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Last Two NAB Traders Guilty: Bank to Turn its Attention to Brokers?

The two remaining former FX options traders accused of rogue trading and covering up AUD 360 million losses at National Australia Bank (NAB) have been found guilty by the Victoria County Court.

Hopes that this may bring a curtain down on the sorry affair appear unfounded however as NAB is now likely to target two broking firms for compensation for their alleged parts in the affair.

David Bullen was found guilty of 18 out of 20 charges and Vincent Ficarra of all 13 charges he faced. Both men were remanded in custody and will appear at a pre-sentencing hearing next month. Their conviction follows those of former head of the FX options team, Luke Duffy, and London-based trader Gianni Gray, who both earlier pleaded guilty. Duffy was sentenced to a minimum 16 months imprisonment and Gray was sentenced to a minimum of eight months.

Speculation over NAB following through with threats of a civil suit against two brokers have been fuelled by evidence given during the trial of Bullen and Ficarra which revealed the alleged roles played by Icap and BGC Partners, then part of Cantor Fitzgerald. In September 2005, NAB issued letters of demand against Icap and Cantor for AUD 539 million, claiming “a strong case to seek compensation from the parties involved in the foreign currency options trading losses”. The bank added that while it would prefer to resolve its claims against those parties by negotiation, “it may be necessary for it to bring legal proceedings against them to enforce its rights” (see Profit & Loss, November 2005).

During the trial of Bullen and Ficarra, the Australian Financial Review (AFR) cited evidence from witnesses that Icap and BGC supplied the NAB traders with incorrect revaluation rates that distorted their P&L and led to them claiming bonuses to which they were not due.

During the trial the AFR reports that both Bullen and Ficarra claimed that supplying incorrect revaluation rates was a common practice; a statement backed up by Dennis Gentilin, a former London-based member of the currency options team, widely thought to be the person who reported the losses to senior management. This reinforced earlier claims that the four accused traders had entered their desired revaluation rates on a spreadsheet and sent this to the brokers. The rates were duly rebranded and returned to NAB, thereby giving the appearance of independence, it was alleged.

The Australian Securities and Investment Commission (ASIC), which brought the charges against the four, expressed satisfaction in a statement issued by Jeffrey Lucy, chairman of ASIC. “This result shows that senior employees who breach their duties as officers of a company can cause significant damage to the company’s interests and shareholder value. ASIC will not tolerate dishonest conduct by company officers, and as the decision by the jury demonstrates, the community will not tolerate dishonest conduct either.”


Although NAB has not confirmed it is to take legal action, local market sources expect it to be a matter of time. They also expect the two brokers to fight any action vigorously. At the time of the original letter from NAB to the two brokers, Icap refuted the allegations and cited the PriceWaterhouseCoopers (PWC) report into the events surrounding the losses in it defence; the same report that NAB said supported its case.

In the section of the PWC report which investigated the revaluation of NAB’s portfolio using incorrect rates, it states: “The revaluation process of currency options was poorly controlled, with only limited independent checks or reviews on the volatility rates supplied by third parties to value the currency options portfolio. At least two of the traders prepared schedules containing revaluation rates which were emailed to third parties used by the National. These rates were emailed back to the National unamended. We have not established whether there is an effect on the value of currency options portfolio at year end as a result of using these rates, but have identified some evidence of the reported results being impacted at other times.”

Although both parties cite the PWC report in their respective statements, the paragraph likely to cause most contention between the parties actually comes from the APRA (Australian Prudential Regulatory Authority) report into the losses and the breakdown of NAB’s operational procedures. This report culminated in NAB having its approval to trade currency options for anything other than back-to-backing of customer trades revoked.

APRA summarises that the event “was possible, first and foremost, due to the collusive behaviour of the traders themselves. However, it can also be attributed to an operating environment characterised by lax and unquestioning oversight by line management; poor adherence to risk management systems and controls; and weaknesses in internal governance procedures.”

However it also goes on to state that: “Volatilities used within currency options valuations have been sourced from no more than two but often just one external source. These external sources have consisted of brokers which were used frequently by the currency option traders, there is evidence of collusion between the traders and one of the brokers used to source rates.”

APRA also noted that, “there has been minimal testing of these sourced volatilities rates against other sources to verify the accuracy of the volatilities provided”.

Support for NAB’s case against the brokers remains thin on the ground in the local market, as it was when the letter of intent was first revealed. Local sources point out that during the trial it was revealed that some revaluation rates provided by the desk/brokers were so far out of the market that one call to another bank would have revealed events. Also they note that the Market Risk department received revaluation rates by accident with one of the trader’s names on it; and still did nothing.

Finally, and most damning in the view of many locals with knowledge of events, is NAB’s attitude to warnings from within the Australian market that its currency option team was trading over-aggressively. “I called up the National and told friends there that these guys were out of control but was given a less than polite response,” the head of FX at another Australian bank told Profit & Loss before the extent of the losses were revealed. “It seems the whole Australian market knew about it apart from the bank itself, which apparently chose to ignore our warnings.”

Profit & Loss

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