LSBM302 AB1 Ludwig Report Allied Irish Bank Currency

LSBM302 AB1 Ludwig Report on Allied Irish Bank Currency
OVERVIEW

This report is submitted by Promontory Financial Group LLC and the law firm of Wachtell, Lipton, Rosen & Katz to advise the Boards of Directors of Allied Irish Banks, p.l.c. (“AIB”), Allfirst Financial Inc., and Allfirst Bank with respect to losses sustained by Allfirst Financial Inc. and Allfirst Bank (together “Allfirst”) in foreign exchange trading. The purpose of this report is to advise the Boards in connection with the questions that they have referred to us for our review and advice and it is not intended to represent the definitive report on the matters set forth herein. This report should be regarded as preliminary, because significant leads remain to be pursued. Indeed, the person primarily responsible for these losses, John M. Rusnak, has thus far refused to speak with us, and we have not had an opportunity to talk to the foreign currency traders with whom Mr. Rusnak dealt.

Our inquiry was authorized by the AIB Board of Directors on February 8, 2002. Thus far, we have interviewed approximately 55 present and former employees of AIB and Allfirst and have reviewed a substantial volume of electronic records and thousands of pages of printed documents. Given the complexity of the matter and the volume of materials to be reviewed, however, our interviews and review of the electronic and documentary record are not complete. We have emphasized from the outset that we believed that 30 days was inadequate to render a comprehensive report. Nevertheless, we understand the Boards’ need for timely guidance. Therefore, our work to date has focused primarily on the Allfirst treasury operation and, as this report reflects, we have drawn conclusions in that regard. Although we have confidence in our preliminary conclusions, it is likely that further inquiry will uncover additional material information or provide further clarification and insight into those events and practices of which we are aware.

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LSBM302 AB1 Ludwig Report Allied Irish Bank Currency

OVERVIEW LSBM302 AB1 Ludwig Report Allied Irish Bank Currency

LSBM302 AB1 Ludwig Report Allied Irish Bank CurrencyThis report is submitted by Promontory Financial Group LLC and the law firm of Wachtell, Lipton, Rosen & Katz to advise the Boards of Directors of Allied Irish Banks, p.l.c. (“AIB”), Allfirst Financial Inc., and Allfirst Bank with respect to losses sustained by Allfirst Financial Inc. and Allfirst Bank (together “Allfirst”) in foreign exchange trading. The purpose of this report is to advise the Boards in connection with the questions that they have referred to us for our review and advice and it is not intended to represent the definitive report on the matters set forth herein. This report should be regarded as preliminary, because significant leads remain to be pursued. Indeed, the person primarily responsible for these losses, John M. Rusnak, has thus far refused to speak with us, and we have not had an opportunity to talk to the foreign currency traders with whom Mr. Rusnak dealt.

Our inquiry was authorized by the AIB Board of Directors on February 8, 2002. Thus far, we have interviewed approximately 55 present and former employees of AIB and Allfirst and have reviewed a substantial volume of electronic records and thousands of pages of printed documents. Given the complexity of the matter and the volume of materials to be reviewed, however, our interviews and review of the electronic and documentary record are not complete. We have emphasized from the outset that we believed that 30 days was inadequate to render a comprehensive report. Nevertheless, we understand the Boards’ need for timely guidance. Therefore, our work to date has focused primarily on the Allfirst treasury operation and, as this report reflects, we have drawn conclusions in that regard. Although we have confidence in our preliminary conclusions, it is likely that further inquiry will uncover additional material information or provide further clarification and insight into those events and practices of which we are aware.

The losses here appear to arise out of possible violations of federal and state laws by Mr. Rusnak, and possibly others. Accordingly, the events are being investigated by the United States Department of Justice, bank regulatory authorities and others. Unlike governmental authorities, we do not have subpoena power. Nor do we have the ability to threaten criminal prosecution and other sanctions that governmental agencies may bring to bear. The governmental investigations of this matter, expected to continue for some time, will likely generate material information that is not now available to us.

Finally, our review, which covers the substance of the activities in question and highlights the most significant oversight issues, necessarily required us to make judgments as to the credibility of witnesses and to the weight to assign the views and recollections of these witnesses, who, it should be emphasized again, were not under legal compulsion. Based in part upon those judgments, this report summarizes our conclusions on relevant matters, and does not purport to itemize all of the evidence or record all of the views and information received. Moreover, given the time limitation, we were required to make judgments as to how to allocate our attention and resources among a myriad of issues; those judgments necessarily have affected the conclusions we have reached. In this regard, we have not examined the activities of all third parties, such as brokers and external auditors.

LSBM302 AB1 Ludwig Report Allied Irish Bank Currency

That being said, given the available time and resources, we conducted a careful and impartial inquiry that has led us to the following principal conclusions:

  • The fraud was carefully planned and meticulously implemented by Mr. Rusnak, extended over a lengthy period of time, and involved falsification of key bank records and documents.
  • Rusnak circumvented the controls that were intended to prevent any such fraud by manipulating the weak control environment in Allfirst’s treasury; notably, he found ways of circumventing changes in control procedures throughout the period of his fraud.
  • Rusnak’s trading activities did not receive the careful scrutiny that they deserved; the Allfirst treasurer and his treasury funds manager—the principal persons responsible for Mr. Rusnak’s supervision—failed for an extended period to monitor Mr. Rusnak’s trading.
  • At both the AIB Group and Allfirst levels, the Asset and Liability Committees (“ALCOs”), risk managers, senior management, and Allfirst internal auditors, all did not appreciate the risks associated with Mr. Rusnak’s hedge-fund style of foreign exchange trading; even in the absence of any sign of fraudulent conduct, the mere scope of Mr. Rusnak’s trading activities and the size of the positions he was taking warranted a much closer risk-management review.
  • In particular, because of time pressures and the determination not to interfere with the ongoing audit work of Slaughterhouse Coopers, we did not interview representatives of Slaughterhouses.
  • Allfirst and AIB senior management heavily relied upon the Allfirst treasurer, given the treasurer’s extensive experience with treasury functions and foreign exchange trading in particular. In hindsight, this heavy reliance proved misplaced.
  • Nothing has come to our attention during the course of our review that indicates that anyone at AIB or Allfirst, outside of the Allfirst treasury group, were involved in, or had any knowledge that, fraudulent or improper trading activity was occurring at Allfirst before the discovery of the fraud.

While we recognize that there are additional items to be pursued, we are confident in the conclusions and the recommendations as set forth herein.

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