5 Biggest Rogue Traders -- and Could It Happen Here?

NEW YORK ( TheStreet) -- The five most infamous rogue traders in recent history all belong to foreign banks. Does that mean U.S. banks have better risk management or can such trading scandals happen here too?

So far, there does not seem to have been a major incident in the U.S in recent years. But banks are racing to update their surveillance measures, to meet regulations on risk management pushed through the Dodd-Frank Wall Street Reform and Consumer Protection Act.

One Dodd Frank provision allows the Commodity Futures Trading Commission to police "manipulative and deceptive" conduct in the commodities futures and swaps market. Among other things, the rules demand stricter reporting requirements on trades.

It could be assumed that banks are playing regulator arbitrage, playing fast and loose with risk management overseas while being more conservative in the U.S. And if recent history is any indicator, that may be the case.

On Tuesday UBS ( UBS) said that it had discovered an estimated $2 billion loss from unauthorized trades by a 31-year old, Kweku Adoboli, a director of exchange-traded funds and "Delta 1", working in its London office.

UBS said it might post a third-quarter loss as a result of the trades.

Kweku Adoboli is the latest in a long line of "rogue" traders- those who make unauthorized, risky bets with other people's money and almost get away with it.

Besides the prospect of huge losses, banks also are increasingly being held responsible for failing to adequately supervise their trading operations.

Societe Generale, for instance, was ordered to pay a $5.5 million fine, for not adequately supervising rogue trader Jerome Kerviel, who cost the bank $6.7 billion in losses.

Here is a list of the biggest rogue traders since the mid nineties.

5. Nick Leeson

Nick Leeson is the most famous rogue trader there is, not least because he managed to take down a whole bank down with him.

Leeson's fraudulent and speculative trades cost 233-year old Barings Bank, which counted the Queen of England as a client, a whopping $1.3 billion in losses, wiping out its reserves and capital.

Leeson made millions for Barings as a derivatives trader on the floor of the Singapore monetary exchange by betting on the future of the Nikkei Index. However, his luck soon turned and Leeson began to hide his losses, using error accounts- accounts used to correct mistakes in trading. He continued to bet more and more money to try and extricate himself from the mess, but that strategy failed.

In 1995, he was arrested and extradited to Singapore, where he was sentenced to six- and- a half years in prison. His wife left him soon after and he was subsequently diagnosed with colon cancer.

Leeson, of course, managed to capitalize on his fraud. After being released out of prison in 1999, he went on to write a book on his experience for which he was paid a substantial fee. The book was then turned into a movie called Rogue Trader, starring Ewan McGregor.

How is this for irony? In 2001, he got a psychology degree and now spends much of his time making presentations to companies about risk management, according to his official website.

4. Toshihide Iguchi

Toshihide Iguchi, a former trader, for Japan's Daiwa Bank racked up huge losses through unauthorized trades over a period of eleven years and successfully hid it from his bosses in Tokyo.
Toshihide Iguchi

His trades out of the New York branch cost the bank $1.1 billion in losses. In addition, the trader embezzled $570,000 from the bank.

In 1995 he confessed to his employers at Daiwa Bank and pleaded guilty to charges of fraud and conspiracy. A Manhattan Court sentenced the bond trader to four years in prison and ordered him to pay a $2 million fine.

U.S. regulators in 1996 ordered Daiwa to close its U.S. operations after finding it guilty of lying to regulators to cover up Iguchi's fraud. The bank paid a $340 million fine and shut its New York offices.

3. Yasuo Hamanaka

Yasuo Hamanaka, a copper trader with Japan's Sumitomo Corporation, was know as Mr Five Percent, referring to the share of the copper market he controlled.

His unauthorized trades over a period of 10 years led to a $2.6 billion loss for Sumitomo.

Sumitomo was also charged with forging the signatures of three Sumitomo executives on documents related to his trading activities.

In 1996, Hamanaka was sentenced to 8 years in prison. He was released in 2005.

2.John Rusnak

John Rusnak was a currency trader at Allfirst Financial Bank, which was a subsidiary of Allied Irish Bank ( AIB). In 2002 it was discovered that Rusnak was making fake trades and hid losses of $691 million over five years.

Rusnak tried to hide his losses by supposedly conducting five option trades with at least four other banks that raised about $300 million in cash. However these trades were actually synthetic loans. Rusnak also fabricated prices for fake trades, according to the charges.

On January 17, 2003 Rusnak was sentenced to seven and a half years in prison. Rusnak served a prison sentence until September 2008 and was then confined to his home until January 2009. He was released early and is required to pay $1,000 a month for five years.

Allied Irish sold Allfirst to M&T Bank ( MTB) in July 2003 after the scandal.

1. Jerome Kerviel

Jerome Kerviel joined Societe Generale ( SCGLY) in 2000, working in a compliance department and was promoted to junior trader by 2005.

In 2008, the bank accused him of making unauthorized speculative trades that had cost it $6.7 billion dollars.

Kerviel maintained that the bank and his bosses encouraged massive risk-taking as long as it made money.

Kerviel was sentenced to serve three years in prison, but that was where he got off easy. He was also ordered to pay back $6.7 billion to Societe Generale, which would likely take him more than a lifetime to repay once he got out of prison.

SocGen was ordered to pay a $5.5 million fine for failing to adequately supervise Kerviel.

"The absence of proper supervision on the part of the bank should not have been interpreted as a tacit green light to engage in wild speculation," Judge Dominique Pauthe said, according to reports.

--Written by Shanthi Bharatwaj in New York

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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