AB9102

Forensic Accounting and Fraud

Investigation

Individual Assignment (35%)

The Man who Broke Barings – Nick Leeson

Name Davina Lau Mei Lin

Matriculation Number U1810967B
Tutor Prof Tan How Choon
Seminar Group 01

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Table of Contents
1. Introduction.................................................................................................................. 4
1.1 Trigger to spark Investigation .............................................................................................. 4
2. Preliminary Investigation .............................................................................................. 5
2.1 Present Facts ...................................................................................................................... 5
2.2 Background Information on Barings .................................................................................... 5
2.3 Background Information on Nick Leeson ............................................................................. 6
2.4 Red Flags ............................................................................................................................ 8
2.5 Fraud Diamond ................................................................................................................... 8
2.6 Hypothesis ......................................................................................................................... 9
3. Investigation .............................................................................................................. 10
3.1 Issues for Investigation ..................................................................................................... 10
3.2 Investigation Timeline....................................................................................................... 11
3.3 Investigation Subjects ....................................................................................................... 12
4. Evidence Analysis........................................................................................................ 15
4.1 Internal Documents .......................................................................................................... 15
4.1.1 Internal Audit Report .......................................................................................................................... 15
4.1.2 Forged Documents .............................................................................................................................. 16
4.1.3 Letters of Communication .................................................................................................................. 19

4.2 Interview and Interrogation .............................................................................................. 22

4.3 Causes of Collapse of Barings ............................................................................................ 33
4.3.1 External Audit Report.......................................................................................................................... 33
4.3.2 Failure to Observe the Matrix Management Structure ...................................................................... 34
4.3.3 Combined Front and Back Office Functions ........................................................................................ 34
4.3.4 Inadequate Co-ordination ................................................................................................................... 35
4.3.5 Account 88888 .................................................................................................................................... 35
4.3.6 Funding Requests ................................................................................................................................ 37
4.3.7 Fictitious Trades .................................................................................................................................. 37
4.3.8 Approval for Fund Requests ................................................................................................................ 37
4.3.9 CONTAC System .................................................................................................................................. 38
4.3.10 Baring Group’s Lacking Management ............................................................................................... 38
4.3.11 Asset and Liability Committee .......................................................................................................... 39
4.4 Ongoing Concern Analysis ................................................................................................. 39
5. Summary .................................................................................................................... 41
5.1 Case Timeline ................................................................................................................... 41
6. Recommendation ....................................................................................................... 47
6.1 Charges for Leeson............................................................................................................ 47
6.2 Charges for Other Directors............................................................................................... 48

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 6.3 Winding Up of BFS ............................................................................................................ 48
7. Lesson Learnt .............................................................................................................. 49
7.1 How to Perfect the Fraud .................................................................................................. 49
7.1.1 Threaten His Supervisors on Their Prior Mistakes .............................................................................. 49
7.1.2 Set Up Multiple Accounts ................................................................................................................... 49

7.2 Preventive and Deterrence Mechanisms ........................................................................... 49

7.2.1 Private Sector: Engaging Competent Auditors .................................................................................... 50
7.2.2 Private Sector: Segregation of Duties ................................................................................................. 50
7.2.3 Private Sector: Hiring Sufficient Personnel ......................................................................................... 50
7.2.4 Government: Amendments to the Futures Trading Act ..................................................................... 50
7.2.5 Third Party: Heightening Controls at SIMEX ....................................................................................... 51

8. References .................................................................................................................. 52
9. Appendixes ................................................................................................................. 53

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1. Introduction
Barings Bank was the oldest merchant bank in Britain, founded in 1762 by Francis Baring,
from the Baring family of merchants and bankers. It boasts of Her Majesty the Queen as one
of its clients.

Baring Futures (Singapore) (‘BFS’) was incorporated in Singapore on 17 September 1986.

The man in the center of this controversy is Nicholas William Leeson, better known as the
rogue trader. He first stepped foot in the investment arm of Barings Group, as a clerk in the
settlements department of Barings Securities (London). He was later relocated to Singapore
as the derivatives operations manager.

He became the star of BFS when he single-handedly contributed to almost 10% of Barings’
revenue in 1993. He gained the trust of his supervisors who in turn, gave him the free rein to
conduct his activities under little supervision.

This gave him the opportunity to manipulate documents and fabricate stories to gain more
funding from Barings.

However, the reality is Leeson is no super-trader. He had made substantial losses which he
managed to hide in a separate account. The losses were so massive that it eventually resulted
in the collapse of Barings in 1995.

1.1 Trigger to spark Investigation

It was officially reported that Barings had lost £860 million and was forced into
administration. Barings Singapore was placed under interim judicial management on 27
February 1995. It is also made known to the public that a particular trade account “88888”
and Nicholas William Leeson (Nick Leeson) are the crucial propulsions to the collapse of
Barings.

On 9 March 1995, our team was engaged to take on this case to investigate the affairs of
Baring Futures (Singapore) and Barings Securities Singapore and thereafter, to reconstruct
the events leading to the collapse of Barings and to look into the cause(s) of the collapse.

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2. Preliminary Investigation
As part of our preliminary investigation, we take information provided by our judicial
managers and perform background checks on the relevant entity and personnel. We also
identified certain red flags, established the fraud diamond and came up with a hypothesis.

2.1 Present Facts

Prior to the commencement of our investigation, these are fundamental facts that are known
to the public and also presented to us by the judicial managers – Mr Wong Yew Meng1 and
his team.

17 Sept 1986 Baring Futures (Singapore) and Baring Securities (Singapore) were
incorporated.
Jul 1989 Leeson joins Baring Securities (London) in their settlements department.
Apr 1992 Leeson joins Baring Securities (Singapore), as the derivates operations
manager.
3 Jul 1992 Leeson opens account 88888.
Sept 1992 Losses in account 88888 reaches S$8.8 million.
Dec 1994 Losses balloon to S$373.9 million.
Jan 1995 Leeson bets heavily on Nikkei 225 index.
17 Jan 1995 Nikkei 225 plunges due to the Kobe earthquake.
23 Feb 1995 Leeson flees to Malaysia with his wife.
24 Feb 1995 Discovery of 88888 account.
26 Feb 1995 Barings London is forced into administration.
27 Feb 1995 BFS and BSS placed under interim judicial management.

2.2 Background Information on Barings

Barings was the oldest merchant bank in Britain before its collapse. We identified the
branches in the Barings Group that are pertinent to our case.

BIB Baring Investment Bank

BFS Baring Futures (Singapore) Pte Ltd
BSS Baring Securities Singapore
BSJ Baring Securities (Japan) Ltd
BSL Baring Securities (London) Ltd

Baring Futures (Singapore) Pte Ltd

For this case, we are focusing on BFS and BSS, both of which Leeson held an employment in.
BFS was incorporated in Singapore on 17 September 1986. BFS applied for a corporate non-
clearing membership of SIMEX2 in late October 1986. Later in July 1992, BFS upgraded its
membership to corporate clearing, and it commenced trading on SIMEX.

1
BFS’ judicial managers were Mr Wong Yew Meng, Ms Deborah Ong and Mr Dominic Nixon.
2
SIMEX refers to Singapore International Monetary Exchange.

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Nature of Business at BFS
BFS mainly was an agency business, which executed the orders placed by Baring Group
companies elsewhere on behalf of external clients on SIMEX.

The futures that Leeson was entitled to trade, were independently traded on OSE or TSE3 on
one hand and SIMEX on the other, thus price differences arises periodically due to different
market conditions. The Baring Group held a seat in these Exchanges and therefore could
simultaneously access the market intelligence and execute capability on these Exchanges to
exploit such differences. In short, Leeson’s principal activity was to arbitrage.

Asset and Liability Committee & Group Treasury Risk

The Baring Group also had several committees established to control different aspects of the
businesses. The ALCO, Asset and Liability Committee, managed capital allocation and risk
control. It was a high-level committee, comprising of: Baker, Barnett, Hopkins, Kat,
Maclean, Norris, Broadhurst and Hawes4. In August 1994, a new department, Group
Treasury and Risk (GTR) was formed to manage risks arising from the Baring Group’s
trading positions and funding issues within BIB.

Matrix Management Structure

In the course of his work, Leeson reported locally to James Bax, Managing Director at BSS,
and Simon Jones, Director at BFS and BSS. At the same time, he worked closely with and
reported to Mike Killian, Head of Global Equity Futures and Options Sales at BIB. This was
the Matrix Management Structure that was implemented by Peter Norris, Chief Executive
Officer at BSL. This structure sees reporting done along two axes i.e. location and product.

2.3 Background Information on Nick Leeson

Nick Leeson is the center man of this controversy.

Personal Life
Nick Leeson was born in Watford, Hertfordshire on 25 February 1967, to working class
parents. He led a humble life and left school at the age of 18 to join the working force.

Debt
Leeson had run up a debt of £639 with an electronics corporation Hitachi, and judgment had
been given against him in Watford County Court in February 1991. When Leeson married in
March 1992, he was nearly taken to court again, by the National Westminster Bank, for a
larger sum - £2,426.

Work and Ethics

He has worked in the Coutts Bank and Morgan Stanley where he was trained in futures and
options. He applied to be recognized as a registered representative of BSL, but because of his
untruthful declaration, SFA5 withdrew his application. He once again applied for a
registered representative of BFS, and similarly, made a false statement that he had not any
civil judgements against him. It was negligently approved thereafter. It is noteworthy to

3
OSE stands for Osaka Exchange and TSE stands for Tokyo Stock Exchange
4
These personnel will be introduced in detail in the later section 3.3 Investigation Subjects.
5
Securities and Futures Act

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zoom into Leeson’s credibility, however, as he failed to report a judgment against him while
applying for the broker’s license in Singapore.

Assignment to Singapore
Leeson commenced his positions in Singapore in April 1992, to head BFS’ settlement
operations, and at the same time, as BFS’ floor manager at SIMEX. After earning big gains
for Barings, he was recognized and quickly promoted to the Assistant Director and General
Manager of BFS on 28 June 1993.

