Ask uncomfortable questions

While it is unlikely that journalists by themselves can uncover fraudulent activity by rogue traders, they certainly can ask questions of banks and investment firms about their risk-management policies, the risk-management qualifications of executives and board members, and whether banks and other financial institutions have policies and systems to protect against unauthorized trades.

Though many of the corporate scandals of recent years were engineered by top executives, some shady dealings were the work of rogue employees who managed to hide their activities from their superiors until it was too late.

At U.K.’s Barings Bank plc, futures trader Nick Leeson was a star in the early 1990s, responsible in one early high-flying year for 10 percent of the bank’s entire annual profits. But then the Asian financial crisis began to unfold, and losses piled up. Leeson managed to hide more than £800 million in losses in an obscure account.

His bosses began to uncover the dealings with a spot audit in 1995, but by that time, all of the bank’s assets and its very future were on the line. Eventually, heads rolled, Leeson went to prison and Barings was sold.

Despite investigations and lessons learned from the Leeson case, another rogue trader caused similar problems for French banking giant Societe Generale many years later, in 2008. The tab for Jerome Keviel’s rogue trades was £7 billion.

Story Toolbox

When writing the bread-and-butter periodic earnings story for a listed company, compare the company’s analysis of its performance in the press release to the numbers in the actual financial filing, and the company’s discussion in the filing of the numbers.

The press release often puts a positive spin on certain numbers, and altogether ignores other numbers that may tell a different story.

The same is true for the annual report: The glossy photos and upbeat analysis are sometimes contradicted by the numbers in the financial statements, and it’s the journalist’s job to study the numbers rather than reporting the spin.

That same year, Kweku Adoboli, a trader for Switzerland’s UBS AG’s investment bank, was starting to hide his trading losses, which ultimately caused a $2 billion loss for UBS, discovered in 2011.

Adoboli was charged with fraud and false accounting, and governance experts immediately began questioning the banks’ risk management and oversight. USB chief executive Oswald Gruebel at first said that USB had “one of the best” risk-management units in the industry. But he soon resigned, saying he was shocked that a trader was able to inflict multibillion-dollar losses through unauthorized trades.

See “Ten Tips to Spotting Trouble in the Companies You Cover” at: http://bit.ly/HGol8e