“rogue traders and risk culture”

Titre de la présentation

OpRisk North America 2012:

“Rogue Traders and Risk Culture”

Neil RothBNP ParibasOversight of Operational Permanent ControlMarch 22, 2012

Rogue Traders and Risk Culture

March 22, 2012 2

Table of Contents

Purpose 3Definition of "Rogue Trader" 4Profile #1: Dany Dattel 5Profile #2: Nick Leeson 13Profile #3: Toshihide Iguchi 20Profile #4: Yasuo Hamanaka 31Profile #5: John Rusnak 38Profile #6: Jérôme Kerviel 45Profile #7: Kweku Adaboli 55Bad Traders, not Rogue Traders 60Rogue Trader Heat Map 61Fraud Diamond 62Lessons Learned: Shoring Up Defenses 67Epilogue - Profile #8: William Pullinger 68Contact Information 72Disclaimer 73End of Presentation 74


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Purpose

The purpose of this presentation is to examine the most infamous Rogue Trading incidents of all time from an Operational Risk Management perspective. By going into more detail than is typically available in Ops Risk books or news reports, we’ll be able to get a more accurate view of the similarities and differences between the frauds, and the role that Risk Culture played in facilitating the losses.


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Definition of “Rogue Trader”

A “Rogue Trader” is someone who trades either a specific product without authorization, or an amount without authorization. Most rogue trades involve a limit violation of some sort, where the trader has exceeded a specific $ amount. In most cases, the rogue trader will attempt to conceal the unauthorized trades.

Rogue Trading is not in and of itself illegal - it’s a violation of company policies and procedures. However, many of the things that accompany rogue trading (such as accounting fraud, forged documents, destroyed records, etc.) are illegal. When a rogue trader goes to jail, it’s usually because of these things.


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1. The Rogues:

Dany Dattel


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Dany Dattel

Alleged Rogue Trader: Dany DattelCompany: Bankhaus Herstatt

Trading Losses: ($480,000,000)

• In 1967, he was named Head F/X Trader. The F/X desk was packed with state of the art computers, monitors, and telephones. Iwan Herstatt nicknamed the area "Space Station Orion“ and called Dattel’s team the "Golden Youth."

• Iwan Herstatt founded Bankhaus Herstatt in 1956, in Cologne, West Germany.

• Dany Dattel was born in 1940. In 1944, the Nazis arrested his mother, and the two of them were imprisoned in Auschwitz for several months (the Labor camp, not the Death camp). As a young man, he wanted to be an actor. But, ultimately, he decided to pursue a career in finance.

• Dattel joined Bankhaus Herstatt in 1958, as a trainee on the foreign exchange trading desk.

Dany Dattel


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Dany Dattel

• In early 1973, the Nixon administration fully abandoned the Gold Standard.

• On February 28, 1973, Dattel sold $1 Billion for 3 Billion Marks, a rate of 1:3.

• Over the following months, the Dollar plunged versus the Mark.

• On May 31, 1973, Dattel closed out his position, buying back the $1 Billion for 2.5 Billion Marks, a profit of 500 Million Marks ($200 Million).

• The pinnacle of Dattel’s career was in 1973.

• With the Deutsche Mark pegged to the Dollar and the Dollar pegged to Gold in the waning days of the “Gold Standard,” the Dollar was convertible in Gold at $44/ounce. Dattel noticed that the value of the Dollar was around $70/ounce in “gray” Markets, while the Deutsche Mark seemed to be stable.

• Dattel became convinced that the Dollar would plummet versus the Mark when America left the Gold Standard, and when F/X rates floated freely. Dattel spoke to his superiors, and got permission to make a huge bet against the Dollar.

Iwan Herstatt


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Dany Dattel

• While these limit violations were technically rogue trades because they were not authorized, Dattel did not conceal them, and reported the profits and losses accurately.

• In September 1973, Dattel accumulated an enormous unauthorized position in Marks versus Dollars. But Marks depreciated, resulting in big losses. Now, rather than reporting the losses, Dattel decided to hide them, and try to trade his way back to profitability. The new trades almost always lost money.

• This pattern continued through the early part of 1974. Dattel took increasingly large positions, and would conceal the losses if the trades lost money.

• The stress got to Dattel, who kept a bowl of tranquilizers on his desk.

• On the street, rumors began to circulate that the bank was in trouble.

• The trade made Dattel a millionaire, and a star within Bankhaus Herstatt. Some junior members of his team bought Porsches.

• After his epic trade, Dattel was given carte blanche, and his team traded more or less as they pleased, routinely exceeding their trading limits.

Bankhaus Herstatt


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Dany Dattel

• Internal auditors approached him about rumors that he had lost huge amounts of money in Marks versus Dollars. He told them that the position was hedged with a winning position in Swiss Francs versus Marks. The auditors could not see the hedge, and reported their findings to management.

• In March 1974, West German regulators sent auditors to evaluate Dattel’s trading book. They found an unhedged long position of $3.2 billion Dollars versus 8 billion Marks. This single position was four times larger than Bankhaus Herstatt’s 2 billion Marks ($800 million) in operating capital.

• Regulators knew that if the Dollar plunged against the Mark, Bankhaus Herstatt would be insolvent. They tried to find a buyer. Deutsche and Commerzbank were approached, but wanted to know the extent of any losses first. The regulators called Iwan Herstatt, but he denied knowing anything about the huge position, and anything about concealed losses. Herstatt then met with Dattel.

• Dattel himself did not know the exact amount of the concealed losses. On June 11, 1974, he told regulators that the losses totaled ($25 Million). On June 16, he revised the figure to ($208 Million). A few days later, he revised the figure again to ($480 Million). When notified of this, Deutsche Bank and Commerzbank pulled out of a possible deal to buy Bankhaus Herstatt.


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Dany Dattel

• This caused mayhem in the world financial system. Rumors circulated that some of the twelve banks were now insolvent. Their identities were not known, so many banks stopped making payments to each other.

• Liquidity dried up, and the Clearing House Interbank Payments System (CHIPS) stopped functioning for several days.

• When the regulators closed the bank, Bankhaus Herstatt had received the Mark legs of the foreign currency transactions that were scheduled to settle that day, but had not sent out the Dollar legs that they owed.

• Twelve firms had sent Bankhaus Herstatt a total of $620 million worth of Marks. These banks were now de facto unsecured creditors of Bankhaus Herstatt.

Confusion in Cologne as Bankhaus Herstatt is shuttered.

• The regulators decided to close the bank. They chose a time in the afternoon when West Germany was playing Yugoslavia in a World Cup soccer game, thinking that most bank employees would not be at their desks, and that most depositors would be temporarily distracted by the game.