Leeson was authorized to arbitrage between SIMEX and OSE for Nikkei futures, and
between SIMEX and TSE for JGB futures. His job scope includes taking advantage of price
differences by buying on one platform at a lower price and selling on the other platform at a
higher price.

By early 1993, Leeson was involved in executing orders on behalf of the proprietary traders
and the external clients of the Baring Group. Into the last quarter of 1993, he was already
trading on behalf of the Baring Group. It is important to note that at this point, BFS did not
have its own proprietary books; all the proprietary trading in question was booked for the
account of BSL or BSJ.

Wife
He wedded his wife, Lisa Sims, in 1992. Lisa did not have any reported involvements in
Leeson’s scheme.

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2.4 Red Flags
Based on the facts given by our judicial managers and the background checks done, we have
identified several red flags.

Unusually High earnings for an Arbitrager

Arbitraging futures and options is a low-risk business. It is the simultaneous purchase and
sale of an asset in order to profit from the difference in the asset’s price between markets.
Arbitraging exploits the price differences, bringing in low and steady profits.

Despite being an arbitrager, Leeson could make remarkable profits for Barings. Logically,
this should have raised an eyebrow to many – Leeson was new, doing arbitraging, yet he was
earning better than a proprietary trader.

Control of Back-end and Front-end Operations

Leeson was to lead BFS’ settlement operations and simultaneously, be BFS’ floor manager at
SIMEX. These functions are normally kept separate, as part of the necessary checks and
balances in the world of trading.

We find this an ill-judged decision for these reasons:

(i) Leeson had no prior trading experience at all;
(ii) Leeson was not honest in declaring his previous civil proceedings when
registering to be an Associated Person of BFS; and
(iii) Leeson was effectively entrusted with responsibilities for BFS’ front and back
offices far from the headquarters’ supervision in London.

This is a prominent red flag as it gives Leeson the power to manipulate the accounting
records.

Rapid Promotion for Leeson

Having worked in BFS for only one year, Leeson was quickly promoted to the Assistant
Director and General Manager of BFS. This rapid climb is questionable as Leeson has just
started his career as a settlements clerk with no trading experience prior to joining BFS.
However, we do not rule out the possibility that Leeson has been able to make a name for
himself in being a turbo-arbitrager.

2.5 Fraud Diamond

We believe that the concealment of the 88888 account (as accounted by the judicial
manager) was the starting point of the whole fraud. Thus, we adopt the fraud diamond that
illustrates the four elements in place for a perpetrator to successfully execute a fraud scheme.

Pressure
Leeson has striking losses in the 88888 account that he must breakeven before the audit
takes place. These losses, if discovered, may put his and his team’s careers to an end. He also
gained a reputation for himself as an extraordinary competent trader. Thus, he feels the
pressure to uphold to that title and not let the higher management discover his mistakes in
trading.

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Opportunity
Leeson had gained the trust of his superiors and was given the freedom to oversee the trade
operations. Being in both the back and front operations, he was able to control both sides of
the balance sheet. Essentially, what was presented to the higher management of the Baring
Group depended on what he wants to include in the balance sheet.

Rationalization
Leeson was, after all, engaging in trading that in its nature comes with gains and losses. He
had earned substantial profits for Barings previously and is confident of doing the same
again in the future. Leeson was not bent on hiding the losses forever, but rather keep it under
the books for a short while, before he recoups the losses. Furthermore, he justifies it by
needing to do so in order to keep his and his trading team’s jobs intact. He was not just
taking care of himself, but also, his team and their families.

Capability
Leeson had acquired enough knowledge in Futures and Options, from his training at Morgan
Stanley to dabble in trading so impetuously. He also quickly learnt on the job while taking
instructions from his supervisors.

Furthermore, his trading team was loyal to him and unquestioning of his actions. He could
count on them to proceed with his plan.

2.6 Hypothesis
We have come up with a hypothesis using the Act, Conceal and Convert concept.

Act
Leeson engaged in reckless trading which costed Barings substantial losses.

Conceal
He concealed these losses by putting them into an error account 88888 and hid this account
from accounting records and audits. He concealed the figures from the higher management,
and when questioned about the discrepancy in the accounting figures, he made up stories
and forging documents.

Convert
Conversion is not relevant in this case as Leeson did not have gains to be converted. He was
facing losses which he attempted to conceal.

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3. Investigation
From the red flags, fraud diamond and our hypothesis, there is sufficient ground to open the
case and thus we commence the investigation.

3.1 Issues for Investigation

At this point, Leeson had already fled the country. Our investigation follows a tight timeline
aimed to extradite Leeson back to Singapore.

At the point Leeson absconded, the cumulative losses incurred by BFS was S$1.4 billion. The
total eventual losses were S$2.2 billion, almost doubling the figure within the span of a few
days.

The management of Baring Group contended that they had zero knowledge of account
88888 until 24 February 1995, up to the collapse of Barings.

Thus, with the advice of the judicial managers, we have decided to focus on the following
issues:
(i) Whether there exists any weakness in the organizational structure and controls,
particularly regarding Leeson;
(ii) The extent the internal audit had identified red flags that Baring Group ought to
have monitored;
(iii) The extent of a proper system present to monitor Baring Group’s risk exposure;
(iv) The actions taken by BSL Settlements to resolve the concerns that had arisen
from Leeson’s activities;
(v) Group Treasury’s manner of handling with the funds requested by Leeson;
(vi) The extent of financial and credit controls in regard to Leeson’s activities;
(vii) The extent that Leeson’s supervisors may have contributed to his ability to
function freely;
(viii) How these affairs escaped the regulatory reporting regime the Baring Group was
subject to; and
(ix) The extent that external controls may have been negated.

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3.2 Investigation Timeline
Our investigation timeline is as follows –

1. Identify Initial Suspects

The apparent perpetrator is Nick Leeson. However, since this is an act of concealing the
discrepancy in accounting figures, it is not possible for Leeson to act single-handedly. We
recognize the possibility of his trading team executing the artifice with him, and the lack of
supervision and detection of Leeson’s doings. We have identified those related to this case in
the next portion, 3.3 Investigation Subjects.

2. Search and Seizure & Collection of Documents

After identifying the suspects, we conducted a search and seizure on 3 April 1995 at BFS and
BSS to collect internal documents crucial to our investigation. Prior to the actual search and
seizure, our team applied for a search warrant. The process for this application was smooth
as BSS has been put under interim judicial management. The chain of custody was
maintained throughout the whole process of collection, transportation, storage and analysis
of evidence.

At the same time, we have obtained documents from SIMEX, BSL and other relevant
external institutions. We adopted the Wheel of Investigation model and collect evidences of,
as far as possible, six forms – internal documents, external documents, electronic
documents, interview and interrogation and the opinion of expert(s).

In total, we collated transcripts of interviews amounting to more than 6,500 pages (of which
noteworthy is elaborated in 4.2 Interview and Interrogation) and gathered several
thousand primary documents (of which crucial is detailed in 4.1 Internal Documents).

3. Analyze Documents
Having collected the evidence, we will do analysis for the internal, external and electronic
documents. For most of the documents, we accepted the facts at the face value, unless there
pose reasonable suspicions against the legitimacy of the documents. For the analysis of the

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documents, we have engaged professional brokers and forensic accountants6 to assist us.
From this stage, we identified gaps in comprehending the documents.

4. Interview & Interrogation

Interview and interrogation serve the purpose of verifying information, filling in the missing
gaps we have identified in the previous stage and gather additional facts. We also take this
opportunity to corroborate the statements given by the different individuals. This will be
further discussed in portions 4.2 Interview and Interrogation.

5. Evidence Analysis
With all the documents collected and oral statements from interview, we will be critically
analyzing the evidence we have. This will be further discussed in 4 Evidence Analysis. This
stage is the most important as we scrutinize the legitimacy of documents and the honesty of
interviewees’ responses.

6. Investigation Report
At this stage, we have gained a good grasp the events that have unfolded. We will present the
causes that led to the collapse of Barings, put forward recommendations on the charges on
Leeson and others, if applicable. This will be discussed in portions 5 Summary and 6
Recommendation.

3.3 Investigation Subjects

We have decided to interview the related personnel. Few personnel were identified after
search and seizure, in which we found relevant documents that brought our attention to
them.

Interviewee Position Relation to the Case/Rationale for Interview

James Internal James Baker was assigned the primary responsibility for the
Baker auditor, internal audit of BFS.
BSL
In his position as the auditor, we want to find out when, if he
did, discover the discrepancy in the figures, and whether
there was action taken to inform the higher management
corresponding actions by them.

We found one important letter by Baker (more in 4.3 Letters

of Communication) that pointed out crucial internal control
weaknesses.

We want to find out what actions had been taken by the

recipients of the letters and audit plan and if there were any
favorable responses to Baker.

Ron Baker Head of Ron Baker is the signatory present in the forged document
Financial (4.2 Forged Documents) by Leeson.

6
We engaged our team of forensic accountants from KPMG.

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 Products
Group, BIB We want to find out if Ron Baker knew about this document.
We are also interested in the extent Ron Baker was aware of
Leeson’s trading activities, since he is the product manager of
Leeson.

James Bax Managing Bax was Leeson’s local manager.

Director,
BSS We found two letters by Bax. One touched on the activation of
the SIMEX seat and reporting lines. Particularly, it was
mentioned that Leeson should report to Jones. The other
specifically mentioned that Leeson should be stripped off his
settlements duties.

We want to find out if Jones and Bax have assumed proper

responsibility in supervising Leeson, and if they knew clearly
of Leeson’s trading activities.

