Rogue Trader

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On February 26, 1995, the oldest British Bank’s declared bankruptcy due to fraud caused the warning bells for many other organizations about the level of danger fraud can cause. Nick Lesson, a guy who comes from a background of the working class, had been working for Royal Bank Coutts, Morgan Stanley for a couple of years until he finally joined the Barings. He was assigned a job in Barings (Jakarta) to sort out a back-office mess that involves about £100 million in share certificate. After successfully completing his job assignment, Nick was transferred to Barings in Singapore to work as a derivative trader for both Singapore and Japan. Nick caused the lost for Barings Bank of almost 1.4 billion due to the enormous accumulation of trading obligations that he had built up. Nick Lesson thought he could make up the loss by waiting for the market price to go up, but it never happened since the earthquake in Kobe in 1995 was totally out of his plan. Knowing that the bank wouldn’t be able to make up for the loss, Nick ran away with his wife and was caught afterward. Barings declared bankruptcy in February 1995 and was bought by Dutch Bank for £1.

In this report, we would like to discuss more about this case based on the COSO Framework to see the bigger picture on how Nick Lesson could commit such a huge fraud and also learn from that mistake.

Control Environment
• Describe the internal control environment
1. High integrity and ethical behavior: board members and executives didn’t set a consistent example of high integrity and ethical behavior. For example, in the movie, Nick Lesson as the general manager didn’t practice the ethical behavior and integrity. He told his assistant to create an error account called 88888. Besides, once one of his team members named Kim Wong made mistake that lead to the loss of 20 contracts, Nick helped her to cover up the mistake.

2. Code of conduct: There was no code of conduct written for employees that had been used to communicate adequately. Code of conduct is the set of rules outlining the responsibility for an individual within an organization. In the movie, for example, all the new employees that Nick recruited didn’t get any appropriate training or taught about the responsibility that they had to take while working for Barings. They even asked Nick about what do they supposed to do and what was their job all about. One interesting thing we found out while doing research is that Nick also didn’t have the trading certificate, so probably he didn’t even understand his responsibility of his job.

3. Performance and incentive compensation: Performance and incentive compensation targets are not reasonable and realistic. For instance, Jones Simon who was Nick’s immediate supervisor told Nick that he was the bottom line type of guy. We think that that he puts a lot of pressure on Nick for how to make the balance sheet look good no matter what. It’s all about profit. Nick’s immediate supervisor as well as the high executives didn’t really care about the process of how Nick achieved such high profit, but the bottom-line profit itself. Thus, management actually gained incentives that prompt personnel to engage in dishonest, illegal act. Moreover, rewards, bonuses didn’t foster an appropriate ethical tone but create incentives for employees to act illegally. As mentioned in the movie, Nick got a bonus of 130,000 pounds over the top of 50,000 salaries.

4. Fraudulent financial reporting: It’s not clear that fraudulent financial reporting at any level and in any form would not be tolerated. It depends on the situation and how bad it will affect the organization. In the movie, there’s only one time when Nick was brought to the table due to his inappropriate behavior toward some ladies in the bar. But he was forgiven due to his accomplishment toward the company.

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