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Dany Dattel

• It was months before confidence in the world banking system was restored.

• Criminal prosecutions in the wake of the failure of Bankhaus Herstatt began in 1979. Ultimately, six employees of Bankhaus Herstatt (including three of Dattel’s traders) were found guilty of various charges, and served between 2-7 years each in prison. Iwan Herstatt himself was found guilty of breach of trust, and sentenced to 2 years probation.

• Interestingly, Dany Dattel was never tried. As Dattel’s legal troubles mounted, he began to act erratically. His attorney told the presiding judge that Dattel was showing signs of KZ Syndrome, a dangerous form of Post Traumatic Stress Disorder that has a high suicide rate. Dattel’s KZ Syndrome was supposedly related to the time he spent as a child in Auschwitz. The judge agreed. Citing a Denazification law from 1946 that sought to reduce the number of prison suicides, he decided not to prosecute Dattel.

• In the aftermath of the event, a whole new category of risk came into being, called “Settlement Risk.” Settlement Risk (also known as “Herstatt Risk”) is the risk that one party in a transaction will default after the other party has met their obligations.


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Dany Dattel

• It should be noted, however, that Bankhaus Herstatt did not fail because of Settlement Risk. Regulators closed Bankhaus Herstatt because they had insufficient capital relative to the size of their exposures.

• At the end of 1974, in response to the failure of Bankhaus Herstatt and the ensuing chaos in the financial system, the G-10 countries formed the Basel Committee on Banking Supervision, under the auspices of the Bank for International Settlements (BIS).

• In 1988, the committee authored the Basel Capital Accord.

• Revised Capital Accords commonly known as “Basel II” and “Basel III” were introduced in the subsequent decades.


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2. The Rogues:

Nick Leeson


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Nick Leeson

Rogue Trader: Nick LeesonCompany: Barings

Trading Losses: ($1,300,000,000)

• Leeson's performance as a member of the team impressed his superiors. So, in 1992, when Barings began setting up a futures trading operation in Singapore, Leeson was offered the opportunity to manage the back-office. He accepted the offer, and relocated to Singapore with his wife Lisa.

• Nick Leeson was born in 1967 in Watford.

• Leeson wanted to go to college, but he failed the qualifying exam in mathematics. So, he left school and got a job with a bank in London.

• In 1989, he took a job in the back-office at Barings.

• In 1991, Barings' branch in Indonesia was experiencing problems in their trade support area. Leeson was sent to Indonesia as part of a trouble shooting team.

Nick Leeson


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Nick Leeson

• The Singapore office had a shortage of traders, so Leeson asked the Home Office if he could be a trader. They agreed to the move. He remained in charge of the back-office while he traded.

• Leeson’s first trading assignment was as an arbitrageur covering the Nikkei index. He monitored the price of Nikkei futures in the financial markets in Singapore and Osaka. If he saw a large enough price difference in the two markets, he was supposed to simultaneously buy the less expensive contracts, and sell an equal number of the more expensive ones. The Market Risk was minimal, because Barings would be long and short an equal number of Nikkei futures. The difference in the purchase and sales prices represented the profit or loss for Barings.

• Soon after he began trading, one of his back-office clerks made an error which cost Barings $32,000. Leeson didn‘t want this person to get into trouble, so he booked the loss to error account 88888, and suppressed the entry so that it would not appear in management reports. This worked – Leeson’s superiors in London did not find out about the error. Ominously for Barings, Leeson now knew how to hide losses.


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Nick Leeson

• Leeson started speculating in the futures markets. Like any trader, he had good and bad days. But, because Leeson always reported his profits while rarely reporting his losses, his reported P&L was much better than his actual P&L.

• Leeson’s reported P&L impressed his colleagues and his superiors, and he started to get a reputation as a top trader. However, by the end of 1992, Leeson had hidden losses totaling ($3.6 Million) in account 88888.

• In 1993, Leeson's reputation continued to grow. He was the subject of newspaper and magazine articles, and was seen as one of the most dynamic young traders in Singapore.

• Barings gave Leeson more and more autonomy to trade. The Singapore office’s profit ostensibly increased by $14 million in 1993, due almost entirely to Leeson's seemingly profitable trading book. What they did not know, was that Leeson’s actual trading results were terrible.

• As his losses mounted, Leeson had to ask London for cash to cover margin calls. Leeson told his superiors that the underlying trades were for customers. When asked for documentation, he faxed them deposit tickets that he had forged. Management believed him, and honored his requests.


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Nick Leeson

• Desperate to recoup his losses, Leeson kept making bigger and bigger bets, all the while hiding his losses in account 88888. By August 1994, the debit balance in account 88888 was ($332 million). By the end of the 1994, the balance was ($512 million). Barings was now on the precipice of financial ruin.

• At the end of 1994, Leeson’s deceptions were almost discovered by Coopers & Lybrand, Barings’ external auditors. In order to cover some losses, Leeson fabricated a $79 Million credit that had ostensibly been paid to Barings by Spear Leeds. Coopers & Lybrand asked Leeson to contact Spear Leeds and ask them to fax over a copy of the payment instructions. Leeson forged the document and faxed it to the auditors. He was careful to change the “Fax Number” field on the watermark of the fax so that it appeared to have been sent from a fax machine at Spear Leeds. However, Leeson mistakenly did not change the “Name” field on the watermark. Had the auditors looked more closely at the fax, they would have noticed that it was not sent from “Spear Leeds.” Rather, it was sent from “Nick and Lisa.” Meaning, it was sent from the fax machine in the Leesons’ apartment.

• Coopers & Lybrand’s final report rated the controls in Barings’ Singapore office to be “Satisfactory.”


March 22, 2012 18

Nick Leeson

• With the Nikkei at 19,000, Leeson became convinced that it would rise. So, he bought 10,000 "straddles" on the Nikkei trading between 18,500 and 21,500. Leeson’s trade was undone when, on January 17, 1995, a major earthquakecaused significant damage in Kobe, Japan. The Nikkei fell 7%, thereby making the straddles unprofitable.

• Leeson then went all-in in what would prove to be the position that finally broke Barings. He bought 20,000 futures contracts on the Nikkei @ $180,000 each, for a nominal value of $3.6 Billion. Because of the immense size of the position, if the markets moved sharply against him, Barings would not survive.

• At first, the trade was profitable. The Nikkei started climbing and by February 6, 1995, Leeson had made $200 Million on the contracts.

• But shortly thereafter, the Nikkei plummeted again. In the end, the losses on this one trade totaled ($900 Million).

• Leeson was now often seen vomiting in the bathroom near the trading floor. On February 23, at the end of the trading day, he left a note on top of his desk. It said, "I'm sorry."