Gordon Risk In his position as the Risk Manager at BSL, we want to find
Bowser Manager, out the risk control on Leeson’s activities, and BFS in general.
BSL
Geoffrey Group As the Group Finance Director, we want to find out when
Broadhurst Finance Leeson’s misconduct was alerted to him and what actions
Director, were taken accordingly.
BIB
Tony Settlements The daily transfers of cash to BFS were collectively approved
Gamby Director, by the settlements department and the group treasury.
BIB
Brenda Manager We want to find out if they knew the purpose of these
Granger Futures and transfers, whether there are controls put in place to limit the
Options amount that can be requested and transferred, and whether
Settlements, they had at any point reported to a higher management of
BIB these daily transfers of cash.
Tony Hawes Group
Treasurer, We identified these four key personnel that held the power to
BIB approve the fund requests.
Ian Hopkins Director
and Head of
Group
Treasury
and Risk,
BIB
Simon Director Jones was Leeson’s local manager in Singapore.
Jones BFS
Finance We want to find out if Jones knew of Leeson’s misconduct,
Director, and if so, whether Jones had any involvement to aggravate or
BSS overlook the situation.

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Mike Killian Head of Killian was Leeson’s product manager on the indexes.
Global
Equity Leeson was known to have worked closely with Killian on the
Futures and Nikkei Index; thus we want to find out if Killian knew about
Options the existence of 88888 accounts, and whether he knew that
Sales, BIB Leeson had been trading beyond his authority.

Nick Leeson General Leeson is the main perpetrator of this case.

Manager/
Assistant We want to ascertain the facts and corroborate the statements
Director, given.
BFS
However, Leeson has fled the country. We have decided to
forgo interviewing him at this stage because Leeson may not
offer an objective view to the issues presented.

We decided to get his statement when we have successfully

extradited him back to Singapore.
Peter Norris Chief In his position as the CEO at BSL, we want to find out the
Executive extent of Norris’ knowledge on this matter, and his actions
Officer, BSL taken.

Tony Futures and In his position as the Settlements Clerk and the personnel
Railton Options who was later seconded to Singapore to settle the issue, we
Settlements would like to find out what Railton has discovered and his
Senior actions taken.
Clerk, BIB
Soo Yu SIMEX’s We found a letter from Soo to Jones, dated 11 January 1995
Chuan Senior Vice- (refer to 4.3 Letters of Communication).
President in
charge of This letter was crucial to the story. Soo’s compliance
Audit and department had discovered that one of Barings’ biggest
Compliance accounts, 88888, appeared not to have met the exchange’s
initial margin requirement.

We want to find out how SIMEX discovered the account, and

further actions SIMEX has taken regarding this matter.
Furthermore, we want to know Jones’ response given to
SIMEX with regards to this account discovered.

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4. Evidence Analysis
We have adopted the Wheels of Investigation model to, as far as possible, obtain evidences of
five forms – internal documents, external documents, electronic documents, interview and
interrogation, and expert.

However, for better flow of presentation of evidences, we have decided to cover the evidences
and our opinion in the manner of a detailed explanation of events unfolded (4.3 Causes of
Collapse of Barings). As such, only internal documents and interview and interrogation
would have independent sections.

4.1 Internal Documents

4.1.1 Internal Audit Report
From the 1994 audit plan for the audit of, we note a section on Key Audit Issues, where it
clearly point out Leeson’s precarious domination of back and front operations and BSL’s
compliance in transferring the funds to BFS.

The internal auditors also included specific requirements that Leeson do not:
(i) Retain sole responsibility for the supervision of BFS’ back operations;
(ii) Retain authorized signatory for cheque and journal passing powers;
(iii) Review and sign off SIMEX deposits, variation margin and collateral
reconciliations; and
(iv) Review and sign off bank reconciliations.

In a separate section titled Reconciliation of Margins, the internal auditors also pointed out
that:

“All figures should agree. If they do not, it is possible that either SIMEX or BFS are calling
incorrect margin amounts. There is no reconciliation between the margin call made by
SIMEX on BFS and the margin call made by BFS on BSL and other clients.
A reconciliation of margins would ensure that discrepancies between SIMEX and BFS
systems are identified.
We recognize that a daily reconciliation would be cumbersome and thus recommend that a
weekly reconciliation procedure be introduced as soon as possible.”

It is apparent that the internal audit report has identified the crucial internal control
weakness that eventually led to the collapse of the Baring Group. They also lined out the
procedures that Barings should heed regarding Leeson dominating the front and back
offices, as well as the reconciliation of margins.

Had these steps been taken, Barings would not have collapse at the foot of Leeson.
Henceforth, we gather that the audit points brought up by the internal auditors of Barings
were irresponsibly neglected.

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4.1.2 Forged Documents
Forged Documents on SLK Receivable
First, there is a letter purportedly from Richard Hogan, Managing Director of Spear, Leeds &
Kellogg (SLK), which confirmed the outstanding balance of 7.78 billion yen maturing on 30th
December 1994. We found there to be no such transaction with SLK. This letter was a
perfunctory response to C&L Singapore (BFS’ external audit) regarding the discrepancy in
figures.

Hogan’s signature’s typeface particularly struck to us as it is different from the rest of the
letter. Leeson was careless in the consistencies of the fonts, which pointed to the falsehood of
the letter.

Figure 1: Letter from Richard Hogan, forged by Leeson

It is apparent to us that this act of forgery was one of the most basic of cut-and-paste. Leeson
had taken an earlier letter from the SLK, the New York-based company and cut out the
letterhead of Richard Hogan’s original letter, cut off the signature, stuck them to the plain
letter and photocopied the whole thing.

From the document, we also noticed on the top right corner (not visible in Figure 1) that it
was faxed from “Nick and Lisa” instead of from SLK. This suggests that Nick used his
personal fax machine at home to send this to BFS, and later disguised it as a letter from SLK.

16
Second, there was a memorandum allegedly by Ronald Baker, Head of Financial Products
Group, at Baring Investment Bank. This was again, forged by Leeson. He had scribbled the
note, and instructed Nisa, his administrative assistant, to type them out, as admitted by Nisa
in the interrogation. Ronald Baker’s signature did not seemed to be cut out from anywhere,
thus we believe that Leeson hand-forged Ronald Baker’s signature.

Figure 2: Memorandum from Ronald Baker, forged by Leeson and seemingly convincing

Third, with the above memorandum came a cover sheet. This cover sheet was a legitimate
piece that Ronald Baker had previously faxed. The date was changed in this case, but the
forgery was not striking.

Figure 3: Baker memo cover sheet, where the date is forged

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Forged Bank Statements
We also found the falsified document which showed that money had come in from an
American bank. This was in relation to the SLK Receivable transaction that Leeson made up.

Figure 4: (Top) Document with stamp in the normal place. (Above) Citibank’s office stamp
is moved to hide the true origin of the SLK receivable.

The top document shows a legitimate past bank statement from Citibank. Leeson had cut out
the office stamp and pasted it on the forged bank statement to make it seem authorized.

We also noticed that the name of the payee of the sum of ¥7.778 billion was not visible
because the office stamp was positioned strategically to hide it.

We gather that the forged documents had loopholes that would have been discovered if the
recipients (C&L Singapore) of these documents had scrutinized and enquired about the
inconsistencies.

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4.1.3 Letters of Communication

From James Baker to the Higher Management of BSL

We focus on one important letter by Baker.

It was dated 22 June 1994 notes the following:

“If something was amiss in Singapore (eg. fraud, error, backlog), … not confident that any
of the senior clerks would speak up.

A second major concern is the futures company. Nick Leeson has too dominant a role
looking after both trading (agency and proprietary) and settlements aspects of the
business; there is no deputy to challenge him. The amounts of money involved are vast and
this is a very fast moving and complex market.

One specific concern in the futures area is the level of margin calls paid by BSL London
without knowing precisely on whose behalf the cash is being paid. If our account in
Singapore does not carry sufficient funds for a margin call, BSL London pays the difference
(could be as much as $10 million). Tony simply receives a request for US$ to make up the
shortfall and has to satisfy the demand at very short notice, sometimes even during SIMEX
trading hours.”

This letter is self-explanatory. Baker specifically mentioned in the early assignment of

Leeson to the Singapore office that there were legitimate concerns to be taken care of.

From James Bax to Andrew Fraser and Higher Management of Barings

We found two crucial letters from James Bax.

The first one, dated 25 March 1992, was faxed to Andrew Fraser, Head of Equity, Broking
and Trading at BIB, with regards to the activation of the SIMEX seat and reporting lines.
Particularly, it was mentioned that Leeson should report to Jones.

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His second letter dated 3 February 1995 to the higher management of BSL was noteworthy.
He identified the weak internal controls and suggested to “split Nick’s role so that he is no
longer responsible for the settlement functions”.

From this letter, it is apparent that in his position as the Managing Director of BSS, James
Bax has had early concerns about Leeson’s domination of the front and back offices.

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From SIMEX to Jones
This letter was crucial to the story. Soo’s compliance department had discovered that one of
Barings’ biggest accounts, 88888, appeared not to have met the exchange’s initial margin
requirement.

There was a clear reference to account 88888 that Leeson had kept hidden from the Barings
management.

This letter ought to have raised questions about this account and the identity of this “client”,
whose number did not appear in their systems.

SIMEX knew about the existence of account 88888, yet little action was taken up till the
collapse of Barings. We pose our suspicions on the clients management at SIMEX.

21
4.2 Interview and Interrogation
This section is sequential of 3.3 Investigation Subjects. Interview (or interrogation) is
carried out for the relevant personnel identified. After gathering information from these
people, we have a clearer idea of the events unfolded that led to the collapse of Barings. We
have presented our notable findings in the following manner – in separate paragraphs for
things/events specified to the interviewee, and in the later portion 4.3 Causes of Collapse of
Barings that speaks for the general events.

All interviews are held in separate rooms to prevent distractions and simultaneously, as far
as possible, to prevent collusion in the statements given. We have kept questions reasonably
short and straight to the point. For each individual, our flow of interview follows the general
rule of starting with background information, questioning events in chronological order, and
reiterating the facts from the oral statements. We understand that interviewees may be
uncooperative in providing truthful statements, but we will maintain a professional tone
throughout the interview. Apart from taking down their oral statements, we will also observe
their body language, and make use of polygraph and consult from deception detection
experts7.

