VaR) metrics to monitor their trading. With bogus options, Rusnak was able to indicate a hedge position and with his “holdover” bogus options, Rusnak reduced his overall open currency position.
All of these practices were discovered only when the bank asked Rusnak to release some of the used capital. It was then only that the bank realized that Rusnak was trading in red all the time. Rusnak was fired from the company immediately along with 6 other executives who were blamed with the incapability to detect such a scam.
Rusnak was sentenced to seven and half years in prison effective from 17 January 2003 for hiding $691 million losses and rogue trading practices. After the discovery of the fraud, AIB, the parent bank, sold Allfirst to M&T Bank of Buffalo, New York and left more than 1,100 Allfirst employees jobless.