Ethics Discussion: Financial Trading + Mail Order Brides

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Financial Trading: Rouge Trading
Financial Trading:
Insider’s
Trading
Debate
on

Are
Bank
Bonuses
Ethical?”
Operation of Mail Order Brides Marriage Agencies

Agenda

Financial Trading:
The Rogue Traders
"Barings' collapse was due to the unauthorized and ultimately catastrophic activities of, it appears, one individual (Leeson) that went undetected as a consequence of a failure of management and other internal controls of the most basic kind".

Case 3

-Lord Bruce of Donington, in the House of Lords

4 Cases of Rogue
Trading

At the start
- Started out arbitraging
- Became a star trader by speculating on
futures derivatives

- Internal Audit warned that Leeson was in
charge of both trading and settlement.

The fraud begins
- Oversight allowed Leeson to set up fake
accounts for non-existent clients to mask losses
- Masked huge losses while making increasingly
risky bets in an attempt to recoup the losses

- Bet
on
Nikkei
Index’s
recovery
- Kobe earthquake sent stock prices
plummeting

The verdict
- 6.5 years in prison for financial
misrepresentation.

- The $1.3 billion in liabilities Leeson ran
up wiped collapsed the bank.

Barings PLC- featuring Nicholas W. Leeson

At the start
Buys a portfolio of financial instruments (i.e. European index futures) in one market and sells a similar offsetting portfolio at the same time with a different value in order to minimize risk.

The fraud begins

- Actually made an unhedged bet
of

$60
billion
of
the
bank’s
money
on
European
futures

without the bank's knowledge
- End up costing the bank roughly $6 billion.

The verdict

- Sentenced to three years in prison
- Insisted he was not the only one doing
this and that his bosses knew of and
condoned his behavior while at the bank.

"During three years these managers
earned colossal amounts of money out of
bonuses based on the ever growing results
that I was making for the bank," he said.

Societe Generale- featuring Jerome Kerviel

At the start
Handles speculative trades for clients

The fraud begins
- Positions taken were that of a properly hedged portfolio.
- True magnitude of the risk exposure was distorted because the positions had been offset with fictitious, forward-settling, cash ETF positions, allegedly executed by the trader. - These
fictitious
trades
concealed
the
fact
that
the
index
futures
trades
violated
UBS’s
risk

- Allows a seller in a transaction to receive payment for a trade before the transaction has been confirmed

The verdict
- Charged with fraud by abuse of position and false accounting dating. - UBS's actual losses were subsequently confirmed as $2.3 billion.

UBS-

featuring Kweku Adobli, 31

At the start
- Traded 5% of total world demand, Chief Copper Trader at Sumitomo - Extensive experience in copper trading (over 23 years)

The fraud begins
- Buy huge quantities of copper and store itcreating an artificial shortage of the precious metal
- Drive up demand, before releasing smaller
amounts of copper on commodities markets at
extremely high prices.

- Trading was mainly off the books, cumulative
losses hidden
- Forged signatures of executives for documents
such as payment confirmations or trade
contracts.
- Scheme fell apart in 1996

The verdict
- Jailed for seven years for hiding more than $2.6 billion in losses. - Sumitomo paid $150 million to regulators while refusing to admit or deny if the corporation knew about or condoned the actions of its rogue trader.

Sumitomo Corp- featuring ‘Mr Copper’ (Hamanka)

ROGUE TRADING
• Uncontrolled risk-taking stemming from seemingly
riskless trading
• Mostly young adults with no special formal accreditations to their trading abilities
• Bypassed internal audits and quality control. All cases
illustrated the lack of control and supervision by top
management...
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