March 22, 2012 19

Nick Leeson

• Leeson knew that he would be jailed for fraud once his activities were uncovered. He wanted to serve his time in the UK rather than Singapore. So, he and his wife fled the country.

• Meanwhile, internal auditors uncovered his frauds. On February 29, Barings declared bankruptcy under the weight of ($1.3 Billion) of trading losses incurred by Leeson. What was left of Barings was purchased by ING for £1.

• Leeson never made it back to the UK. On March 2, he was arrested in Germany, and flown back to Singapore to face criminal prosecution.

• On December 1, 1995, Leeson pled guilty to two counts of fraud and forgery, and was sentenced to 6.5 years in prison. He was released after serving four.

• Leeson published a book called “Rogue Trader.” The book was later turned into a movie, with Ewan McGregor playing Nick Leeson.

• Leeson currently resides in Ireland. Until 2011, he was the CEO of the Irish soccer team Galway United.

The World’s Most Wanted Man in police custody.


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3. The Rogues:

Toshihide Iguchi


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Toshihide Iguchi

Rogue Trader: Toshihide IguchiCompany: Daiwa


• In 1984, he was promoted to Trader, and started trading U.S. Treasury Bonds.

• Daiwa’s NY office was small. Because of his back-office experience, Iguchi was allowed to do all of his own bookkeeping and financial reporting while he was trading. Daiwa had no firewall between the front and back-office.

• Iguchi’s problems began when he lost $200,000 on a bond trade. He concealed the loss on Daiwa’s books, and then tried to recoup the money through more aggressive trading. However, the new trades also lost money. Undeterred, he kept increasing his bets, only to lose more money.

• Toshihide Iguchi was born in Kobe, Japan in 1951. In 1971, he moved to the U.S. He graduated from Southwest Missouri State University in 1975.

• His first job after college was selling used cars. In 1976, his father got him a job in the back-office at Daiwa Bank in Manhattan.


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Toshihide Iguchi

• Daiwa’s custodian in the U.S. was Bankers Trust.

• When Iguchi lost money on a bond trade, he would secretly sell a bond that they Daiwa had in inventory, and use the proceeds to pay the counterparty.

• When he received Daiwa’s monthly account statement from Bankers Trust showing the sale of the bond, he would replace it with a fake one which indicated that the securities were still in custody.

• If a customer tried to redeem a bond that Iguchi had already sold, he would get the proceeds by selling another bond that Daiwa had in inventory at Bankers Trust.

• Then, he would produce a series of fake confirms and forged documents that made it seem to the customer that their bond had been the one that was just sold.


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Toshihide Iguchi

• Iguchi also traded futures contracts.

• While he was responsible for the settlements and bookkeeping of his own bond trades, he did not have the same level of control over futures trades. This meant that any losses he incurred on futures trades were much more likely to be detected than losses on bond trades.

• When he lost money on a futures trade, he would execute a “basis trade” to move the loss out of his futures trading account, and into his bond trading account, where he could then secretly sell a bond from Daiwa’s inventory to pay for the loss, while at the same time concealing both the trading loss and the sale of the bond on Daiwa’s books.

• Basis trades bypass cash settlement in favor of the physical settlement of the contract’s underlying asset. The terms of basis trades are flexible, in that their values do not have to be set at the market price. Instead, they can be set anywhere between the day’s high and low prices, as long as the terms are agreed upon by both parties involved in the trade.


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Toshihide Iguchi

• The Futures side of the basis trade was profitable, because the purchase price was lower than the day’s high. The Bond side of the basis trade was unprofitable, because the market price was lower than the day’s high price. Note that the Net of the two basis trades is equal to the original value of Iguchi’s futures trade. So, to the dealer, the machinations seemed legitimate.

• If Iguchi made money on a futures contract, he would simply report it.

• However, if he lost money on a futures contract because it fell in price, he would do a basis trade with the dealer, and ask for the value to be set at the day’s high.

• This is how the trades looked to Iguchi’s dealer:

Futures Trade: • Day’s Range = 100-110 • Purchase Price = 108 • End Price = 102 • Profit/Loss = -6 (102-108=-6) ---------------------------------------------- Basis Trade - Futures Side: • Value (set at Day’s High) = 110 • Purchase Price = 108 • Profit/Loss = +2 (110-108=2) Basis Trade - Bond Side: • Value (set at Day’s High) = 110 • End Price = 102 • Profit/Loss = -8 (102-110=-8) -----------------------------------------------Basis Trade - Net: • Futures Side Profit/Loss = +2 • Bond Side Profit/Loss = -8 • Net Profit/Loss = -6 (2-8=-6)


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Toshihide Iguchi

• However, to conceal his losses, Iguchi would forge a trade confirmation to change the value of the “Basis Trade - Bond Side” from the day’s high price to the current market price.

• This made the Bond side of the basis trade appear to be break-even on Daiwa’s books, and made the Net of the two basis trades appear to be profitable:

Futures Trade: • Day’s Range = 100-110 • Purchase Price = 108 • End Price = 102 • Profit/Loss = -6 (102-108=-6) ---------------------------------------------- Basis Trade - Futures Side: • Value (set at Day’s High) = 110 • Purchase Price = 108 • Profit/Loss = +2 (110-108=2) Basis Trade - Bond Side (Forged): • Value (set incorrectly as the End Price) = 102 • End Price = 102 • Profit/Loss (Fake) = 0 (102-102=0) ---------------------------------------------- Basis Trade – Net (Fake): • Futures Side Profit/Loss = +2 • Bond Side (Fake) Profit/Loss = 0 • Net Profit/Loss (Fake) = +2 (2-0=2)


March 22, 2012 26

Toshihide Iguchi

• The basis trades had another important benefit for Iguchi, in that they allowed him to access Daiwa’s inventory of bonds anytime he needed to sell one to raise funds to pay off a counterparty on a losing trade.

• Normally, Bankers Trust would not release a bond unless they received cash for it. However, they would release a bond if they received a trade ticket showing that the bond was used in an exchange for a futures contract as part of a basis trade. Iguchi used these techniques year after year on thousands of losing trades. Over time, his losses accumulated to historic proportions.

• Iguchi’s base salary was $40,000 a year. Another firm offered him a job with a base salary of $150,000. However, Iguchi had to turn it down. By this time, he had concealed hundreds of millions of dollars of losses, and knew that he would go to jail if the frauds were discovered. As a result, Iguchi rarely missed work.

• One day, a flood kept Iguchi from commuting to work. Fearing that his losses would be discovered if his trades were settled by his coworkers, he called brokers at other firms, and asked them not to settle his trades until he returned to work. While this should have been a huge red flag to his coworkers, no one at Daiwa wanted to directly challenge their star trader.


