Case Background

The merchant bank Barings & Co developed a lineup from a UK trader,

Henderson Crosthwaite, and commenced creating a subordinate, Barings
Securities Limited or BSL, concentrating in tradeoff dealing Far Eastern
securities in 1984.
In July 1989, Barings employed Nick Leeson to work in futures and options
settlement in its London office. He was then moved in Singapore to run the back
office of Barings Future Singapore (BFS), a Barings subsidiary involved in futures
dealing on the Singapore Monetary Exchange, SIMEX in March 1992. He was
then quickly promoted and became the head trader and general manager of BFS
during last quarter of that year. Most of the transactions made by Barings Future
Singapore is own account trading which basically aims at manipulating minute
differences in price amongst Japanese and Singapore exchanges. These own
account trading also operated like brokers for clienteles who want to be involved
on SIMEX Trading.
Leeson conveyed progressively huge amount of revenues on this
deceptively risk-free trading game. But apparently, he was leading a sumptuous
dishonesty. In which positions on SIMEX were by all accounts prevaricated by
equivalent, counterbalancing position on Japanese exchanges. This all
happened from late 1992 until early 1995.
At first, Leeson made some losses but to hide this losses he made a secret
SIMEX Account—with number 88888. It is worthy to note that Leeson was the
person in charge for both deals and operations so he communicated with the
office programmers to modify and adjust the system so that the data under this
account would not be conveyed to their main office in London.
During an internal audit in 1994, separation of front and back personnel was
suggested to have a more coherent and simultaneous work experience.
However, Baring’s management did not take this recommendation and never
implemented it.
Being forbidden in the rules of the exchange, SIMEX are alarmed that
Barings, particularly account 88888, might be backing its clientele. In the first
month of 1995, Coopers & Lybrand Singapore auditors of BFS were disturbed of
a £ 50 million receivable. It wrote to BSL to query this. Leeson also falsified
papers on this particular receivables to hide all his activities related in generating
profit for his exponentially increasing loss.
On February, Baring decided to send London personnel to Singapore to
ascertain what was really happening there. A $200 million gap in BFS's positions
was found by a settlement staff on February 13. Ten days after that, Leeson fled
to Malaysia with his wife and faxed his resignation letter.
Efforts were organized by Bank of England to save Barings. However, these
weren't enough due to it was impossible to gauge Baring's exposure flawlessly.

It was February 27 when Barings was declared insolvent, to the amount of £827
million. A week after that, Barings was assumed by the International Nederlands
Group NV (ING), a world renowned Dutch banking and insurance group.

The SFA imposed disciplinary actions to the leaders of Barings which

results into some of them being banned as directors or managers.

Statement of the Problem

Leeson’s unauthorized trading activities left a $1.4 Billion hole in Baring’s
balance sheet causing the bank to collapse.

Objectives
Main:
To be able to suggest alternative courses of actions as suggestions to
eradicate or minimize the losses brought by the rogue trader – Nicholas
Leeson.

Specific:
• To understand how is it possible for Leeson to be able to cripple a
financial giant.

• To know the roles of the management in this situation and how did they
contribute to this bankruptcy.

• To evaluate internal control systems in Singapore during this incident.

• To identify deficiencies in internal controls and risk management systems

and their contributions.

Areas of Consideration
These are the areas to which Barings Bank should need to give serious consideration in
order to successfully address the crisis.

Management/Leadership/Operations

o Document breaches by senior staff though may seem benign

o Funds advanced from London Treasury without documentation
o Barings Bank board ignoring internal audit report highlighting non-
segregation of duties
o Internal Strife between General Managers two senior managers
 o Trading activities going beyond the charter to solely carry out arbitrage and
execute client business
o The company engages in risky investments like derivatives
o The company/board placed too much trust and confidence to Leeson

Documentation/Reports
o Documentation seems not a strong point in the policy of the company
specifically senior bank staff, senior bank regulator, bank internal and
external auditors, and bank board of directors
o An eternal programmer could easily alter Barings Accounting systems so that
information about a hidden account could not be reported to London

External Events
o The Kobe Earthquake
o The Bank of England leaks news to press on the weekend before a final
solution is found
o Weak government regulations
 Singapore Monetary Exchange (SIMEX) Clearing House unaware that
market losses have exceeded Barings Bank capital
 SIMEX Clearing House does not act to force Barings to reduce Open
Interest at over 50%