Two major US banks, Bank of America and Citibank, have been drawn into the investigation of how foreign currency trader Mr John Rusnak incurred losses of $691 million (€796 million) at AIB's Allfirst, while allegedly hiding them using fictitious trades.
Both banks have received subpoenas for records of their transactions with Mr Rusnak. Bank of America and Citibank have been named as the main banks with prime brokerage agreements with Mr Rusnak. These agreements allowed the trader to make contracts using the banks' names, a procedure that possibly helped him conceal from Allfirst what he was doing.
The inquiries are focusing mainly on Citibank, a unit of Citigroup, which was the prime bank for Mr Rusnak's options transactions where the main losses occurred, while Bank of America dealt in spot and cash transactions only, according to banking sources.
A spokesperson for Bank of America said yesterday, "We are assisting in any way possible with the investigation." A Citibank spokesman declined to comment yesterday, other than to underline that "Allfirst has not raised with us any evidence or allegations of collusion." The bank said earlier this week that it had been "co-operating with AIB and their auditors in an effort to account for their transactions between Allfirst and Citibank".
AIB executives have said that Mr Rusnak sold option contracts to other currency traders to raise money to offset losses he did not want to reveal. Such options give the right to buy or sell a currency at a fixed price at a future date.
Citibank may have to face ackward questions if it turns out that the options sold by Mr Rusnak were so attractive to the buyer that red flags should have been raised at the huge amounts of money being drained from the AIB-owned bank when the options were exercised. Investigations are being conducted at Allfirst by Federal Reserve and bank regulatory agencies. An AIB-commissioned probe is being carried out by former US treasury official, Mr Eugene Ludwig. The FBI is undertaking a separate criminal investigation of Mr Rusnak, but no charges are expected until the bank presents detailed evidence of wrongdoing.
Mr Ludwig's inquiries are reportedly focusing on how Mr Rusnak was allowed to consistently exceed his trading limits by as much as $1 million over five years without raising suspicions.
The fact that the trader was exceeding his $2 million to $3 million limits was apparently well known in the bank's offices in Baltimore's South Charles Street. The Baltimore Sun yesterday quoted an unnamed source at Allfirst as saying Mr Rusnak "didn't get around the system, the system caught him all of the time", but executives "looked the other way". "These people knew he was over his limit. They knew very well about it," the source said.
According to the paper, Mr Rusnak once reportedly told a risk control officer, Ms Svetlana Tslav, not to worry about the limits. "They walked around the hallways for about a year, and Lana would say, 'Hey, John, you are over your limits today'. And John would say, 'Don't worry, Lana, I will take care of you'." Ms Tslav was not available for comment.