All interviews were conducted in the period 8 June 1995 to 6 July 1995, apart from Nick
Leeson’s. Leeson’s statement was taken in August 1995, when he was extradited back to
Singapore. We have excluded any attempts to conduct remote interview with Leeson as we
were pushing for his extradition, thus we decided that he should refrain from any
involvement in our investigation at this stage.

For these oral testimonies provided to us, we have sought as far as possible to have the
evidence on major points corroborated.

Otherwise, our view is also clearly expressed, accentuated in a dark red font.

Interview with Nick Leeson

Leeson is the General Manager and Assistant Director at BFS.

Leeson was co-operative after he has been extradited back to Singapore. In our view, Leeson
had seen this coming when he escaped even before the commencement of the investigation.
Leeson did not attempt to push the blame to others, although he honestly presented his
views on how he was able to carry out the fraudulent activities because of the opportunity
lack of supervision has given him.

Apart from a minor false claim – Leeson claimed that he first used the account 88888 to
cover up losses for his inexperienced colleague but we found out that account 88888 has
been in use even before his colleague made the mistake – we were not particularly doubtful
of the rest of Leeson’s account as it was consistent with our findings and interpretation.

7
We engaged a deception detection expert, Blanca Cobb and her team in deciphering corporeal clues
throughout the interview process.

22
Interview with James Baker
James Baker is the Internal Auditor at BSL.

James Baker provided us with the scope of the audit that he was limited to:
(i) Making enquiries of the management and staff of BFS; and
(ii) Observation of the conduct of businesses of BFS and checks of the internal
controls.

Baker contended that it was not within his scope to carry out any detailed testing to ensure
that the accounting systems could be relied upon for generation of accurate information – he
relied on the information as presented.

Baker’s basis for not directly verifying trades against primary documents was that his
auditors were not trained in trading and thus did not have proper understanding to do
detailed testing. They did not believe in going to Leeson for deeper understanding because
Leeson was the direct party and may not provide an objective view.

It seems to us that Baker did only the fundamental of he was supposed to in his capacity and
position as the internal auditor. He put forward the existence of the discrepancy in figures
and the lack of internal controls several times to the higher management of Barings.
However, he was inadequate in his work as he did not pursue further in detailed testing nor
follow ups to ensure controls were done as promised.

Responses from Jones and Leeson appeared favorable. There were clear addressing of each
point – Leeson would cease to be responsible for back offices, bank reconciliations will be
carried out, a separate finance manager will sign off journals, and there would be more
stringent supervision of the settlements and record keeping process.

Baker was convinced that Jones would handle these issues immediately. Baker claimed that
this was the reason why the higher management were not concerned by the audit points
brought up – because Jones seemed resolute in his responses. However, Jones did not do
what he promised to.

In our view, Baker should have demanded for the auditors’ recommendation to be
implemented with a greater sense of urgency. He also should have requested for follow ups
and updates of actions taken.

Baker also revealed that when C&L Singapore (external auditors) requested for a copy of the
internal audit report, Jones instructed Yong to lie about the existence of report. (to be
discussed more under interview with Simon Jones)

He mentioned that the part on Reconciliation of Margins was omitted because Leeson raised
objections, that were not understood by the auditors, but accepted by Broadhurst who in
turn told them to omit that section.

In our view, this recommendation on reconciliation was crucial and apparent that it should
not have been omitted. We find it reprehensible that Broadhurst, as a senior manager,

23
supported the omission of this fundamental control. Had the recommendation been
followed, the reconciling difficulties would have been discovered.

From our review of the work of the internal audit team, we gather that:
(i) The internal audit team did good preparatory work prior to the conduct of the
internal audit and identified significant issues that were the root causes for the
collapse of Barings;
(ii) They identified the prevailing difficulties faced in understanding funding requests
made by BFS;
(iii) However, they could not draw a connection between (i) and (ii), the fact that the
unreconciled figures stems from the control weakness exploited by Leeson;
(iv) They confirmed the validity of the concerns that had arisen from the failure to
segregate Leeson’s responsibilities in the front and back office.
(v) They gave intelligent recommendations that were to be implemented promptly;
(vi) But these recommendations were not implemented as the internal auditors
thought they would be; and
(vii) They did not take to detailed testing for the figures they could not understand.

We believe that the collapse of the Baring Group could be prevented had the auditors:
(i) Properly understood the funding issue and carry out the necessary work to
address the concerns by Tony Hawes;
(ii) Included the section on Reconciliation of Margins, and ensure the reconciliation
is done;
(iii) Undertaken proper transaction testing.

Interview with Ron Baker

Ron Baker is the Head of Financial Products Group at BIB.

Ron Baker was initially impressed by the amount of profits Leeson could generate, and “took
direct responsibility” for Leeson. We were not sure what the “direct responsibility”
constituted.

Ron Baker had a conceptual understanding of Leeson’s business, but we believe that he did
not have a detailed comprehension of the technical aspects. Ron Baker also admitted that
despite having spent substantial time with Leeson observing the SIMEX operations, he did
not fully understand Leeson’s activities.

In our view, if Ron Baker knew in depth the details of Leeson’s activities, he should have
realized that the unusually high profits reported from arbitraging could not be true. Given
Ron Baker’s experience in the financial market, it is only logical for him to question Leeson’s
conduct.

24
Interview with Gordon Bowser
Gordon Bowser is the Risk Manager at BSL.

We gather that Bowser had very early emphasized the need for tight control for the money
paid by Barings to SIMEX on behalf of clients, and the money received from their clients.

Bowser recommended that reconciliation be separated from Leeson’s settlements

department. This was suggested in April 1992, and he asked for this procedure to be agreed
by Jones, which was readily agreed by Jones, but no further actions were taken.

Bowser also admitted one count of a forged audit confirmation in September 1992, to resolve
an audit point raised by their then external auditors, Deloitte. He claimed that Leeson was
the too, the perpetrator of that forged confirmation.

Interview with Geoffrey Broadhurst

Geoffrey Broadhurst is the Group Finance Director at BIB.

Broadhurst was one of the few who tried to keep the SLK Receivable issue under wraps, and
not reporting it to ALCO at first hand. He also refrained Granger from calling SLK to check
the matter.

He informed Hopkins that the amount has been repaid and no longer poses a problem.
Broadhurst later admitted that this was based on what Norris has said – Broadhurst himself
did not actually ascertain the facts.

Broadhurst was closely working with C&L London and he pleaded with them to omit the
mention of the SLK transaction in the audit management letter.

In our view, Broadhurst is yet another director that has his judgment clouded by his personal
benefit. He was the Group Finance Director at BIB and is reasonably motivated by a smooth
and favorable audit outcome. Without ascertaining the facts of this issue, he spread false
alleges and kept the issue from blowing up.

Broadhurst repeatedly asserted that his responsibilities did not cover affirming the accuracy
of regulatory reports, the resolution of the SLK Receivable and reminding ALCO of the
consequences of the Baring Group’s funding pressure, although these issues falls rightly
within the responsibilities of a Group Finance Director. He maintained that his actual scope
was more modest than his role claims to be. We do not accept these claims because it seems
to us that Broadhurst is attempting to cover up for his lack of concern in the company’s
matters.

In our view, Broadhurst, as the Group Finance Director, was aware at least by January 1995
that:
(i) Problems had arisen since 1993, in the reconciliation of funds collected from
clients of BSL with the funds remitted to other Baring Group companies to place
as margin deposits with exchanges for client positions;

25
 (ii) There were concerns over the reliability of the financial information received
from BFS;
(iii) The Baring Group face funding pressure from Leeson’s trading activities; and
(iv) BSL was not aware of a transaction allegedly between BSL and SLK, which was
Leeson’s explanation for the large discrepancy identified by the external auditors.

We find it unreasonable for Broadhurst to have been aware of all these issues yet did not take
proper actions to correct them. In our view, Broadhurst was unduly preoccupied with relying
on others to oversee the resolution of these issues, instead of handling them on his own.

Interview with Brenda Granger

Brenda Granger is the Manager Futures and Options Settlements at BIB.

Granger (and Gamby) contended that they authorized the funds requested by Leeson
because there were no objections from the Group Treasury. The fund requests were made to
both BSL Settlements and the Group Treasury. If the Group Treasury had no objections,
Granger felt that BSL Settlements did not have to query further nor doubt the funds
requested.

Furthermore, with Leeson’s position as the General Manager in BFS, it constituted sufficient
authorization for BSL Settlements to remit the requested funds, even if Granger (and
Gamby) did not have clear understanding of the underlying transactions.

Granger claimed that she mentioned to Hawes, the Group Treasurer, about the unreconciled
amount.

Interview with Tony Gamby

Tony Gamby is the Settlements Director at BIB.

Gamby did not enquire further into the basis of Leeson’s fund requests on the same grounds
as Granger (refer to Granger’s account above).

We find it amusing that Gamby later admitted that according to this logic, there would be no
purpose in having BSL Settlements to be involved at all in the settlement of the BFS’ fund
requests in question.

Gamby claimed that he first noticed the unreconciled amount in late 1994. He believed that
the amount was an intercompany loan to BFS to meet advance margin calls made by SIMEX;
to fund BSJ’s positions because of its inability to remit funds quickly enough; and to fund
some of BFS’ local clients including BNP. He alleged that both the Group Treasury and
Credit Control were not concerned with this, thus he did not see a need to investigate further.

In our view, we are hesitant to accept Gamby’s contentions because the amount requested
for was simply too large for the reasons Gamby has presented.

26
He admitted that he first mentioned this problem to anyone else only on 23 February 1995.
In our view, Gamby should have raised this issue earlier, considering the size of the
unreconciled figures and the numerous concerns that existed in BFS.

We find flaws in Granger and Gamby’s contentions that prove that they were not performing
their job well. Had the full responsibility been on the Group Treasury to validate the fund
requests, there would be no need for Settlements department in place.

