Top Five Rogue Traders of All Time

There have been many egregious acts that have taken place throughout the history of the stock market – price manipulation, insider trading, ponzi schemes, securities fraud, etc., etc. It is hard to believe that in an industry with so much regulation and oversight such devious acts can occur. Unfortunately, stock market-related crimes seem never-ending. That is not to say, however, that such acts are uninteresting – actually, quite the contrary. Today, we take a look at the top rogue traders of all time. Driven by a desire to outwit the market, the men profiled in this article went to great lengths in an effort to hide their mistakes, which, unfortunately for them, wound up leading to astounding catastrophes. It is a slippery slope once a trade is concealed, because once the cover up begins, it becomes imperative to keep it going - even as the situation escalates out of control. The following men lost their direction and composure, and the market ultimately made them (and their firms) pay for it. In reverse order, here are the biggest losers of all time: 5) Toshihide Iguchi - $1.1 billion Iguchi racked up over a billion dollars in losses over ten years while Executive Vice President at Daiwa Bank. The losses came from over 30,000 unauthorized trades in the bond market between 1983 and 1995. It started with a relatively small loss of $70,000 in 1983. To protect his reputation (and job), Iguchi covered up the trades and secretly tried to recoup his losses by averaging down. His attempt was an epic failure. By the time Iguchi submitted a confession letter to his bank president in 1995, the losses had ballooned to over $1 billion. How can someone hide such a huge transgression? In Iguchi's case, it was simple, as he also ran his firm's clearing and distribution of client funds division. To cover up the losses, he would sell assets which belonged to clients of the firm, or assets of the firm itself. He would then forge statements to veil the transactions and make his trades appear profitable. Fortunately for Daiwa's clients, the firm covered all losses stemming from the incident. The company's reputation, however, was ruined. Shortly after the story became public, Daiwa ceased all operations in the United States. Toshihide, while in jail, wrote a memoir of his life, which ending up becoming a bestseller in Japan. He was released in 1997 and went on to write several other books based on the lives of people he had met in prison as well as his experiences in the finance world. 4) Nick Leeson - $1.4 billion Leeson is one of the most recognized rogue traders on this list, partly because his endeavours were brought back to life in the film, Rogue Trader, which is based on his autobiography. Between 1992 and 1995, Leeson, who was head derivatives trader for Barings Bank in Singapore, executed numerous unauthorized trades, originally stemming from an attempt to make back a loss of approximately $35,000 from a colleague's improperly executed order. The illicit speculations were held in an “error” account to avoid exposure and contained several losing transactions relating to the futures market. By the end of 1994, the losses in the account had grown to $350 million. To make matters worse, on January 17, 1995, the Kobe (Great Hanshin) Earthquake stuck in Japan. On January 16th, Leeson placed a trade which relied on the Japanese stock market remaining sedate overnight. Needless to say, it did not, and the event only compounded the already swelling losses. On February 23, Leeson fled, and was later arrested and extradited back to Singapore. By February 26, his employer, Barings Bank, which was the oldest merchant bank in London at the time, was insolvent. The losses accrued by Leeson totalled nearly $1.4 Billion. Barings Bank wound up being sold to ING ING for $1, forming the subsidiary ING Barings. Leeson was later sentenced to six and half years in prison. He was released two years early after being diagnosed with cancer, which he survived. 3) Kweku Adoboli - $2.3 billion Adoboli, who was recently arrested by London police in September 2011, is the most recent addition to the rogue's gallery. Adoboli worked on the UBS UBS trading floor for the Delta division, a unit which trades on the behalf of both clients and the firm itself. According to The Telegraph, transactions made in the division Kweku worked for were to be hedged by taking positions in other asset classes in an effort to minimize risk. As it seems, Adoboli seemingly had little regard for that policy. In the three months leading up to his arrest, Adoboli allegedly made huge, un-hedged bets on the direction of the Euro Stoxx 50 (STOXX), Deutsche Borse AG German Stock Index (DAX), and S&P 500 ($SPX) – an estimated $10 billion worth. The trades quickly soured, however, as global indices plunged. The S&P 500 and DAX dropped 8% and 26% respectively shortly