My favourite financial fraud of all time has to the work of John M. Rusnak at Allfirst Bank, a sub of Allied Irish Bank, perpetrated in 2001.  Following the events which cost this Irish bank tens of millions of losses, an audit report was prepared by Promontory Financial Group and Wachtell, Lipton, Rosen & Katz.

I love this audit report. It describes in brilliant detail the failures and lack of controls throughout the Maryland Bank. It is well written, hardly boring and entertaining. Anyone looking to do a quick and dirty audit of their back office operations merely has to use this report as a check list for what not to do and where the skeletons may be hiding.
In short, the fraud occurred for a variety of reasons including inadequate supervision, inadequate response to issues identified about Rusnak’s trading, difficulty confirming Rusnak’s trades.

But the best part reads like this:

The next morning, the most senior back-office manager called Mr. Rusnak down to his office and told him that the back office was having trouble confirming the Asian option trades. Mr. Rusnak had left twelve written confirmations on the back-office employee’s desk. The back-office personnel reviewed the confirmations and concluded that the confirmations looked bogus. (They were. Subsequent investigation revealed that Mr. Rusnak had created these confirmations— complete with counterfeit logos for the presumed counterparties— on his personal computer. He stored them in a computer file labeled “fake docs.”)

I love it. Stored them in a computer file labeled “fake docs”. What a maroon.

And history will repeat itself for sure. Frauds like this always do.

To read the complete report click here.