Interview with Tony Hawes

Tony Hawes is the Group Treasurer at BIB.

Hawes find it surprising that Granger put the complete responsibility on himself to manage
the cashflow of the Baring Group.

We gather that Hawes brought up significant concerns to the internal auditors, but little was
done to address his concerns.

He claimed that he convinced by Leeson because Leeson told him the funds were needed for
the financing of “advance margin calls” – intra-day margin requirements imposed by SIMEX
on an ad-hoc basis for volatile contracts. Leeson was also said to have pressed on for the
funds urgently, as it was “promptly required” by SIMEX. Hawes thus did little to ascertain
the grounds of Leeson’s excuse.

Hawes believed that Leeson gave legitimate reasons:

1. The time differences between Singapore, England and North America posed a
challenge to obtaining same-day payment from its clients;
2. There were delays in remitting the required Yen funds from BSJ, and thus it was
faster to obtain the funds from BSL.

In our view, we take into consideration the fact that the Group Treasurer may not know fully
the operations of trading in SIMEX. However, there should have been critical evaluation of
Leeson has claimed – as there has never been a prior case of “advance margin calls”. The
Group Treasury should have inquired and seek to ascertain this excuse presented by Leeson.

We also find it logical for Hawes to have questioned why long-term financing was necessary
for such advance margin calls. Had the trading prices remained at the status quo, the
advance margin call would have been subsumed. Conversely, had the trading prices move
favorably from those levels, there would no longer be a need for the margins and the funds
would have been returned. It should have been apparent that BSL should only have
advanced funds for a short period of time. Furthermore, Hawes should have clarified the
position directly with BSJ, which he failed to.

Interview with Ian Hopkins

Ian Hopkins is the Director and Head of Group Treasury and Risk at BIB.

He also propounded concerns on the effectiveness of Baring Group’s internal controls.

27
We found a memorandum from Hopkins addressed to Norris on 4 November 1994. These
are the highlights of the content:
(i) Existing risk committee could not work effectively because the manner of
presenting papers at meetings for immediate decisions meant that the committee
could “only achieve awareness rather than informed consent”;
(ii) Insufficient attention was paid to credit decisions;
(iii) There was a shortage of suitably qualified credit personnel who understands the
nature of the trading business; and
(iv) There was a need for proper monitory of the option and warrant trading activities
to comprehend the corresponding profit and loss incurred.

Hopkins claimed that Norris was dismissive of these concerns.

Hopkins said he was told that the SLK Receivable has been repaid and it was “no longer a
problem”. Following this, he prepared a report on SLK for BIB, recording it as a transaction
between BNP and SLK.

In our view, Hopkins was not exercising professional judgment in his capacity. He took the
words of others without checking further, although he was already physically present in
Singapore – which made investigations into SLK Receivable more plausible.

Interview with James Bax

James Bax is the Managing Director at BSS.

Bax had a complete misunderstanding of Leeson’s role from the start. Bax believed that
Leeson was only in charge of settlements. He wrongly thought that Leeson was only handling
settlements, and in that case, reporting to Bowser in London was sufficient.

This suggests that Bax did not see a need to supervise Leeson’s trading activities. True to
that, Bax proved himself to be unsure of Leeson’s trades booked in account 88888.

Additionally, the BSS office where Bax and Jones worked was on the 24th floor of the office
building, while Leeson worked on the 14th floor. Leeson was out of sight and out of mind,
and this gave Leeson a free rein.

In our view, Bax had an active role in concealing the significance of the matter raised by C&L
Singapore and had attempted to:
(i) Actively sought to divert Hawes from his investigation into the accident;
(ii) Keep references to the SLK Receivable out of C&L Singapore audit management
letter;
(iii) Encourage some form of confirmation to be obtained from Leeson that states the
approval from BSL to appease C&L Singapore, notwithstanding the fact that these
confirmations may be false.

We have sufficient grounds to believe that Bax evidence, though given under oath, was false
in material aspects.

28
Interview with Peter Norris
Peter Norris is the Chief Executive Officer at BSL.

With regards to the memorandum from Hopkins on 4 November 1994, Norris defended
himself with several reasons – which all pointed to the soured personal relationship with
Hopkins that had Norris doubtful of his words.

In our view, we find this unacceptable because Hopkin’s concerns were serious enough to be
deserving of proper responses. Norris proved himself to be impartial between work and
personal relationship, and this is distressing for someone who holds such a high position. We
also believe that the collapse might have been averted if Hopkin’s concerns had been taken
seriously and acted upon promptly and effectively.

On 24 February 1995, Norris instructed his team of colleagues to immediately review BFS’
records and check for unauthorized payments. Norris contended that pointing to
unauthorized payments was an intelligent guess, and that he had not known beforehand.

However, we find it surprising that Norris, the CEO of BSL, whom we do not expect to have
detailed understanding of BFS’ operations and trade settlement procedures, was the first to
arrive at the conclusion that unauthorized payments were the source of the discrepancy.

In his interview, Broadhurst also mentioned that Norris identified the source of the problem
faster than anyone else. It is noted that Broadhurst suggested to raise the SLK Receivable at
the ALCO meeting, but Norris refrained him from doing so.

Thus, we believe that Norris had already known of this issue but did not raise words on it
because he counted on his subordinates to settle the problem before it blows up. He knew
that if the word got out, there would be a lot of complications.

Norris claimed that the Baring higher management continued to provide Leeson with the
funds he needed because they believe Leeson’s trading activities posed little risk yet yielded
very good returns.

In our view, this is absurd because any reasonable man would have known that little risk
trading strategy could not yield consistent high returns.

From the ALCO minutes, we discover that the details of the discussions on the SLK
Receivable was omitted. This was ascertained by Smith, the assistant in charge of minutes
taking. Norris had instructed Smith to omit the details.

We gather that Norris is outright untruthful. He knew of the problem certainly by late
January, but was consistently attempting to:
(i) Downplay the significance of the transaction raised by external auditors;
(ii) Discourage all independent investigations into the transaction including by
external auditors;
(iii) Ensure that to the other directors that were still unaware, the matter was
conveyed to them in terms that were deceptive and understated;

29
 (iv) Withhold any action against Leeson.

We cannot help but be of the opinion, backed up by our deception detection expert, that
Norris and Bax were seeking to prevent the discovery of something. It is plausible that Norris
and Bax may be dismissed from their positions if it was found out by the higher management
that Leeson had be doing unauthorized trade. Alternatively, if Norris believed that Leeson
was a natural trader and an asset to Barings, he may have wanted to ensure that the matter
was not understood in terms which warranted Leeson’s dismissal.

Norris asserted that no motive could be advanced to explain why he was acting this way.

Another highly plausible motive could be to conceal losses that had been incurred by himself.
Had Leeson’s case been investigated, it is easy to track prior records that points to Norris’
wrongdoing. However, this is only conjectural, we are not able ascertain this fact.

Interview with Simon Jones

Simon Jones is the Director at BFS and Finance Director at BSS.

Jones and Bax worked very well together and they were known as “Fortress Singapore”.
Jones, like Bax, misunderstood the scope of Leeson’s work. He believed Leeson reporting to
Bowser was sufficient. There was no need for himself to be heavily involved.

Jones received the SIMEX letter dated 11 January 1995 from Soo. However, he only
distributed this letter to Leeson. Jones did not forward it to his London superiors. This made
it easy for Leeson because he only has to convince one man (Jones) for this matter to
subside.

In our view, Jones presented very little understanding of Leeson’s trading activities. He was
unsure even about the SLK Receivable transaction that he and Leeson collectively submitted
the external auditors.

Later, when we presented the forged SLK documents to Jones, he was able to logically
suspect that there had been “round tripping to convey to the external auditors the
impression that the SLK receivable had been repaid when in fact it had not.” He also pointed
out to us that the fax was from “Nick and Lisa”, Leeson’s personal fax machine at home,
rather than from SLK.

This was surprising to us because this suggests that Jones have not taken a clear look at the
documents when it was submitted by Leeson. At that point, Jones was too focused on
producing a reply for the higher management that he failed to scrutinize the document.

Jones admitted that he noticed matters which were abnormal, but he did not want to jump to
conclusions since the external auditors did not report any anomalies.

We find it difficult to accept Jones’ explanation because these were not small and common
anomalies – they were big figures, and probably have not been experienced by Jones before
– yet he could fail to raise these issues, even as Leeson’s direct supervisor.

30
With regard to keeping the internal audit paper from C&L Singapore, Jones claimed that it
was to avoid divulging sensitive trading information to the external auditors. However, it was
pointed out to Jones by Baker that there was no information in the internal audit report that
external auditors were not entitled to. Jones had no response to this.

It is apparent that Jones acted improperly in hiding the internal audit report from the
external auditors.

Interview with Mike Killian

Mike Killian is the Head of Global Equity Futures and Options Sales at BIB.

From the interview, we learnt that Killian was very concerned about increasing his cost base.
Even when the business was thriving, he was reluctant to recruit new staff.

Killian claimed to not have known the existence of account 88888 because Leeson was acting
under his words and there should not be any unreported error accounts.

Killian was quick to wash his hands off his responsibilities of Leeson and BFS’ operations on
the basis that he was “physically far” from Singapore.

Interview with Tony Railton

Tony Railton is the Futures and Options Settlements Senior Clerk at BIB.

Railton was sent to BFS to “improve the flow of information on settlements”, on 6 February
1995. Later on 17 February 1995, Railton discovered an unreconciled figure amounting to
S$215 million/¥14 billion between the funds remitted to BFS, and the sum of funds retained
in BFS and those placed with SIMEX. This news got to only Granger and Gamby.

Gamby had instructed Railton to settle it with Leeson without blowing things up. Gamby also
told Railton to skip over the SLK Receivables trade because that issue is to be handled at the
discretion of the higher management.

Railton had attempted to contact Leeson and resolve the discrepancy but it was a futile
attempt. Leeson kept cooking up excuses to either leave early during a meeting, or not be
present at all.