March 22, 2012 27

Toshihide Iguchi

• Year after year, Iguchi continued the pattern of covering up his losses, while reporting his gains. At one point, he was single-handedly responsible for over 50% of the NY office’s trading profits. But, it was all a fiction.

• Regulators sensed that something was amiss with Iguchi, so they paid special attention to him. However, they were never able to catch him doing anything illegal.

• In one infamous incident in 1992, the Fed sent a team of auditors to inspect Daiwa’s trading desk. At Iguchi’s prompting, while the auditors’ attention was focused elsewhere, Iguchi and the other traders left the building. Then, stacks of cardboard boxes and office supplies were piled on top of the desks in the trading room, and all of the computers, monitors, and lights were turned off. When the auditors entered the room, they were told that it was just a storage room. The auditors were skeptical, but moved on.

• Commenting on this incident and other close calls, Iguchi would later say, “I was sometimes frightened by my own surprisingly strong nerves.”


March 22, 2012 28

Toshihide Iguchi

• As it turned out, the extreme stress of his situation eventually overwhelmed him. He contemplated suicide, but was talked out of it by his priest.

• By the summer of 1995, Iguchi could no longer keep up the deception. He said, “After 11 years of fruitless effort to recoup losses, my life was filled with fear, guilt, and deception. I saw that no one was coming to stop this. There was no end in sight.” So, he decided to turn himself in to management.

• On July 13, 1995, Iguchi sent a letter to Daiwa President Akira Fujita, detailing his losses, and all of the illegal activities he had engaged in to conceal them.

• In order to conceal his activities, Iguchi had forged an incredible 30,000 trade tickets, confirms, reports, and other documents.

• His losses were staggering. Daiwa’s books indicated that they had $4.6 billion in bonds on deposit with Bankers Trust. But the actual figure was $3.5 billion –Iguchi had racked up over ($1.1 billion) in trading losses since 1984, and had cashed in the bonds to pay for the losses. All told, Iguchi sold $733 million in bonds from Daiwa’s own portfolio, and $377 million that belonged to their customers.


March 22, 2012 29

Toshihide Iguchi

• When Iguchi sent his letter to Daiwa, they were legally obligated to report the fraud to the regulators immediately.

• However, Daiwa wanted to wait until after they reported their next Quarterly numbers, so they didn‘t contact the Fed and the SEC until September 18, which was two months later.

• The Fed and the SEC contacted the FBI, and Iguchi was arrested on September 24.

• Iguchi cooperated with the investigators.

• When he was deposed, Iguchi told the judge that after he had confessed to Daiwa senior management, “…they asked me to continue concealing the losses.”

• When asked about this, officials at Daiwa’s headquarters in Osaka confirmed that this was true. They justified it to the investigators by saying that they did this “…in order to keep him from escaping.”

Iguchi on the cover of Time Magazine


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Toshihide Iguchi

• In February 1996, Iguchi pled guilty to fraud and forgery. He was sentenced to four years in prison.

• Daiwa pled guilty to 16 criminal charges, including falsifying books and records, conspiracy, wire fraud, and obstructing a Fed examination. They were barred permanently from doing business in the U.S.

• In the wake of the scandal, most of Daiwa’s senior management resigned, including the Chairman, the President, and the Deputy President.

• While in prison, Iguchi wrote and published a book called “The Confession”about his years at Daiwa, which became a best seller in Japan.


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4. The Rogues:

Yasuo Hamanaka


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Yasuo Hamanaka

Rogue Trader: Yasuo HamanakaCompany: Sumitomo


• He developed a reputation in copper trading circles for his aggressiveness, and his willing to take huge risks.

• He was nicknamed “Mr. Copper” and “Mr. 5%” because he had direct control over 5% of the world’s copper supply. Ultimately, he became the most influential copper trader in the world.

• Yasuo Hamanaka joined Sumitomo as a trainee in the Credit department.

• He joined the Nonferrous Metals department as a trader in 1981, and did very well, and was named Head Copper Trader in 1986, when he was 38.

• Over time, he accumulated enough political power within Sumitomo that he was allowed to settle his own trades, and do his own bookkeeping.

Yasuo Hamanaka


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Yasuo Hamanaka

• Hamanaka’s frauds were almost uncovered in 1991, when an American broker allegedly received a letter from Hamanaka asking him to backdate a fake trade. The broker gave the letter to London Metal Exchange (LME) CEO David King.

• King contacted Sumitomo about Hamanaka.

• When questioned, Hamanaka denied any wrongdoing, and Sumitomo took no action against their star copper trader.

• From 1986-1989, Sumitomo’s Copper Trading desk racked up huge losses from purchases and sales of physical copper, and the trading of copper futures. However, Hamanaka hid the losses.

• He maintained a secret book in which he recorded all of his fraudulent activities.

Copper ingots


March 22, 2012 34

Yasuo Hamanaka

• Hamanaka devised a long-term strategy to corner the Copper market, manipulate prices, and reap large profits on both copper physicals and futures.

• To launch his plan, Hamanaka needed the ability to accumulate an enormous number of copper futures contracts without being seen as a speculator, as this would draw regulatory scrutiny.

• Hamanaka entered into an arrangement whereby Sumitomo would buy copper from Global Minerals & Metals Corp. Global would then purchase large numbers of warrants redeemable in physical copper from producers in Zambia, who were in on the deception.

Sumitomo

Zambians Global

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Global buys warrants redeemable in physical copper from Zambians

Sumitom

o buys physical

copper from G

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(1)

(2)

(3)• What the street didn’t know was that Sumitomo would then sell the physical copper they had purchased from Global back to the Zambians, thus completing a triangle of transactions.


March 22, 2012 35

Yasuo Hamanaka

• Sumitomo opened cash and trading accounts with Merrill Lynch. Using Sumitomo’s financial clout, Hamanaka was able to establish $600 Million in credit facilities with Merrill Lynch and several other A-list banks.

• Hamanaka also opened a “B” account at Merrill Lynch for Global. With Merrill Lynch’s consent, Global was allowed to utilize the credit lines that Merrill Lynch had approved for Sumitomo. Global was given power-of-attorney, and could theoretically trade any way they saw fit. Of course, neither Merrill Lynch nor any of Sumitomo’s other creditors were aware of the true nature of the relationship between Sumitomo and Global.

• With all of the angles worked out, Hamanaka went live with his strategy.

• By September 1995, Sumitomo owned warrants on 50% of the physical copper that was traded on the LME. By November 1995, that figure increased to 90%. He also owned by far the biggest futures position in the world. The copper market was now cornered.

