AIB has sued two US banks for at least $500 million in damages for allegedly helping former currency trader John Rusnak hide $691.2 million in losses.
The claim, filed in US District Court in Manhattan on Friday, accuses Bank of America and Citibank of helping undermine controls at Allfirst, the AIB subsidiary in Baltimore, Maryland where Rusnak worked. It also alleges that they even doctored trade confirmations to cover up fake trades, according to agency reports.
A spokeswoman for Citigroup, the New York-based parent of Citibank said: "We believe the suit is without merit." A spokesperson for Bank of America which is based in North Carolina could not be reached for comment.
Rusnak is currently serving 7 ½ years in prison for fraud. His former lawyer, Mr David Irwin, told The Irish Times yesterday he was not surprised at the news that AIB had taken the case against the two banks but would make no further comment.
In court papers AIB said that Rusnak hid his losses from 1997 until early 2002 by booking fictitious trades, manipulating Allfirst's internal controls and engaging in other misconduct.
It said Bank of America and Citibank in September 2000 joined Mr Rusnak's scheme by opening "prime brokerage" accounts for him and then helping him hide ever-growing losses from Allfirst.
AIB maintained that Rusnak persuaded the prime brokers not to seek margin from Allfirst, an act which would have forced Rusnak to reveal his trading losses. "As a result of the prime brokers' actions, Allfirst's losses from Rusnak's scheme ballooned, costing Allfirst an additional $500 million," the lawsuit said. AIB is claiming $500 million damages and an unspecified amount in punitive damages.
Rusnak ran up losses undetected for five years mainly from trading Japanese yen and disguised his losses by faking confirmations of hedging bets. In one spell he generated $200 million in so-called deep-in-the-money options contracts from Bank of America, Citibank and two other banks, in a failed attempt to recover his losses with even bigger wagers.
Two salesmen at Citibank were fired over the Rusnak affair, reportedly for inappropriate entertaining of Rusnak. The Allfirst trader was making such big bets that he was moving markets and counterparty banks entertained him lavishly to keep his custom.
He was taken on a trip to Italy, brought to the Super Bowl in Florida and was hosted in Las Vegas and at the US Open Golf Championship in Pebble Beach, California.
Rusnak told friends before sentencing that he believed the other banks' traders had sensed his desperation and took advantage of him when he was taking out the options contracts.
A report into the affair by US banker Mr Eugene Ludwig led AIB to conclude that the person "primarily responsible" for the losses was Rusnak. The bank dismissed several Allfirst executives, including Mr David Cronin, the bank's treasurer and Mr Robert Ray, who was Rusnak's immediate boss.
The FBI, the US Federal Reserve and Maryland regulatory authorities investigated what Mr Ludwig called the fourth biggest international bank fraud but no charges were made against any person or institution other than Rusnak.
Rusnak reportedly co-operated fully with the FBI but did not speak to Mr Ludwig or AIB before being sentenced last October for fraudulently claiming his salary and bonuses while incurring losses.
AIB has since sold Allfirst to M&T bank headquartered in Buffalo, New York in a transaction valued at $3.1 billion.