In our view, Railton was not successful in his attempts to reconcile the figures because he
was constantly being suppressed by people of higher statuses – Leeson, Jones, Gamby and
Granger. He was only but a mere senior clerk, who was instructed to settle the issue, yet not
given the authority to. What Railton could have done, was to directly report his findings to
the higher management of BSL who had sent him to BFS. The S$215 million discrepancy was
not a small figure and could sufficiently gain the attention of higher management.

31
Interview with Leeson’s Team
This team comprises of traders, telephone communicator, settlements clerks and
administrative assistant. They are George Seow, Maslan Tuladi, Eric Chang, Riselle Sng,
Norhaslinda Hassan and Nisa.

We gather that Leeson’s team were loyal to him. Leeson had fought for their bonuses and
treated them well, thus they would do anything for him in return.

Leeson dominated the staff of BFS, and they did his bidding. The brokers who executed the
transfers between account 88888 and BSJ and BSL accounts did so under Leeson’s
instructions. They were not aware for which accounts the trades were for.

The line traders knew that the quantities and prices of the trades reported to BSJ and BSL
were fictitious and not in line with the actual trades done. However, they claimed to not be in
the position to question because Leeson was their superior.

His settlements staff regularly pass bank accounting entries at each month end to debit
“bank funds received/receivable” and credit “client account 88888”. This is to convert the
deficit balance on account 88888 to a small positive balance or zero balance and reflect the
deficit balance as funds receivable These entries would be reversed out the following month.

Particularly, for the forged documents, Leeson’s administrative assistant, Nisa, admitted
that:
(i) On the forged letter; “I had followed Nick’s instructions to type out the scribbled
note and I did so and sent it back to him. I remember the contents of the letter,
and (pointing to the letter placed in front of her) this was exactly what I had
written. But I did not include the letterhead.”

(ii) On the customer balance at Citibank; “Nick had wanted me to arrange a transfer
of 7.78 billion yen from the client account to the house account. I thought it was
odd since the transfer would not be successful, but Nick only wanted the
statement showing that the amount has been paid in. I did so because I trusted
Nick. After all, I know he is working in our interests. He has been fighting for
our bonuses and he treated us well.”

Leeson’s team played a crucial role in passing irregular amendments to their accounting
records. They were aware that their actions gave rise to discrepancies between BFS’ records
and SIMEX’s records but they claimed to have done so as instructed.

Interview with Soo Yu Chuan

Soo Yu Chuan is the Senior Vice-President in charge of Audit and Compliance at SIMEX.

On his letter dated 11 January 1995, Soo received a reply from Leeson and Jones.
He was convinced and did not pursue the matter further because the letter had the
authorization of Ron Baker, the Head of Financial Products Group at BIB.

32
In our view, SIMEX relied solely on the reputation of the Barings bank and did not take the
proper measures in investigating the issue. There exists control weakness within SIMEX as
well.

4.3 Causes of Collapse of Barings

In this portion, we have identified the key events that are crucial to the collapse of Barings
and included our critical evaluation of information gathered from documents and the
interviews.

4.3.1 External Audit Report

In January 1995, C&L Singapore discovered a discrepancy of S$115 million/¥7.778 billion
between the SIMEX account and the balance shown on the SIMEX statements. Initially,
Leeson pointed it to a computer error. Later, Leeson claimed that this figure corresponds to a
receivable from Spear, Leeds & Kellogg (SLK), which arose from an over-the-counter
transaction between BSL and SLK brokered by BFS.

To support his explanation, Leeson submitted forged documents (4.1.2 Forged Documents).

From C&L Singapore’s audit work, we gather that:

(i) C&L Singapore did not attempt to contact relevant third parties (in this case, SLK
and Citibank) to obtain the required confirmations. They fully relied on Leeson to
provide the explanation, and thus giving him the chance to falsify the documents.
C&L Singapore should have logically sent out confirmation requests to SLK for
affirmation of information.

(ii) C&L Singapore accepted photocopied and faxed documentation. As

aforementioned, Leeson forged the documents with simple skill of cut-and-paste.
Had C&L Singapore requested for original documents, Leeson’s wrongdoing
would have been busted instantly.

(iii) C&L Singapore did not scrutinize the documents; if they had, they would have
noticed that the SLK documents was faxed from “Nick and Lisa” instead of from
SLK, and that the name of the payee of the sum of ¥7.778 billion was not visible
because the document has been tampered with. They did not enquire further
when they should have exercised professional skepticism as auditors.

(iv) C&L Singapore did not raise with BFS’ management or with C&L London the fact
that Leeson was not authorized for OTC (Over-the-Counter) option trading.

(v) C&L Singapore had also not noticed the details of the contract set out on the SLK
confirmation failed to make business sense. It is highly unlikely for the Baring
Group to accept exposure on the part of BFS to a single counterpart for ¥7.778
billion. They should have checked with BSL the legitimacy of this contract.

We were unable to get C&L Singapore’s perspectives on our doubts because they declined
our requests to be interviewed. Thus, we abruptly conclude that based on the above

33
interpretations, C&L Singapore were not exercising enough professionalism in their
capabilities as auditors.

4.3.2 Failure to Observe the Matrix Management Structure

Rightfully, the reporting lines of Leeson exists along two axes – location and product.
However, this structure was not effective in overseeing Leeson’s activities.

Local Management
Bax and Jones were direct supervisors of Leeson. However, they both persistently asserted
that Leeson was to report to Ron Baker, Head of Financial Product Group at BIB. They
believed that the local management only had a limited responsibility for logistical or
administrative matter.

Apart from not assuming duties as supervisors, there are two other main problems:
1. Bax was presented the auditor’s letter that warns him against Leeson’s control of both
the back and front offices. Bax assured that the situation would be corrected but he
did not take any action to rectify.

2. Jones’ response to the auditor was that he would assume responsibilities for the back
office such that Leeson would only be taking care of the front operations. However,
he did not act in accordance.

The local management in Singapore has failed to perform what they were supposed to in
their capacity and position. This loophole gave Leeson a big opportunity to commence his
fraudulent activities.

Product Management
In 1994, Leeson was accountable to Killian for his agency business, and to Ron Baker for his
proprietary trading. However, nearing the end of the year, there was some confusion as to
which product group was in control of Leeson’s trading activities. It was later decided that
Ron Baker and Mary Walz8 would be Leeson’s product managers. However, they had limited
experience in equity derivatives, the product that Leeson was engaging in. Therefore,
Leeson’s reports of unusually high profits were not met with skepticism or inquiry.

4.3.3 Combined Front and Back Office Functions

The absence of a proper matrix management was aggravated by the failure to segregate
Leeson’s trading and settlement functions. Leeson was both the chief trader and the head of
settlements of BFS, and he had a team who were abiding of his instructions.

It was obvious that this arrangement posed a great internal control weakness. Albeit
highlighted by the internal auditors in 1994, the Baring higher management took it as a
passing remark and did not address the issue proper.

Furthermore, Leeson’s activities should have been subject to independent checks of

reconciliation by the companies on whose behalf he transacted trades, particularly BSL and
BSJ. These companies should have verified the reported trades and reconciled these with the

8
Mary Walz is the Global Head of Equity Financial Products at BIB.

34
funding requests. If this had been done, no funds would have been remitted to BFS without
being accounted for.

4.3.4 Inadequate Co-ordination

There was little control over Leeson’s activities. There has also been inadequate co-
ordination between the different departments within the Baring Group that handles the
matter arising from Leeson’s trading activities. It is apparent that the departments have been
working independently, and there was an incomplete exchange of information amongst
different departments.

From the interviews, we gather that Leeson appropriately informed his supervisors –
(i) Reported his trading activities to Gueler9 in Tokyo, and through him to Walz and
Baker;
(ii) Informed Gueler and BSJ’s back office of the funding requirements for
proprietary positions taken on behalf of BSJ;
(iii) Executed orders on behalf of the agency traders from Tokyo and for BSL;
(iv) Executed proprietary trades on behalf of BSL;
(v) Communicated with BSL Settlements for funding requests for the trades executed
for Baring Group’s external clients and for BSL’s proprietary positions;
(vi) Requested funds from the Group Treasury for paying the margin deposits to
SIMEX; and
(vii) Reported profits and losses from his trades to Financial Controls.

Had these departments disseminate the information regarding Leeson’s trading values, they
would have quickly discovered the inconsistencies. However, they were working
independently and unaware of what other departments were doing. Leeson’s success in his
misconduct had arisen from being able to –

(i) Acquire funds from BSJ for the trades Leeson executed on behalf of BSJ, and at
the same time, request the same amount from BSL for the exact same trades; and

(ii) Convince Group Treasury and BSL Settlements to send funds to BFS on the basis
of “advance margin calls”, yet keep it unknown to Credit Control, who should
have ensured the creditworthiness of clients to whom advances were made.

4.3.5 Account 88888

Account 88888 was used extensively by Leeson for hiding the unauthorized trades booked
and losses incurred. These transactions in account 88888 were distinguished by three
features:

(i) The size of the positions was large from the outset and grew quickly;

(ii) The transactions were not hedged by matching positions. Thus, the Baring Group
was exposed to massive potential losses even from small market movements; and

9
Fernando Gueler is the Senior Trader at BSJ.

35
 (iii) The transactions consistently reflected losses. Where transactions were
transferred from other Baring Group accounts (BSJ and BSL) into account
88888, this was often done in a way which artificially generated a profit for these
other accounts to the detriment of account 88888.

Leeson required funds to finance the losses and the margin deposits that had to be placed
with SIMEX, for the transactions in account 88888. He requested these funds consistently
from BSL, yet BSL persisted in claiming that they had zero knowledge of account 88888.
This raises the question of how Leeson had obtained S$1.7 billion from BSL without
accounting for it.

Furthermore, SIMEX required a declaration of the owners of all the accounts in SIMEX
Clearing House computer system. Leeson submitted account 88888 as “Baring Securities
London”, and described it as a Related House Account. However, it was in fact, an error
account by Baring Futures Singapore Ltd.