after the transactions were made. Losses stemming from the trades were originally estimated at about $2 billion, but were revised higher when additional trades, which had little in the way of a paper trail, were discovered. According to a statement made by UBS, the unauthorized trades dealt in forward-settling ETFs, which was why they were able to avoid the firm's risk limit thresholds and detection by the risk management department (forward-settled ETFs do not require immediate confirmation from all parties that the trade actually took place, meaning that cash may not change hands for the transactions for extended periods of time). Abodoli has been charged with fraud and false accounting and is awaiting trial. He is scheduled to appear in court in November 2011 to face the charges. 2) Yasuo Hamanaka - $2.6 billion Commonly known as “Mr.Copper” or “Mr. Five Percent,” which referred to his “control” of the global copper market, Hamanaka traded copper products and derivatives for Sumitomo Corporation in Japan. Controlling approximately 5% of the world's copper, along with a hefty supply of Sumitomo's cash, he would routinely corner and squeeze the copper market (against company policy). This style of trading held the price of copper artificially high, allowing for his company (and himself) to enjoy huge profits on both higher commissions and the sale of physical copper. The game finally turned on Hamanaka in 1995. As worldwide copper supplies increased, copper prices, as a result, plunged. Following the 1995 high, copper prices underwent a dramatic 50% freefall. Needless to say, the firm took a beating, and Hamanaka could no longer hide his transgressions. During the collapse, Sumitomo announced that the firm had already lost $1.8 billion stemming from the collapse in the copper market, and estimated that the number could balloon to as high as $5 billion if the company were forced to liquidate at the prevailing prices. Fortunately for Sumitomo, the firm was able to exit the positions before the worst of the copper decline. When the dust finally settled, the company had accumulated a total loss of $2.6 billion dollars. Due to Hamanaka's actions, regulators have since enacted protocols to curb such manipulation from occurring in the future. Large position and open interest reports are now published by the London Metal Exchange allowing for greater transparency into the commodities market. Hamanaka was eventually convicted and was sentenced to eight years in jail in 1998. Upon Hamanaka's release from prison in 2005 (1 year early), he told Bloomberg News he was “amazed” at the rise in price copper had experienced in that time. If only it would have happened sooner. 1) Jerome Kerviel - $7 billion Responsible for the biggest non-ponzi scheme related loss in history, Kerviel allegedly breached multiple levels of control on his way to amassing huge losses for his employer, Societe Generale. According to Kerviel in an interview with Spiegel, the risk taking behaviour he took was not only overlooked, it was encouraged by the higher ups at his firm. Kerviel was perhaps taking some of the largest positions ever taken by an individual trader. Single trades in excess of €30bn were not uncommon, which were in gross excess of the company's “authorized” trading limits. The staggering $7 billion loss is reported to have happened in just three days. As the stock market collapsed between January 19 and 21, 2008, the unauthorized trades were allegedly caught by the bank and closed. Kerviel was found guilty of abuse of trust, forgery, and computer abuse. Kerviel was sentenced to three years in jail and ordered to pay a fine of $6.75 billion, which would take 177,000 years to repay at an average salary. He is also banned from working in the financial services industry for the rest of his life. He is appealing the decision. Conclusion The losses of these men not only affected the firms that employed them, but shareholders of the companies as well. Such events shake the very foundation of the financial system and tarnish the reputation of the establishment (at least temporarily). The traders are not to be blamed solely, however. Their misdeeds are, either by gross incompetence, lack of internal regulatory procedure, or relative indifference, allowed to occur by both the employing firms and corresponding market regulators. The market is a vessel of emotion—fear and greed simply reflected in price charts and percentage points. Anyone who participates in the market is not immune from these emotions themselves – it is just fortunate that not many people have access to such large amounts of capital. It is likely that there will always be a steady stream of rogue traders, for when profits are made, all parties seemingly turn a blind eye. It is only when there are losses that it seems like anyone cares about the abuse which has taken place. Till next time......