For 11 years before FBI agents nabbed him, Toshihide Iguchi lived the well-ordered life of a Wall Street workaholic in Kinnelon, New Jersey. He rose early and headed to Daiwa Bank's Manhattan office, where he was the trusted head of U.S.-government-bond trading. He took few vacations--and then only several days at a time before rushing back to the office.
He had good reason to keep his head down, according to charges brought last week by the U.S. Attorney's office in Manhattan. During those 11 years, the office said, the baby-faced Iguchi made an astronomical 30,000 unauthorized transactions while trying to cover up losses that ultimately ballooned to $1.1 billion. His method was simple: whenever he lost money as a government-bond trader, Iguchi allegedly plucked and sold bonds from Daiwa's own accounts or those of its customers, and then forged documents to make the trades look like authorized transactions. He seemingly sought no gain for himself other than to conceal his losses.
The spectacular allegations put Iguchi in the company of a rogues' gallery of high rollers accused of vast secret transactions that have rocked their firms in the 1990s, spurring some companies to tighten oversight of trading desks. Iguchi's closest kin in scandal is Nicholas Leeson, the Singapore-based derivatives trader who racked up $1.4 billion in hidden losses that broke Britain's Barings Bank when they came to light last February. Like Leeson, Iguchi was simultaneously in charge of making trades and recording them in his firm's back office--a combination that enabled him to conceal the true nature of the transactions. But unlike Leeson, who has remained in a German jail while Singapore continues its effort to extradite him, Iguchi traded nothing more exotic than U.S. Treasury securities. They are "as plain-vanilla a financial instrument as you can find," notes Marc Cohen, managing director at the Hermes Capital hedge-fund firm. That very simplicity should have made the fraud relatively easy to spot.
While intensely embarrassing, the hidden deals won't shatter Daiwa, the world's 13th largest bank (Barings ranked 474th). Its $197 billion in assets can easily absorb Iguchi's losses. Even after writing them off, Daiwa expects to report a $70 million profit for the six months that ended on Sept. 30. Yet Daiwa's 30 or so top officers, in a form of self-imposed wrist slaps, will take pay cuts of up to 30% for six months and will forgo their annual bonuses. The bank itself sold $336 million worth of real estate in Tokyo, Osaka, Hiroshima and other cities last week to help offset the losses. The situation at Daiwa could hinder Japan's attempts to clean up its banking mess.