Yes, rogue trading is a crime

Why Toshihide Iguchi, who covered up $1.1bn of losses over 12 years, is wrong to argue that the best remedy against rogue trading is to decriminalize it.

Toshihide Iguchi, a rogue trader who once lost $1.1 billion at Daiwa Bank, is arguing in a new memoir that rogue trading should not be treated as a crime. Iguchi served four years in a US prison in the 1990s; he says the best way to bring rogues out of their shadows is to reward traders who come forward, not threaten them with jail terms.

He’s wrong.

Iguchi argues* that rogue traders are not in the same league as fraudsters such as Bernie Madoff because they are not trying to enrich themselves; they are digging themselves out of a hole.

He cites his own case as well as those of Nick Leeson (Baring Bank), Jerome Kerviel (Société Générale) and Kweku Adoboli (UBS), all of whom got jail terms, as well as Bruno Iksil of JP Morgan, who avoided jail in return for cooperating with the British authorities. These rogues did not enrich themselves in the process of their trading.

Along with crimes of greed, there exist crimes of passion. And fear of losing face over relatively small losses is the motivation that triggers fraud to cover mistakes, especially among traders who previously enjoyed success.

Of course, if a bank’s culture is such that traders feel a minor loss would imperil their job and reputation, then the supervisors should be held equally accountable. In Iguchi’s case, his supervisors colluded to hide his rogue trading once he confessed, but the magnitude of the losses forced them to go to the authorities.

Although some of those executives would lose their jobs, only Iguchi went to jail; just as no one else has been held criminally accountable at institutions with outed rogue traders. Today it is a truism that a trader who cheats but wins – by, say, ignoring position limits – is tolerated with the lightest of verbal reprimands, when in fact they should be immediately sacked.

But, as unfair or dangerous as all of that may be, it does not mean the original perpetrator of the lie is therefore off the hook. Cooking books is a crime in securities markets because it is the sine qua non of Ponzi schemes and other Madoff-like activities, and there cannot be room for tolerance.

Iguchi argues for special treatment for traders trying to undo mistakes as opposed to those who seek to defraud investors. He says the true culprits are ‘rogue banks’ such as Daiwa, SG, UBS and JP Morgan because they failed to properly supervise their traders, and fostered environments conducive to rogue activity.


But then he contradicts himself by further arguing that internal controls can never deter all rogue trading incidents; that desperate traders will always find a crack in the system to exploit. So which is it?

Indeed, Iguchi’s own behaviour is not as honourable as he claims. In his memoir, he describes how two of the junior traders he had brought on board in New York confessed they had made losses of their own. This was at a time when Iguchi had already come to regret his ongoing cover-up.

Did he advise the younger men to come clean, to avoid his fate? No, he helped them obfuscate their losses. He justifies this by saying he incorporated their losses into his own, bigger hole, and the two younger men eventually moved to Japan and got promotions. But Iguchi had made them accomplices; he had sucked them into his world of pain and self-loathing, instead of freeing them. (And although the endless hours in the office cost him his family, the traders also benefited from broker largess – big nights out, Broadway tickets, and so forth.)

He claims moral superiority to Nick Leeson, his contemporary, because Iguchi kept all of his records and made whole his positions before confessing to his bank’s CEO. Leeson fled Singapore on the cusp of being found out; because he left his positions open, the additional damage doubled the losses and sank Barings.

But this argument misreads the crime. By Iguchi’s lights, he didn’t commit a crime because he felt sorry and he sought eventually to do right by the bank (for 12 years). But the actual crime of both men – the crime of passion – was refusing to accept that they had generated an initial loss, and then to manipulate bank records.

And both Leeson’s and Iguchi’s crimes led to the same type of collateral damage: the destruction of an august financial institution and a loss of jobs among innocent colleagues. Barings collapsed; Daiwa Bank lost its entire international business (and is today rebranded as Resona Bank). Iguchi makes no mention of anyone at Daiwa Bank losing their jobs except his immediate, corrupt superiors, but having the bank close down all of its overseas business surely harmed many people.

Iguchi’s suggestion of giving rogue traders a reward and retaining their status to encourage them to come forward is bogus. Leeson actually dug himself out of his initial hole. Did he change his stripes? No, he continued unauthorised trading. Did Iguchi encourage his underlings to come clean? No, he told them to cover up their crimes (and was then oddly shocked when his superiors did the same upon his own confession).

And besides, the difference between owning up to an initial, modest loss versus owning up to a much longer string of failed, bogus trades does not exactly encourage confidence in such a trader. The very nature of rogue trading is a snowballing of losses. Who’d give such a person an ongoing role on the trading floor?

Rogue trading is alive and well, although the methods practised by Iguchi could not be replicated today (he was actually the head of the bank’s custody department in New York). Despite the mandatory two-week holidays without access to company email and the separation of back offices from trading desks, it still happens – on April 22, Hong Kong regulators reprimanded Royal Bank of Scotland and fined it HK$6 million for lax controls leading to unauthorised trading of emerging-market interest rates.

I agree with Iguchi that the rogue trader’s motivation and the culture of supervision should play a role in how he or she is treated by prosecutors and regulators. And I agree that supervisors should be held accountable too. Iguchi is not a Bernie Madoff. And now, having served his debt to society, it is good that he is trying to enable institutions and investors to better understand what makes rogue traders tick. Losing money is not a crime. But covering up trades and misreporting bank activity is – for good reason.

* “My Billion Dollar Education: Inside the Mind of a Rogue Trader”, by Toshihide Iguchi; self-published.


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