America's two largest banks have "inappropriately" claimed that AIB was so immersed in illegal activity that it should be blocked from taking a $500 million (€420 million) claim against them for their involvement in the John Rusnak trading scandal, a New York federal judge has ruled.
In a written ruling outlining her decision earlier this month to allow AIB to take its case against Bank of America and Citigroup, US District Court judge Deborah Batts said that AIB's former US subsidiary, Allfirst was not an "active, voluntary participant in the unlawful activity that is the subject of the suit".
Judge Batts said such a defense against AIB's claim would only work if Allfirst or AIB had broken the law in cooperation with Bank of America or Citigroup. However, Judge Batts was satisfied Allfirst "did not fraudulently conceal information from itself" and was not an "active, voluntary participant" in the fraud of its currency trader, John Rusnak, who lost $691 million before his scheme was uncovered in February 2002.
AIB's New York legal team said disclosure in the case is expected to take more than a year and that the case could go to trial in 2007.
Judge Batts cited a case involving two gangster rap moguls to show that Bank of America and Citigroup must answer AIB's claims of fraudulent concealment. AIB alleges that Bank of America and Citigroup disguised Rusnak's massive losses and lent him $200 million to keep him trading with them. AIB has presented the court with emails between Rusnak and employees of the two banks, allegedly showing how they helped him disguise his losses.
Citing previous New York case law, Judge Batts said AIB would be working against its own interests by allowing Rusnak to accumulate such losses with these trading partners. Someone like Rusnak "though ostensibly acting in the business of the principal, is really committing a fraud for his own benefit" and it would be "most unjust" to charge AIB with knowledge of it, she said.
Outlining details of the case, Judge Batts noted that Bank of America and Citigroup had allegedly lent Rusnak $200 million in early 2001 while disguising the loans as "options". These "options" allowed the two banks to purchase Japanese yen from Rusnak "at a rate strikingly lower than the current market rate", Judge Batts said, noting that AIB alleged these options were "lose-lose situations" for Allfirst.
She also noted AIB's claim that Bank of America and Citigroup "charged Rusnak an exorbitant interest rate on these transactions" and therefore should have known the loans were designed to hide Rusnak's massive losses.
Judge Batts also cited a case involving the ownership of work by gangster rapper, Ja Rule, to show that Bank of America and Citigroup had to answer AIB's allegation of fraudulent concealment.
"According to AIB's Complaint, defendants BofA and Citibank certainly made statements requiring clarification," she said, noting that the defendant banks had allegedly hidden confirmations of Rusnak's trades from his bosses at Allfirst.
