Prime Brokerage Stories: Thank You, Nick Leeson

This is the second in a series called "Prime Brokerage Stories," real-life experiences from a close family member of mine who has worked in this area of the Street for about 30 years.

For a good introduction to what prime brokerage is, I recommend you read the following: //

And for the first story, "Big Mack and the Phantom Pricing," see here: //…

This story took place a few years after the first one. And now, I'll let him take it away…

Due to my success in prime brokerage dealing with the infrastructure at this white glove brokerage firm, I was promoted to vice president and given additional responsibilities. By this time, hedge fund trading was well underway to becoming global. The idea of clearing all your international trades through one prime broker was catching on big time.

But even though the idea was catching on, the reality was something else. The systems were not up to it. The people either could not keep up, or just did not give a crap.

One example of this is the 'out of currency trade'.

When a hedge fund or institutional client wanted to purchase a security outside the U.S. but pay in U.S. dollars (or other currency) this was considered an 'out of currency trade' and required special handling.

It required separating the trade in two, settling the shares and money separately, using multiple 'firm' accounts. Because it did not follow the normal procedure these trades gave rise to operational risk.

The prime broker paid the counterparty so he was happy and hopefully someone knew to clean it up internally. This was going on for many years.

One thing about bad accounting is that at some point the music stops.

In this case the catalyst was the venerable brokerage house of Baring Securities. In 1995 (in case you are too young to remember) this 233 year old British bank went belly up. An early example of a single rogue trader, Nick Leeson, taking down a firm.

At the time of that colossal bankruptcy, I was tasked with reviewing all counterparty exposure to Barings involving multiple groups at my firm (not normally my responsibility). I found some big amounts that Barings owed us, but I was assured that this was not a problem. The money was in a different account because they were 'out of currency' trades as mentioned previously.

I was assured, "Just find the account with the money and move it over! It's a pair-off."

I'm starting to get concerned. "These trades are 2-3 years old, so why didn't you "pair-off' a long time ago?"

"No worries," I'm told…."the accounts are all 'firm' accounts so the firm HAS to have the money!"

Well…maybe these guys were assholes and should be fired, but they were not working for me, so I bit my tongue. Maybe finding the money would be easy?

Well, I found the money. There it was sitting in the firm account.

However, the firm account was dated early 1993. Was it still there?

A look at the current records (1995) showed no funds.


I traced it forward to almost the present day. The funds were mysteriously transferred only 45 days ago. The trail ended with the employee who knew how to trick the system to avoid controls and tried to wash the money through various accounts. He eventually paid the money to an offshore account in his own name after figuring no one would look for it. After all it had been sitting there for 2 and half years! Finders, keepers!

So, thanks to the Barings bankruptcy, we caught our own 'rogue' employee! I'm glad I did not rip those guys for not doing their job…because it ended up that the rogue employee actually worked for me!

I wonder if Barings did not collapse, this guy might be a multi-millionaire today?

So in a very odd sense, I suppose I should thank Mr. Leeson!

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Comments (5)

Aug 6, 2013 - 11:56pm
huanleshalemei, what's your opinion? Comment below:

Cool story. It would be better if u gave more details..Always interested in channelling firm's money into my own bank account, hahaha~~

The Auto Show
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Best Response
Aug 7, 2013 - 11:47am
pfalzv, what's your opinion? Comment below:

Some more details:
The Method
- He identified funds sitting in an account with no activity for an extended period of time.
- Assessed the group responsible for overseeing the accounts (weak controls)
- He first transferred the funds to another account to see if anyone would come after him
- In order to transfer the funds to internally without supervisory authorization, he used specialized knowledge to bypass the normal approval process. In short, the managers went home at 5:00 PM and there was a way to do this after they had gone
- Washed the funds through other accounts internally with ambiguous and official sounding trailer descriptions to confuse any auditors.
- The wire transfer (actually there was two, probably to keep them below 500,000), required a letter of authorization, I don't recall if this was forged or he just lied about it to get it approved.
Most of the money was retrieved immediately when the offshore bank returned the funds, they were suspicious on their own.
The Author.

Nov 21, 2017 - 11:50am
GridironCEO, what's your opinion? Comment below:

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