99002 vs. 88888

99002: Legitimate error account, every bank has one

88888: bogus error account, the 2nd hidden account In order to conceal his unauthorized trades

SIMEX: thought it was a customer accountBarings: customer account borrow loans from

them In fact Barings is the “customer”

Arbitrage

Deft: practice of taking advantage of a price difference between two or more markets.

Example. Buy in Nikkei: worth $100 million Sell in Singapore: $100,001,000 ($1000)

What Nick did instead: held on to the contract, gambled on the future direction of the Japanese markets (approved by his superiors)

$100m*1%=$1m, resulted to an unhedged losses made losses escalated rapidly

Double Roles

Nick’s double roles: Front: floor manager for Barings' trading on SIMX (trade)

Back: head of settlement operations (calculate paperwork)Deficient internal auditing and risk management practices:

Being suggested by internal auditor, Ash Lewis Ignored by his supervisor, Simon Jones to save money

Should

report to

Cover Losses

1. More Trade Aggressive & Asked money from Barings for “big clients’

loan”2. Bring new clients

Big client: Pierre Beaumarchais, Swedish investment banker

Deep trouble: lost 7.78billion yen ($77.8million) by the end of 1994

3. Cook the book Zero balance : changed general ledger, not the sub-ledger,

made it looks as if Barings should collect money from SIMEX instead of paying

Cook the Book

Role Model

“...it was not actually terribly difficult to make money in the securities business,”

--Peter Baring, the Barings' Chairman of the Board

“People at the London end of Barings were all so know-all that nobody dared ask a stupid question in case they looked silly in front of everyone else.”

—Nick Leeson, Rogue Trader (1996)

Fraud

Turning point: Lisa’s miscarriage Decision: more aggressive to get out of his mess and

go home External Audit: Coopers & Lybrand

Accountant Mui Mui: 1994 year-end audit Wild story

OTC trade between SLK (Spear, Leeds & Kellogg ) & Barings

Forgery Cut & paste signatures; arranged for bogus bank

transfer

Forgery

Attach Pat’s photo copy page