The following figures shows the cumulative losses booked into account 88888. It has been
on a rising trend since the opening of the account, and exponentially increasing in January
1995.

We reconstructed the records of accounts 88888, and the realized and unrealized losses on
futures contracts from 1 January 1995 to 24 February 1995 were as follows:

Realised and Reduction in option Total Total

unrealized losses on portfolio profit losses losses
futures contracts ¥ billion ¥ billion S$ million
¥ billion equivalent
January 1995 2.6 12.2 14.8 227.7
February 1995 48.0 5.5 53.5 823.1

36
4.3.6 Funding Requests
An increasing amount of funds were required for the margin deposits by SIMEX to meet the
losses incurred for unauthorized transactions by account 88888. BFS could not provide for
these funds because it was a broking house whose funds were monitored by Citibank,
arranged by Group Treasury. BFS could not turn to borrowings either, because there would
have been capital charges on such borrowings. This would reduce BFS’ Adjusted Net Capital
position and would have alerted a warning to SIMEX.

Thus, Leeson turned to several ways of obtaining the fund. He requested funds from BSL and
BSJ. His funding requests were inflated to include the amount of option margins for account
88888. At the same time, he also recorded fictitious trades in order to reduce the total
margins required to furnish to SIMEX.

In late June 1994, BSL Settlements and Group Treasury have noticed the unreconciled
figures between the funding requests from BFS and the trades in respect of which the funds
were requested for. For that unreconciled amount, BFS requested even more funds. Despite
this, Leeson’s funding requests continued to be fulfilled in full. We found that the
unreconciled is almost entirely used to fund the unauthorized trades booked in account
88888.

Furthermore, Leeson has managed to convince BSJ to leave some of its funds that were due
from BFS, with BFS. He reasoned it as having to meet the “advance margin calls” by SIMEX.
This additional funding was, again, used by Leeson to carry out his unauthorized trading.

At the time of collapse, BFS’ positions were funded as follows:

(i) S$1,040 million from BSL; and
(ii) S$690 million from BSJ.

4.3.7 Fictitious Trades

As aforementioned, Leeson recorded fictitious trades. These trades were promptly reversed
out at the start of the following day. These trades decreased the daily closing aggregate gross
long positions of SIMEX Nikkei Futures held by BFS. In turn, it reduces the amount of
margin deposits required by SIMEX.

This was not instantly discoverable by SIMEX because SIMEX relied on the accounting
systems provided by their members. Discrepancies could only be discovered during the
course of an audit.

4.3.8 Approval for Fund Requests

Granger and Gamby maintained that they relied heavily on (1) Leeson’s position as the
General Manager in BFS, and (2) The lack of objection from the Group Treasury, to approve
the funds requests.

In our view, this is a surprising response. The approval for huge fund requests were passed
carelessly. It is apparent that BSL Settlements knew little of the fund limits that could be
requested.

37
It was logical for BSL Settlements to reconcile the funding requests to the information
pertaining to margin calls set out in the margin feed, which would have busted Leeson’s
fabrication of funds required.

Leeson vague reasons for why the figures were not reconciled were accepted, even though
they were not fully understood and scrutinized. Thus, we believe there exists a serious issue
in the process of approval of funds requests by BSL Settlements and the Group Treasury.

4.3.9 CONTAC System

BFS adopts the CONTAC system as a computerized client accounting and settlement system.
This system generates and transmit reports to BSL, and the “margin feed” was one of these
reports. The margin feed was a daily report of the margin calls made by BFS on its clients,
categorized by individual trading accounts, including account 88888. The “trade feed” was
another report showing trades booked in all accounts, including account 88888.

We learnt that after a few days from the opening of account 88888, Leeson instructed the
CONTAC system consultant, Dr Edmund Wong, to exclude the trade feed of account 88888
from the system. However, the margin feed of that account was still transmitted to BSL
regularly.

In our view, Dr Wong plays a crucial role in this case. He was amongst the first to know that
the trades relating to account 88888 was hidden from BSL. If he remained as the consultant
to BSL, which he did, he should have pointed out the existence of account 88888 to the
higher management of BSL when the discrepancy in figures gets bigger.

4.3.10 Baring Group’s Lacking Management

The Baring Group’s management put forward many explanations as to how they did not
manage to discover account 88888. However, we do not accept their contention that account
88888 was an unauthorized account that they had zero knowledge of. In our view, Barings
should have or already knew about the existence of account 88888 and the rough idea that
there are losses in this account. This is because:

(i) BFS has been consistently requesting for very large amount of funding. BFS only
has four clients, three of which were other Barings entities. BFS had no funding
lines which allowed it to operate at its own discretion, except for the Citibank
daylight margin facility. BFS’ funds were from its clients BSL and the other
Baring Group companies. In this case, the entities that remitted funds to BFS
should have reconciled the funds that they remitted with the trades for which the
funds had been requested. Had they done this; Leeson would not have been able
to perform the unauthorized trades.

(ii) It was increasingly more difficult to reconcile the funds requested. Surprisingly,
the Group Treasury dismissed it on the basis of short-term funding requirements
to meet intra-day advance margin calls by SIMEX; and advances to fund the
positions of BSJ, because BSJ purportedly takes a longer time to raise the
necessary funds than BSL. However, such explanation would have accounted for
only extremely short-term funding. The Group Treasury should have casted

38
 suspicions on the large and persistent unreconciled balance throughout the
year.

(iii) The settlements operations of BFS were reported to BSL Settlements via the
CONTAC computer system. Leeson had suppressed the trade feed for account
88888 to be transmitted to BSL Settlements. However, the margin feed for that
account was material at all times, transmitted and available to BSL Settlements.
BSL Settlements knew or should have known that the margin feed comprises a
complete breakdown of the margin calls that were being made by BFS on its
clients. Yet, BSL Settlements claimed that it never used the margin feed, a simple
one page document, to resolve the unreconciled balance.

(iv) The internal auditors specifically pointed out that Leeson “occupied a very
powerful position controlling both the front and the back offices of BFS”, creating
a significant risk that internal controls could be overridden. However, the Baring
Group continued to turn its eye away from this situation. They continued to
remit even more funds to BFS, blindly.

4.3.11 Asset and Liability Committee

ALCO was a high-level committee, comprising of experienced bankers and financial
managers. However, ALCO was not logical in contending that Leeson’s trading activities
posed little risk to the Baring Group but could bring in high profits. This was the
fundamental concept of risk-reward trade off, which ALCO completely neglected.

In our view, the reliance on Leeson’s low-risk yet high-return activities to remit large
amounts of funds into BFS is reprehensible. The formation of the ALCO committee was to
take care of capital allocation and management controls. Yet, they failed to react responsibly
and appropriately with regard to Leeson’s matters. This defeats the purpose of setting up the
ALCO committee.

We also discover that the risk control mechanisms ALCO relied on to monitor and control
the risk positions was not trustworthy. Simply because, these reports were submitted by
Leeson himself.

We believe that ALCO has failed in fulfilling its duties.

4.4 Ongoing Concern Analysis

From our investigation, we also ascertained that BFS is insolvent and incapable of paying its
debts. The following is an unaudited statement of BFS’ balance sheet, consisting asset and
liabilities as at 24 February 1995.

39
From the unaudited statement, BFS’ liabilities figure surpasses way beyond that of the
assets. It is apparent that BFS is not able to continue operating efficiently.

On another note, Monetary Authority of Singapore revoked BFS’ Futures Broker’s License on
14 March 1995.

40
5. Summary
Our conclusions, in summary, are:
1. The massive losses were incurred from unauthorized and concealed trading activities
within BFS by Nick Leeson;

2. The true position was not noticed earlier due to a serious failure of controls and
managerial confusion within Barings;

3. The true position had not been detected prior to the collapse by the external auditors,
supervisors or regulators of Barings.

This is not a simple case of one man who had ill intentions in bringing down Barings for his
own benefit. Rather, it was the collective lack of responsibility of those in Barings and even
the external auditors and SIMEX. Had it not been Leeson, Barings would have had fallen at
the foot of another man who exploits the loopholes within Barings.

We find it unreasonable to make Nick Leeson fully culpable for the collapse of Barings.

In retrospect, it is probable for the Baring Group to avert collapse by timely action, even up
till Feb 1995. By the end of Jan 1995, although substantial losses had been incurred, it only
accounted for a quarter of the eventual losses. The Baring management could remain
ignorant of account 88888 up to the time of collapse only if they had persistently shut
themselves from the truth. In particular, Norris’ explanation that the higher management of
the Baring Group believed that Leeson’s trading activities posed little risk to the Baring
Group, but yielded exceptional returns, is implausible and in our view, demonstrated a
degree of ignorance of market reality that totally lacks credibility.

5.1 Case Timeline

Below, we compiled the events unfolded and presented in the manner of a detailed timeline.
17 September BFS and BSS were incorporated.
1986
31 October 1986 BFS applied for corporate non-clearing membership of SIMEX.

July 1989 Leeson joined BSL as a settlements clerk.

February 1992 BSL applied to the SFA to have Leeson recognized as a registered
representative. Leeson falsely declared no unsatisfied judgement debt
against him. SFA discovered this and rejected the application.

21 February BFS applied for clearing membership of SIMEX.

1992
13 April 1992 Leeson was appointed Derivatives Operations Manager of BSS.

28 May 1992 BFS purchased three seats on SIMEX.

26 June 1992 Leeson sat for the Institute of Banking and Finance, Futures Trading
Test which he passed.

41
1 July 1992 Leeson was registered as a seat-holder for BFS.

BFS began trading on SIMEX. Leeson and Eric Chang were the only
two traders.

3 July 1992 Leeson opened account 88888, and immediately put it to use. This is
reflected within BFS records as an error account.

21 July 1992 Leeson submitted to SIMEX his Application for Registration as

Associated Person. He again made a false statement about having no
any civil judgments entered against him.