• For several years, the strategy was seemed to be profitable for Sumitomo. However, all the while, Hamanaka was hiding a mountain of losses.


March 22, 2012 36

Yasuo Hamanaka

• In Q1 2006, the world supply of copper increased at an annualized rate of 7%, while the demand remained stable. In normal market conditions, these circumstances would usually cause prices to fall. However, because Hamanaka had choked off the supplies, copper prices actually increased by 40% on the LME.

• The irrational price movements on the copper market caught the attention of legendary short seller George Soros. Determined to attack the price of copper, Soros allegedly assembled a consortium of hedge funds, all of whom started shorting copper aggressively.

• A battle royale ensued. Hamanaka used the financial might of Sumitomo to buy huge quantities of it on the LME to try to prop up prices. After several weeks, Sumitomo’s vast resources proved to be too much for even Soros to overcome, and Soros ceased his efforts, giving an impressive victory to Hamanaka.

• For his part, Hamanaka was reportedly delighted with the outcome, although he had taken to chain smoking on the trading floor to help him cope with the stress.


March 22, 2012 37

Yasuo Hamanaka

• In the end, an errant piece of mail led to Hamanaka’s downfall. When he traded on the LME, he arranged for the paperwork to be sent directly to himself. However, the paperwork for one of his unauthorized trades was inadvertently sent to Sumitomo’s Finance department. At around the same time, a clerk at Sumitomo discovered unauthorized accounts at Merrill Lynch, and reported them to senior management. Sumitomo started an investigation.

• On May 9, 1996, Sumitomo demoted Hamanaka from his role as Head Copper Trader. On June 5, 1996, Hamanaka confessed what he had done, and gave management his secret trading book.

• On June 14, 1996, Sumitomo’s president told shareholders about ($1.8 Billion) in previously undisclosed losses that were incurred by Hamanaka.

• To reduce their exposures, Sumitomo had to sell off much of the inventory that Hamanaka had accumulated. There were few buyers, causing prices to drop sharply. Sumitomo lost an additional ($800 Million) selling off Hamanaka’s excess copper inventory, bringing the total losses associated with Hamanaka’s unauthorized activities to ($2.6 Billion).

• Yasuo Hamanaka was arrested and tried. He pled guilty to the charges, and was sentenced to eight years in prison.


March 22, 2012 38

5. The Rogues:

John Rusnak


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John Rusnak

Rogue Trader: John RusnakCompany: Allfirst/Allied Irish

Trading Losses: ($691,000,000)

• Rusnak’s career at Allfirst was undistinguished at first. He earned a good base salary of $85,000, a modest bonus, and was considered to be a steady performer for the first four years that he worked there.

• John Rusnak was born in 1964. He graduated from Bucknell University in 1986, after which he went to work for Chemical Bank and Fidelity.

• In 1993, he joined First Maryland Bancorp as a Foreign Exchange trader.

• First Maryland merged with Dauphin Deposit Corp. and was renamed “Allfirst Financial,” which was ultimately acquired by Allied Irish Bank (AIB).

John Rusnak


March 22, 2012 40

John Rusnak

• Rusnak’s downfall began in 1997, when he incurred large losses betting that the Yen would strengthen versus the Dollar. Afraid of the fallout, he entered fictitious options trades on Allfirst’s systems that made it appear that his losing trades were hedged, and forged trade confirms.

• Emboldened by his success in covering up the loss, Rusnak doubled down on the Yen to try to get even. Once again, his trades lost money.

• He continued trading and losing money, then concealing the losses by entering winning trades on the system. This pattern continued for months, until Rusnak had lost millions, and then tens of millions, and ultimately hundreds of millions of Dollars.

• Rusnak’s Value at Risk (VaR) limit was supposed to be $2.5 Million for any single currency position. Allfirst’s VaR model estimated potential losses by generating 1,000 hypothetical F/X spot trades for a trader’s portfolio, and then calculating the resulting Profit or Loss. The VaR of a position was equivalent to the tenth-worst outcome produced by the simulation.

• Allfirst’s model had a major flaw - the underlying data was taken from the traders own spreadsheets, not from independent sources.


March 22, 2012 41

John Rusnak

• Rusnak knew how his VaR was calculated, so he altered his spreadsheets to exploit this flaw. At the height of his activity, Rusnak had over $1 Billion in unhedged Yen positions versus the Dollar. Yet, he was never flagged for a limit violation.

• His losses were staggering. From 1997-1999, Rusnak concealed ($130 million) in losses. In 2000, he concealed another ($211 million). And in 2001, he concealed another ($270 million).

• As the losses grew, so did the size of the offsetting fake trades. The fake trades were so large and so profitable for Allfirst that Rusnak thought that it was only a matter of time until his activities were discovered.

41

• Rusnak wasn’t exactly a master criminal. In 2001, an external auditor wanted to confirm a (fake) trade. When Rusnak was asked for the counterparty’s contact info, he told them “2472 Broadway in Manhattan.” This was actually a Mailboxes Etc. storefront, where Rusnak rented a box under the name “David Russell.” A few days later, Rusnak went to the store, retrieved the letter, forged the confirm, and replied to the auditor. The ruse worked.

2472 Broadway circa 2001


March 22, 2012 42

John Rusnak

• Rusnak started using “historic rate rollovers” to defer reporting his losses.

• Historic rate rollovers allow existing currency positions to be rolled forward using historic rates instead of current market rates.

• Allfirst’s Internal Auditors saw that Rusnak was using historic rate rollovers in epic amounts, but didn’t really question him about it.

• However, historic rate rollovers use the Balance Sheet.

• In short order, Rusnak’s was single-handedly using 10% of Allfirst’s Balance Sheet. Allfirst’s Treasurer ordered him to stop using the rollovers.

• Rusnak still needed vast amounts of money to meet margin calls and pay for his losses. But, he couldn’t ask anyone for it directly, so he had to come up with another way to get his hands on some cash.


March 22, 2012 43

John Rusnak

• In February 2001, Rusnak started selling “deep in the money options.” With deep in the money options, the strike price of the option in the future is extremely low relative to the current market price in the case of a Call, and extremely high in the case of a Put. This means that buyers of deep in the money options are very likely to make large profits. For the seller, the main benefit of deep in the money options is instant liquidity - they receive money immediately, in exchange for a high likelihood of having to pay a lot more money at the exercise date, which is in the future.

• Rusnak raised $300 Million by selling deep in the money options to Citibank, Deutsche, Bank of America, and Bank of New York. The exercise dates weren't until February 2002, so Rusnak was able to continue his unauthorized trading for another year. But, he was still not able to recoup his losses.

