Today, the last two of the four NAB rogue traders involved in the $360 million foreign exchange loss were sentenced by the Victorian County Court. The head of the desk Luke Duffy and Senior trader Gianni Gray had already pleaded guilty and been sentenced to 29 months, and 16 months jail respectively. David Bullen and Vince Ficarra chose to fight the charges with Bullen representing himself, and much like in the classic game theory problem, suffered the higher penalties for fighting. Bullen receiving a 44 month sentence, and Ficarra 28 months.
What possessed Ficarra and Bullen to fight the charges is beyond me. Ficarra being the junior, in his first job, working for a group noted for their bullying behaviour had ample mitigating circumstances. These might have, if he had pleaded guilty and shown contrition saved him a custodial sentence, or at the very least got a very much lighter sentence than what he received. Trying to fight the charges in the face of taped evidence of them discussing lying to back office seems the sheerest folly. He may have been junior but he clearly knew what he was doing was wrong. In the end Ficarra received one month less than the leader of the group, perhaps part of the all or nothing risk attitude that got them into trouble in the first place.
The other thing that gets me about this, is why did everyone else get off for free? Sure a number lost jobs, but that hardly reflects the fact that the negligence in every area of letting this go was so breathtakingly extreme as to be unbelievable. While the fake trades may not have been discovered until too late, lots of other behaviour was completely out of the bounds of any reasonable trading activity and was clearly a target for further investigation.
Bullen’s behaviour since the scandal broke has been bizarre as this collection from Crikey highlights. Choosing to represent himself in court, writing a book Fake, My life as a Rogue Trader, claiming to be a Buddhist and talking freely to the media with such quotes as, “The $180m is not ‘lost’. Someone else in the world has it, so the planet has not lost anything.” and “This might be the best thing that’s ever happened for the bank, myself, and the people involved”.
More telling though was his claim that “We were already over the limits for a number of months and the bank knew about it…It has been going on and off for a year and consistently every day since October. It was signed off every day by the risk-management people.”
The APRA report into the incident agreed with him stating:
Despite the currency options desk being in excess of market risk limits almost daily, there was no serious effort by Global Markets to either bring the business back within mandated risk parameters, or undertake any rigorous reassessment of the adequacy of the existing limit structures.
The PWC report (a much better read by the way!) is more detailed.
Although in some cases the true risk position was obscured by the false transactions which were structured by the Traders to achieve this goal, a large number of limit breaches were approved on a daily basis by Mr Dillon, and at various times reported to the General Manager Markets Division (Ron Erdos). A daily summary of limit breaches was sent for a period to Mr Erdos who then delegated the review to the Head of another desk in the Markets Division.
The VaR position records show that limits were persistently breached throughout 2003. The VaR position then escalated significantly in January 2004. Both these points are clearly illustrated in Figure 2.5 below.
The line along the bottom with the arrow pointing to is is supposed to be the maximum this measure is risk is meant to reach, but as can be seen risk was rarely below the line. In a properly functioning system, traders would have been required to reduce any breach of this limit the following day, and if it breaches persisted, it would result in their sacking.
Management at NAB claimed that they did not believe the numbers coming out of their system which may have explained the bumping along just above the limit, but certainly didn’t explain the explosion in risk which commenced in October 03. In addition VaR was not the only risk measure that showed the traders consistently and increasingly outside limits but despite this no attempt was made to investigate what was going on. Even without knowledge of the fraudulent deals, the length of time over which it significant breeches occurred and severity of them made the desk obvious targets for some close investigation which should have uncovered the fraud much earlier. Similarly the failure to pass this information up to board level stinks of more than negligence.
The whole affair is also one of how a system with supposedly many levels of checks, can be overidden by a few agressive bullys to whom no one was prepared to stand up to. In addition we are left with the question of should more people have been charged.