AIB Currency Losses: John Rusnak's Role and the Fraud
John Rusnak’s Role
In July 1993, Allfirst hired Mr. Rusnak. The hiring process was led by the head of treasury funds management for Allfirst, Mr. Ray. Mr. Rusnak had extensive experience in currency trading.
Mr. Rusnak promoted himself as a trader who used options to engage in a form of arbitrage, attempting to take advantage of price discrepancies between currency options and currency forwards. Allfirst had until then engaged in “directional” spot and forward trading, simple bets that particular currencies would rise or fall. Messrs. Cronin and Ray were intrigued by Mr. Rusnak’s style of trading, as he claimed it would diversify the revenue stream arising from simple directional trading.
Mr. Rusnak ws earlier reporting to a trading manager, when in 1999, when the trading manager left, he started directly reporting to mr. Ray. Mr. Ray's knowledge of foreign exchange was limited. However, Allfirst's treasurer, despite his own extensive currency-trading experience, nevertheless relied heavily upon the treasury funds manager to supervise Mr. Rusnak. Mr. Ray however, did not devote significant attention to Mr. Rusnak’s proprietary trading.
The treasury funds manager (Ray) was highly protective of Mr. Rusnak; he often strongly defended Mr. Rusnak in inquiries by the back office and risk assessment personnel.
Mr. Rusnak’s annual bonus was directly related to his net trading profits. In effect, Mr. Rusnak received a bonus equal to 30 percent of any net trading profits he generated in excess of five times his salary.
Mr. Rusnak was regarded by some fellow employees as strong and confident. In the market, Mr. Rusnak was perceived as an active trader and a profitable client for the brokers. Many brokerage firms wanted to cover Mr. Rusnak. The brokers and traders heavily entertained Mr. Rusnak, with meals, hotel stays, golf trips, Super Bowl tickets and other travel. He apparently liked to be wined and dined, and the brokers obliged.
Mr. Rusnak’s Fraud
Trading Strategy: Mr. Rusnak told everyone that he engaged in an arbitrage between foreign exchange options and the spot and forward markets to make consistent profits.
In fact, however, much of Mr. Rusnak’s trading was linear, directional trading. These were simple bets that the market would move in a particular direction. The majority of his real positions were simple currency forwards. He also bought some foreign exchange options with “high deltas” (options that were “deep in the money” and had large premiums). He traded in “exotic” options, although the trading in these products was infrequent.
The Bogus Options: Mr. Rusnak sustained substantial losses at some point in or about 1997, and it was around that time that his fraudulent activities may have begun. Using currency forwards, Mr. Rusnak apparently bet wrongly on the movement of the Japanese yen— he bought a great deal of yen for future delivery, only to see the value of the yen, and thus his forward positions, decline. To hide his losses and the size of his positions, he created fictitious options. These fictitious options also tended to give the appearance that his real positions were hedged.