• When the deep in the money options came due, Rusnak had to pay the four banks ($380 Million), an ($80 Million) premium over the sale price of the options. This additional loss of ($80 Million) brought Rusnak’s total losses to ($691 Million). Rusnak was finally literally and figuratively out of options.


March 22, 2012

John Rusnak

• On February 3, 2002, bank officials called the counterparties on several of Rusnak’s suspicious trades. The counterparties denied knowing the trades.

• On February 4, Rusnak didn't show up for work. Bank officials went to his house, but he wasn’t there.

• On February 5, Allfirst alerted the FBI. Rusnak was arrested, and indicted on seven counts of fraud.

• On January 18, 2003, he pled guilty to fraud, and promised to cooperate fully with the authorities. He was sentenced to 7.5 years in prison.

• In the wake of the scandal, six Allfirst officials resigned, and two were fired.

• Parent company AIB’s shares were hit hard, tumbling 16% on the day the scandal was made public.

• AIB decided to cut all ties with Allfirst, and eventually sold Allfirst to M&T Bank.


March 22, 2012 45

6. The Rogues:

Jérôme Kerviel


March 22, 2012 46

Jérôme Kerviel

Rogue Trader: Jérôme KervielCompany: Société Générale


• He was assigned to arbitrage discrepancies between equity derivatives and cash equity prices.

• Jérôme Kerviel was born in 1977 in Pont-l'Abbé, Brittany. He received a bachelor's degree in Finance from the University of Nantes, and then graduated in 2000 from University Lumière Lyon with a Master of Finance.

• He joined Société Générale in August 2000. For five years, he worked in the Middle and Back Offices, including areas that were responsible for trade support. Over time, he gained a sophisticated understanding of SociétéGénérale’s systems, procedures, and controls.

• In 2005, Kerviel moved to the front office, where he was a junior trader on the Delta One desk.

Jérôme Kerviel


March 22, 2012 47

Jérôme Kerviel

• Kerviel’s unauthorized speculation began shortly after he joined Delta One, when he took unauthorized positions in shares of Allianz. The trades made money. According to Kerviel, his bosses criticized him for taking the positions without authorization, but then increased his trading limits.

• Kerviel became bolder, and started taking unauthorized positions in Options, Futures, and Forwards in addition to Equities.

• Kerviel escalated his unauthorized positions in Equities, reaching a total of $200 Million in August 2006.

• In January 2007, he accumulated a short position in DAX futures totaling $1.2 Billion. This increased to $3.6 Billion in February, $7.8 Billion in March, and $42 Billion in July.

• He unwound the position in August, and then built up a new even larger portfolio of DAX and EUROSTOXX futures in September, reaching $45 Billion. He also had a portfolio of unauthorized directional Equities positions.

• Kerviel unwound all of his unauthorized positions by the end of 2007. His unauthorized trading in 2007 realized a profit of $2.2 Billion.


March 22, 2012 48

Jérôme Kerviel

• From January 2-18, 2008, Kerviel built up a new long position on index futures,reaching a stratospheric $72 Billion. This far exceeded Société Générale’s Market Cap, and was not hedged.

• The position was discovered on January 20, 2008. The size of the position put Société Générale at risk, so it was decided to unwind it. The position was unwound from January 21-23, incurring losses of ($8.9 Billion).

• Taking into account Kerviel’s trading profits of $2.2 Billion in 2007 and trading losses of ($8.9 Billion) in 2008, the net result of Kerviel’s unauthorized trading was a monumental loss of ($6.7 Billion). This amount exceeded the combined rogue trading losses incurred by Yasuo Hamanaka ($2.6 Billion), Nick Leeson ($1.3 Billion), Toshihide Iguchi ($1.1 Billion), John Rusnak ($691 Million), and Dany Dattel ($480 Million).

• On January 24, 2008, Société Générale announced that they had lost ($6.7 Billion) due to “exceptional fraudulent trading activities.” After the announcement, their stock plummeted, knocking ($18 Billion) off their market cap.


March 22, 2012 49

Jérôme Kerviel

• On January 26, 2008, Kerviel was taken into police custody. He was formally charged with “Abuse of Confidence” and “Illegal access to Computers,” and then released.

• As details of the case started to become public, Société Générale engaged in an ill-advised war of words with Kerviel. CEO Daniel Bouton described his unauthorized activities as a “mutant virus,” and called Kerviel “a terrorist.”Kerviel fired back, saying that management was aware of his activities, but turned a blind eye as long as they thought he was making a profit.

• Many people in France became sympathetic towards Kerviel. They thought of him as an anti-hero who was just doing what his bosses wanted him to do, only to be made a fall guy when markets turned against him.

• Around Paris, some people could be seen wearing shirts that were openly supportive of him, saying things like “I am Jérôme Kerviel’s Girlfriend” and “When I grow up I want to be like Jérôme Kerviel.” Pro-Kerviel T-shirt


March 22, 2012 50

Jérôme Kerviel


March 22, 2012 51

Jérôme Kerviel


March 22, 2012 52

Jérôme Kerviel

• In May 2008, Société Générale undertook a comprehensive analysis of the breakdowns of controls that allowed Kerviel to trade without authorization. They learned that Kerviel was flagged 74 times by the bank’s systems and controls, and that 64 of the 74 alerts were linked to unauthorized activities.

• They learned that Kerviel used three main techniques to conceal his activities:

1. Taking an Unauthorized Position: He would enter fictitious transactions to conceal the actual position and the Market Risk incurred. He would later cancel the fictitious transactions before confirmations, settlements, or controls were generated, and then replace them with a cascade of new fictitious transactions whose Settlement Dates were far into the future. Kerviel entered 947 transactions of this type.

2. Unwinding an Unauthorized Position: He entered fictitious pairs of Purchases & Sales at off-market prices that offset his Earnings. The pairs were made in identical quantities, so they wouldn’t create a new position on the system. Kerviel entered 115 transactions of this type.

3. Unrealized Earnings: These were calculated on a monthly basis. To offset Unrealized Earnings, he posted intra-month positive or negative provision flows. Kerviel entered 9 transactions of this type.


March 22, 2012 53

Jérôme Kerviel

• Société Générale did a comprehensive analysis of the deficiencies in their control environment that enabled Kerviel unauthorized activities. They also hired PricewaterhouseCoopers to do an independent analysis. Here were the major findings:

• Fragmentation of controls between several units, compounded by a lack of aggregated reporting.

• Inadequate resources allocated to control functions in general.

• Inadequate resources allocated specifically towards fraud prevention and detection.

• Insufficient response to corrective actions identified by Audit.

