Allied Irish Banks PLC sued over trading losses

Daily Record, The (Baltimore), Mar 7, 2002 by Todd Karpovich

Disgruntled shareholders are suing Allied Irish Banks PLC, alleging that the banking company's financial reports fraudulently hid the $691 million worth of currency trading losses associated with its Baltimore subsidiary, AllFirst Financial Inc.

The suit was brought by Washington-based law firm Finkelstein, Thompson & Loughran over allegations that Allied Irish Banks' executives did not act responsibly in managing the bank's business. The suit, filed Tuesday in U.S. District Court for the Southern District of New York, also claims the banking company failed to accurately disclose the effect of the losses incurred by currency trader John Rusnak on the bank's profits.

Lawrence P. Schrenk, a banking analyst and assistant professor of finance at the University of Baltimore, said legal suits such as these are now common, but the irony is that the shareholders, as owners of the firm, might be suing themselves. Schrenk said even if the suit is successful, since the $691 million loss does not seem to be recoverable, there might not be anyone to pay, except the shareholders themselves.

In cases like this, the more effective strategy is for the shareholders to sue another firm, preferably one with deep pockets, that provided some form of advice or guidance, such as the firm's accountants, Schrenk said. For instance, many of those who are suing over various dot-com IPOs target the underwriters of the offering. The difficulty for AllFirst's shareholders is that their case does not fit this pattern, i.e., there is no accounting firm or investment bank involved. The latest trend extends this form of litigation to analysts who recommend stocks that then decline in value.

However, Donald J. Enright, an attorney with Finkelstein, Thompson & Loughran, argued that this is not a case of the shareholders suing themselves.

He said the plaintiffs in the suit represent a certain class of shareholders who bought stock in the company between Jan. 1, 2001 and Feb. 6, 2002 and does not involve all of the bank's investors. In addition, he said, there are other defendants named in the suit beside the banking company itself.

Enright said there are insurance implications as well, where insurance would cover some of the losses and money would not come out of the banking company at all. Lastly, some of the shareholders might have already sold their stock and no longer have a stake in the company.

Also named in the suit, which seeks unspecified damages and legal fees, are Frank Bramble, chairman of the board for Allfirst; Susan M. Keating, president and chief executive officer; Robert L. Carpenter, controller; David M. Cronin,, treasurer; Jerome W. Evans, former executive vice president and chief executive officer; Maurice J. Crowley, chief financial officer; and Rusnak.

Richard T. Dorman, a partner at Cunningham, Bounds, Yance, Crowder & Brown in Mobile, Ala., an expert in class action litigation, agreed there is a possibility shareholders might be able to obtain additional compensation from some of the bank's executives named in the suit.

Charles J. Piven, an attorney in Baltimore, also is looking into possible claims against the board of Allfirst Bank.

The problems for Rusnak began when he tried to hide losses he accumulated when he bet - incorrectly, as it turned out - that the Japanese yen would rise against the U.S. dollar. He allegedly tried to hide his losses by selling fictitious option trades. According to court documents, when the yen continued to decline, Rusnak raised money by selling real option trades, which only increased his losses until banking officials discovered what he was doing.

Rusnak's alleged fraudulent trading caused Allfirst to post a $36.8 million loss last year; the bank would have booked a $200.5 million gain otherwise. Allied Irish officials initially reported that Rusnak's losses were confined to 2001. However, they later revealed that the losses actually started five years ago.

In public filings and other statements disseminated by or on behalf of Allied Irish Banks and Allfirst, defendants materially overstated Allfirst's net worth, earnings and business prospects as a result of gross trading and reporting improprieties in Allfirst's treasury operations, Jules Brody, an attorney for Finkelstein, said in court documents. The scheme resulted from an extraordinary and reckless lack of supervision and controls by Allfirst. Rusnak and other, as yet unidentified, individuals used phantom gains on artificially created trades to offset losses made on real trades.

Allfirst spokesman Philip Hosmer could not be reached for comment.