Big Financial Debacles Help Perpetuate Image Of Lone Rogue Traders

They are the Billy the Kids of the financial world, accused of secret bold schemes to pilfer corporate tills. The errant loners run free for years before the law closes in.

Joseph Jett, Yasuo Hamanaka, Toshihide Iguchi and Nicholas Leeson have a lot in common with the Wild West - at least according to their accusers.

In remarkably similar cases in recent years, major global companies have blamed these and other financial traders as the sole culprits in corporate cover-ups of up to billions of dollars in losses.

But is the lone rogue trader a convenient myth - a scapegoat concocted by lawyers seeking to save the reputation of corporate higher-ups?

Some accused rogues say yes. Several white-collar fraud experts agree, questioning how huge cover-ups can go undetected for up to a decade or more at big financial companies.

“The term ‘rogue trader’ is part of the spin control that lawyers use in the first press release on the newly discovered scandal,” said John C. Coffee Jr., a Columbia University professor specializing in securities law.

“If senior management is implicated in a scandal, they aren’t going to survive,” he said.

The question is more than academic. It is crucial to traders defending against such allegations and superiors fighting to emerge unscathed.

In a two-year-old case that resurfaced last month with his administrative hearing, Kidder Peabody’s once-star bond trader portrayed himself as an innocent victim of his employer’s wrath.

Joseph Jett was the head of government bond trading at Kidder until he was fired in April 1994, accused of a plot to manufacture $350 million in profits to mask nearly $100 million in losses and inflate his annual bonus.

Jett, who denies wrongdoing, testified that his Kidder superiors and co-workers were fully aware of his trading strategy.

His two bosses, Edward Cerullo and Melvin Mullin, reaped millions in bonuses partly as a result of profits on Jett’s trading desk. But both paid only tens of thousands of dollars in civil fines in settlements with the Securities and Exchange Commission on charges of improperly supervising Jett. They denied knowledge of Jett’s suspect trades.

Jett, meanwhile, faces tens of millions of dollars in fines or more if the judge finds him guilty. A verdict isn’t expected until early next year. Meanwhile, about $5 million of Jett’s bonus remains frozen in Kidder accounts. Kidder has been absorbed by PaineWebber Group Inc.

In another major case, Japan’s Sumitomo Corp. two weeks ago blamed at least $1.8 billion in copper-trading losses on a single person, star copper trader Yasuo Hamanaka. But the size of the losses and the fact that they were said to have occurred over a 10-year period raised doubts about the company’s explanation.

Even more disconcerting is that questions about allegedly fictitious trades were raised as early as five years ago with the London Metal Exchange, where most copper is traded, and with Sumitomo.

Journalists may also play into the idea of lone rogue traders: It is easier to put a human face on an abstract financial story.

“The lone adventurer against the big sky in the West - that makes a good story. If it is a successful and charming rogue, then all the more effective,” said Ben H. Bagdikian, professor emeritus at the University of California at Berkeley and a former assistant managing editor at The Washington Post.

Sometimes, though, the story can fall flat.

Daiwa Bank Ltd., also of Japan, insisted for months last year that New York bond trader Toshihide Iguchi was the sole culprit in a plot to hide $1.1 billion in trading losses he accumulated over 12 years.

Iguchi pleaded guilty to the scheme last fall. But the bank later pleaded guilty to failing to notify U.S. authorities sooner about the scandal. It was slapped with $340 million in fines and was forced to shut its U.S. operations.

Sometimes the best public relations effort can’t stem the impact of mushrooming financial losses.

At Barings PLC, trader Nicholas Leeson bet heavily and wrongly that the Japanese stock market would rise, then concealed his losses while trying to trade his way out of them. The 233-year old British firm died early last year.

In another lone-rogue case, a trading scandal that resulted in $138 million in investment losses for more than 700 colleges and universities also claimed the York, Pa., investment firm that lost the money.

“I think we all like to hear of rogue traders or sorcerers or apprentices,” Coffee said.

“I think the duller theme is that there are many organizations that just do not understand that internal controls are critical,” he said.