• A lack of seniority in the back and middle office staffs that ultimately diminished their effectiveness.

• Systems that did not process transactions effectively. Back office staff could not adhere to some controls that were in place, due to a reliance on manual processing.


March 22, 2012 54

Jérôme Kerviel

• In May 2010, Kerviel published a book entitled “L'engrenage: Mémoires d’un Trader (Downward Spiral: Memoirs of a Trader).” In it, he alleged that his superiors knew of his trading activities. The book was a bestseller in France.

• His trial began on June 8, 2010. On October 5, 2010, he was found guilty and sentenced to five years of prison, with two years suspended, full restitution of the money he lost, and a permanent ban from working in the financial services industry.

Kerviel’s Book


March 22, 2012 55

7. The Rogues:

Kweku Adoboli


March 22, 2012 56

Kweku Adoboli

Alleged Rogue Trader: Kweku AdoboliCompany: UBS


• Because the legal proceedings associated with the event are currently ongoing, UBS has decided not to provide their own comprehensive analysis yet.

• Kweku Adoboli was born in Ghana in 1980. His family moved to the UK in 1991.

• He attended private schools, and graduated from the University of Nottingham in 2003 with a degree in Computer Science and Management.

• In 2006 he joined UBS as a trainee in the Equities division, and ultimately joined the Delta One desk.

• On September 15, 2011, UBS announced that they had discovered a massive fraud in their London office.

Kweku Adoboli


March 22, 2012 57

Kweku Adoboli

• On September 6, Adoboli cryptically posted “I need a miracle” on his Facebookpage.

• On September 14, Controllers approached Adoboli about massive unauthorized trades due to settle on September 22 in his trading book. Adoboli then turned himself in to his boss, John Hughes.

• Hughes alerted senior management, who notified the Swiss Financial Market Supervisory Authority (FINMA) and the UK Financial Services Authority (FSA).

• UBS CEO Oswald Grubel then appointed a task force named “Project Bronze”to close or hedge Adoboli’s open positions.

• On September 15, UBS informed the London police of the suspected fraud at 1am. The police arrested Kweku Adoboli at 3:30am.

• Overnight, Project Bronze closed or hedged 70% of Adoboli’s positions. At 5:30am, UBS senior management met in Zurich to discuss the crisis.

• At 7:30am, UBS publically announced the discovery. Losses were estimated at ($2 billion), making this one of the biggest rogue trading events in history.

• UBS stock ended the day down 11% from the previous day’s closing price, knocking ($5 Billion) off their Market Cap.


March 22, 2012 58

Kweku Adoboli

• On September 16, Project Bronze finished closing or hedging the rest of Adoboli’s positions.

• On September 18, UBS issued a communiqué that increased the estimated losses to ($2.3 billion). The communiqué said that an unnamed trader concealed “unauthorized speculative trading” in EuroStoxx, DAX and S&P 500 index futures by creating fictitious hedging positions in internal systems over a three month time period. It also assured shareholders that all of the unauthorized positions were now closed or hedged, and that UBS remained well capitalized.

• On September 19, UBS announced the formation of a committee to investigate the incident. FINMA and the FSA also launched their own investigations.

• On September 24, Oswald Grubel stepped down as CEO, and was replaced by Sergio Ermotti on an interim basis.

• On October 20, Court proceedings began in London.

• 1/30/12: Kweku Adoboli pled “Not Guilty” to two counts of False Accounting, and two counts of Fraud. UK prosecutors contend that his false accounting dates back to at least 2008.


March 22, 2012 59

Kweku Adoboli

• Anonymous UBS sources told Reuters that Controllers had been focused on Adoboli since July 2011. They suspected that he was using fake offsetting trades with other parts of the bank to make it seem as if his long positions were hedged, and keep within his trading limits. These “internal futures” at UBS do not require confirmations.

• When Adoboli became aware of the attention he was receiving fromControllers, he allegedly switched to using forward settling trades that used Exchange Traded Funds (ETFs).

• Many of these trades had Settlement Dates two months after the Trade Dates. This bought Adoboli time to continue to manipulate UBS’s systems. As the Settlement Dates of the trades approached, Adoboli would allegedly cancel those trades, and replace them with new trades that also had Settlement Dates far in the future.

• Since his arrest, Adoboli has been largely silent, although his lawyer said that Adoboli was “sorry beyond words.”

• Kweku Adoboli’s trial is scheduled to begin in London in September 2012.


March 22, 2012 60

Two Who Didn’t Make the List: Bad Traders, not Rogue Traders

• Brian HunterHunter was a star energy trader with Amaranth Advisors. In 2005, he was given a bonus of $75 Million for trading profits of almost $1 Billion. In 2006, with the approval of Amaranth’s senior management, he bet almost the entire capital base of Amaranth on an unhedged natural gas futures position. Ultimately, the position lost ($6.5 Billion), putting Amaranth out of business.

Hunter is frequently called a “Rogue Trader.” However, this is inaccurate, because his trades were done with the knowledge of his management. It is more accurate to call Hunter a “bad” trader than a “Rogue Trader.” As of 2012, he continues to trade.

• Boaz WeinsteinWeinstein was a star derivatives trader with Deutsche. From 2006-2007, his team made a profit of $1.5 Billion, and Weinstein was reportedly paid more than Deutsche’s CEO. However, in a calamitous 2008, his prop trading team lost ($1.8 Billion). Weinstein left Deutsche in 2009 to start his own hedge fund.

Weinstein is also sometimes called a “Rogue Trader.” This is inaccurate, as his trades were done with the knowledge of his superiors. Like Hunter, it is more accurate to call Weinstein a “bad” trader than a “Rogue Trader.”


March 22, 2012 61

Rogue Trader Heat Map

• The diversity of results on the Heat Map clearly illustrates that Rogue Traders do not fit neatly into one well defined profile.

Dany Dattel

Nick Leeson

Toshihide Iguchi

Yasuo Hamanaka

John Rusnak

Jérôme Kerviel

Kweku Adoboli

William Pullington

Gender Male Male Male Male Male Male Male Male

Age 30s 20s 30s-40s 30s-40s 30s 20s-30s 20s-30s 30s-40s

Nationality West Germany UK Japan Japan USA France UK UK

Product/Desk F/X Derivatives Fixed Income Commodities F/X Delta One Delta One Treasury

Location Home Office Branch Office Branch Office Home Office Branch Office Home Office Branch Office Home Office

Gender 100% were MaleAge 3 were in their 30s-40s / 2 were in their 20s-30s / 2 were in their 30s / 1 was in his 20s

Nationality 3 were British / 2 were Japanese / 1 was West German / 1 was American / 1 was FrenchProduct/Desk 2 were in Delta One / 2 were in F/X / 1 was in Commodities / 1 was in Derivatives / 1 was in Fixed Income / 1 was in Treasury

Location 50% worked in the Home Office / 50% worked in a Branch Office


March 22, 2012 62

Predicting Employee Fraud: The Fraud Diamond

• The “Fraud Diamond” is well established among criminologists as a means of evaluating which employees present the highest risk of committing frauds. The four points of the Fraud Diamond are Opportunity, Motivation, Rationalization, and Capability.

Capability

Rationalization

Potential for Employee Fraud Motivation

Opportunity


March 22, 2012 63


• An Opportunity is a circumstance that allows an employee to carry out a fraud. The failure to establish and enforce adequate procedures to impede and detect fraudulent activity also increases the number of opportunities for frauds to occur.

Potential for Employee Fraud

Opportunity


March 22, 2012 64


• Motivation is the incentive or pressure felt by the employee to commit a fraud. It could be a financial need, such as high medical bills, or gambling losses. Or, it could be the desire for material goods or a lifestyle that was not otherwise attainable. Other motivations are the desire to be seen as excelling at work, or the need to cover up losses.

Potential for Employee Fraud Motivation


March 22, 2012 65


• Rationalization is a frame of mind or ethical character that allows an employee to act fraudulently and to justify their actions. Rationalization involves an employee reconciling his or her behavior with social standards and commonly accepted notions of decency and trust.

Potential for Employee Fraud

Rationalization


March 22, 2012 66


• Someone with the Capability to commit a fraud has the intelligence and wherewithal to recognize and exploit internal control weaknesses. That person also needs to have the self-confidence to believe that they can pull off a fraud without getting caught.

Potential for Employee FraudCapability


March 22, 2012 67

Lessons Learned: Shoring Up Defenses

• All employees should receive comprehensive Anti-Fraud training on at least an annual basis.

• Management in Trading and in the areas that monitor and control trading should receive specialized training in the detection of Rogue Trading.

• People who monitor the traders should be made aware of which traders used to work in sensitive areas of the bank (IT, Compliance, Settlements, etc.).

• The Two-Week Block Vacation policy that most firms have in place should be rigorously enforced.

• Market Risk and Compliance personnel should be empowered to take action against traders who repeatedly violate their trading limits.

• A phone tip-line or email address should be established to enable employees to report suspected fraudulent activity anonymously, without fear of reprisals.

• Greater communication among Compliance, Internal Audit, Risk Management and the Governance areas should be encouraged wherever possible when rogue trading (or any other fraudulent activity) is suspected.


March 22, 2012 68

8. Epilogue - The Rogues:

William Pullinger


March 22, 2012 69

Introduction

Rogue Trader: William PullingerCompany: Union Bank of LondonTrading Losses: ($260,000,000)*

• Joined Union Bank of London (UBL) the year it was founded.

• Started out as a clerk in the Treasury Department. Was known as “The Man Who Never Took a Vacation.” Promoted to Head of Cashiering after 16 years.

• Was solely responsible for reconciling activity in UBL's main account with the Bank of England, where they had over $1 Billion* in cash and securities on deposit. Was also responsible for all associated accounting entries.

• Started unauthorized trading in UBL’s name, using his own money. Eventually traded much larger amounts, but used UBL’s money.

• He regularly traded with four counterparties. He arranged for them to send all confirms directly to his attention, rather than to the usual back-office address. He told the counterparties that he was trading on behalf of a wealthy investor who preferred to remain anonymous, and insisted that Pullinger handle all of his trades personally. ______________________* Present Day Value


March 22, 2012 70

Introduction

• His rogue trades were successful at first. He withdrew his profits from the bank, and bought real estate, racehorses, and other trappings of wealth.

• Inevitably, he started losing money. He paid for losses by withdrawing funds from UBL’s account with the Bank of England. He increased his bets to try to recoup his losses. Unsuccessful, he bet progressively larger amounts to try to get even. His losses mounted. Over time, his losses trading in British financial markets totaled ($75 Million*).

• Through an intermediary, Pullinger started trading huge amounts of money in foreign financial markets. However, lost even more money. Pullinger ultimately lost ($185 Million)* in markets outside of Britain, including ($50 Million*) in Mexico, and ($20 Million*) in Turkey. All told, after five years of rogue trading, his losses totaled ($260 Million*).

• A funeral obliged him to be away from the office for several days. His unauthorized activities were discovered, and he was arrested. Pullinger pled guilty, and was sentenced to 20 years in prison in Australia. He died on a penal ship while in transit to Australia.

• Depositors ran on UBL. The Bank of England announced they would backstop UBL. This calmed down depositors, ending the crisis.


March 22, 2012 71

Introduction

The year was:

18601860


March 22, 2012 72

Contact Information

For further information, please contact:

Neil RothBNP ParibasOversight of Operational Permanent Control51 West 52nd Street – 36th FloorNew York, NY 10019Phone: 212-471-6374Cell: 914-214-1152Email: [email protected]


March 22, 2012 73

Disclaimer

This document has been prepared by BNP PARIBAS for informational purposes only. Although the information in this document has been obtained from sources which BNP PARIBAS believes to be reliable, we do not represent or warrant its accuracy, and such information may be incomplete or condensed. This document does not constitute a prospectus or solicitation and is not intended to be and must not be the sole basis for any evaluation of the securities discussed herein. All estimates and opinions included in this document constitute our judgment as of the date of the document and may be subject to change without notice. Changes to assumptions may have a material impact on any recommendations made herein.

BNP PARIBAS or its affiliates may, from time to time, have a position or make a market in the securities mentioned in this document, or in derivative instruments based thereon, may solicit, perform or have performed investment banking, underwriting or other services (including acting as adviser, manager or lender) for any company, institution or person referred to in this document and may, to the extent permitted by law, have used the information herein contained, or the research or analysis upon which it is based, before its publication. BNP PARIBAS or its affiliates will not be responsible for the consequences of reliance upon any opinion or statement contained herein or for any omission.

This document is confidential and is being submitted to selected recipients only. It may not be reproduced (in whole or in part) to any other person without the prior written permission of BNP PARIBAS. Any U.S. person receiving this presentation and wishing to effect a transaction in any security discussed herein, must do so through a U.S. registered broker dealer. BNP PARIBAS Securities Corp., a subsidiary of BNP Paribas Financial Services, is a member of the NASD and SIPC, and a U.S. registered broker-dealer with the U.S. Securities and Exchange Commission.

© 2012 BNP PARIBAS. All rights reserved.


March 22, 2012 74

End of Presentation

“rogue traders and risk culture”

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