12 August 1992 Leeson’s application to be registered as an Associated Person on

SIMEX was approved and he was registered as an Associated Person
shortly thereafter.

Oct-Nov 1992 Leeson forged an audit confirmation purportedly with Bowser to

resolve an audit point raised by the external auditors Deloitte. The
forged confirmation was dated 30 September 1992.

28 June 1993 Leeson was appointed Assistant Director and General Manager of BFS.

11 July 1994 Deloitte resigned as auditors of BFS. C&L Singapore were appointed in
their place.

19 July 1994 – 1 An internal audit of BFS was conducted.

August 1994
October 1994 The BFS internal audit report was circulated to Barings senior
management.

11 January 1995 SIMEX wrote to BFS querying margin requirements for account
88888.

14 January 1995 C&L Singapore identified a discrepancy in their audit. (This was later
identified as the SLK Receivable.) C&L Singapore tried over next two
weeks to obtain an explanation from Leeson.

16 January 1995 SIMEX informed BFS that during their audit, SIMEX auditors noted
BFS had violated SIMEX Rules and Futures Trading Act and
Regulations.

17 January 1995 The Kobe earthquake took place.

24 January 1995 ALCO decided that Leeson should reduce the Baring Group’s positions
because of funding pressure. Hawes informed ALCO that without a
booking error Barings would have broken its Citibank day-light margin

42
 facility limit. ALCO also noted the general lack of inaccuracy about
margin calls received from Singapore.

25 January 1995 Leeson and Jones replied to the letter from SIMEX dated 11 January
1995.

The reply document was forged.

26 January 1995 Norris singled out the risk issues arising from the Baring Group’s
positions on SIMEX at the ALCO meeting.

27 January 1995 C&L Singapore raised a discrepancy between the balances in the
individual trading accounts and those shown on SIMEX transactions
with Leeson.

C&L Singapore sent the “Baring Group (Singapore) Status Report” to

C&L London conveying the explanation offered by Leeson for the
discrepancy in the balances in individual trading accounts and those
shown on SIMEX transactions, which was that it related to the SLK
Receivable. C&L Singapore also stated that the contracting party with
SLK was BSL, and that they had been told that SLK’s credit worthiness
had been discussed with BSL.

27 January 1995 Leeson and Jones sent a response to Hopkins and Hawes on the
Singapore Project. Bax insisted that Jones countersign the fax.

SIMEX wrote to BFS questioning the adequacy of funds to meet

potential losses or margin calls.

28 January 1995 C&L Singapore met with Jones and Leeson on the SLK Receivable.
They asked for various audit confirmations.

30 January 1995 BSL asked Leeson for a correct statement of the house positions as at
31 December 1994. The request was urgent because returns had to be
submitted to Bank of England by the next day and the reports
submitted previously by Leeson were thought to be wrong.

Broadhurst received C&L Singapore’s fax dated 27 January 1995. He

did not know about SLK Receivable. He called Granger and asked
whether Leeson had entered into an OTC Nikkei transaction on behalf
of BSL with SLK. Granger checked her records and confirmed that
there was no record of such a transaction. She offered to call SLK but
Broadhurst told her not to do so.

31 January 1995 Hawes queried Leeson and Jones on the SLK transaction. He informed
them that Broadhurst had passed to him a copy of C&L Singapore’s
comments and that he could not understand these comments.

43
 Leeson informed Hawes and Jones that he would revert to BSL after
speaking to C&L Singapore and this would be after the Chinese New
Year holidays.

The SIMEX letter of 27 January 1995 was discussed at ALCO. Hawes

was asked to draft a reply.

Hawes asked Leeson and Jones for information to draft the reply.

Broadhurst asked Norris whether he should raise the SLK Receivable

at the ALCO meeting. Norris told him not to do so.

1 February 1995 Leeson prepared a handwritten explanation on the SLK Receivable for
Jones and Bax. He informed Jones that the receivable arose from an
authorized transaction.

Hawes spoke to Leeson about the SLK transaction. Leeson told him
that he was addressing the issue and that there was no cause for worry.

2 February 1995 C&L Singapore met Yong, Jones and Leeson to discuss the SLK
Receivables. They pressed for the audit confirmations which they had
yet to receive.

Leeson presented various forged documents to C&L Singapore to

support his explanation on the SLK transaction.

Gamby informed Granger and Railton that Leeson had apparently

done an unauthorized trade. Railton was instructed not to look into the
SLK trade when he went to Singapore. They were told that their
discussion should be kept amongst themselves and that the issue was
being handled at the highest levels.

3 February 1995 C&L Singapore wrote to C&L London clearing BFS’ financial
statements. The letter stated that BSL was the counterparty to the
transaction. It also stated that BSL had confirmed the transaction.
(This was based on the forged documents Leeson presented.)

Bax pressed that Leeson would immediately relinquish his settlement

functions and that Jones would become responsible for all support
functions of BFS.

Railton arrived in Singapore, to understand the flow of funds into and

out of BFS.

6 February 1995 Hawes arrived in Singapore. He needed to make enquiries into the SLK
transaction.

44
 Hopkins found out about the SLK Receivable. He asked Broadhurst
about it and was told that the money had been repaid and it was no
longer a problem.

Norris told Baker that it had arisen from an accounting error.

7 February 1995 Hawes presented Bax with a list of audit points to clarify with Leeson
in connection with SLK.

Baker spoke to Bax about the SLK transaction. Bax informed him that
it was a non-transaction and that Baker need not be concerned.

8 February 1995 The SLK Receivable was reported as an operational error at the ALCO
meeting.

Hawes and Jones met with SIMEX and gave SIMEX verbal assurances
of the Baring Group’s ability to meet its financial obligations.

9 February 1995 Leeson explained to Hawes that he had been asked by BNP and SLK
who were both clients of the Baring Group to assist them by brokering
an OTC transaction between them.

Hawes asked Leeson for documents evidencing the transaction. Leeson

left to retrieve the documentation but did not return that day.

Broadhurst explained to C&L London that this was a booking error of a

transaction between BNP and SLK. Broadhurst made a strong plea to
omit mention of the SLK transaction in the audit management letter.

10 February Hawes presented Leeson and Jones with a further list of audit points
1995 regarding SLK.

Hopkins prepared a report on SLK for BIB management committee.

He recorded the transaction as being between BNP and SLK.

BFS replied to the letter dated 27 January 1995 from SIMEX

reassuring SIMEX that the assets of the Baring Group were available to
meet the obligations of BFS. This reply was approved by ALCO.

13 February The SLK transaction was mentioned again at the ALCO meeting but
1995 this was not minuted.

14 February Hawes wrote to enquire as to the progress on the SLK audit points. He
1995 suggested a meeting on 25 February 1995 with Leeson, Jones and
Railton to resolve this amongst other issues.

17 February 1995 Railton was unable to reconcile funds remitted to BFS from other
Barings companies with money in BFS’s bank account or deposited

45
 with SIMEX. The discrepancy was ¥14 billion. Railton tried to talk to
Leeson about this but Leeson said that he was too busy. He suggested a
meeting on 19 February 1995. This meeting did not materialize.

19 February Baker ordered Leeson to reduce his positions.

1995
20 February Norris informed ALCO that after talking to Leeson in Singapore in the
1995 previous week, he had decided that the positions in Singapore were not
to be reduced and that it would be best to allow the positions to roll off
at contract expiry within two weeks.

Leeson informed Hawes that following his conversation with Norris,

Bax and Jones he had been told that he should await the finalization of
accounts before responding to Hawes’ audit points.

He later claimed that he was unwell and therefore unable to talk to

Railton about the ¥14 billion discrepancy.

21 February Railton managed to meet Leeson for 1.5 hours. However they did not
1995 discuss the ¥14 billion discrepancy. Instead they discussed Railton’s
plans to relocate to Singapore.

22 February Leeson again avoided discussing the ¥14 billion discrepancy with
1995 Railton.

Hudges sent a memorandum to Hawes raising further alarm about

monies that could not be reconciled. He said that the 22 February 1995
request for US$100 million of additional margin funds was totally
incomprehensible given that Leeson was supposed to be reducing his
positions. This message was forwarded to Singapore on 23 February
1995.

23 February A meeting was organized between Jones, Leeson and Railton to resolve
1995 the discrepancy of ¥14 billion. After ten minutes Leeson said he had to
go to the hospital to see his wife. He did not return. Leeson and his
wife left Singapore that night.

Leeson sent a fax to the SIMEX trading floor to say that he had decided
to celebrate his birthday in Phuket, Thailand. This fax was received on
24 February 1995.

Jones, Yong and Railton scrutinized the documents handed to the

auditors in connection with the SLK transaction. These, together with
BFS’ bank statement suggested that Leeson may have “round-tripped”
the sum of ¥7.7 billion that had been represented as payment by SLK.

Leeson and his wife checked into the Regent Hotel, Kuala Lumpur.

46
 Gamby was informed by Railton and in turn informed Norris that
Leeson had not kept his appointment. Norris assembled a team of
advisers in his office.

24 February Leeson and his wife could not be found. Bax believed that they were
1995 still at the hospital.

Norris later told Bax that Leeson may have fled. He called Railton,
Hawes and Bax to go to the office immediately. There, they discovered
account 88888.

Leeson sent a fax to Jones and Bax from the Regent Hotel, Kuala
Lumpur apologizing for having fled and offering his resignation.

26 February Barings in London went into administration.

1995
27 February BFS was placed under interim judicial management.
1995
9 March 1995 Our team was engaged in the investigation of the collapse of Barings.
3 April 1995 Search and Seizure at BFS and BSS. We contacted BSL, BSJ, BIB, and
SIMEX, and SLK for relevant documents as well.
8 June 1995 Commencement of Interview and Interrogation.
15 August 1995 Investigation Report presented to the court.

6. Recommendation
For this section, we will recommend charges for eight counts of cheating and three counts of
forgery on Leeson’s part, criminal sanctions for various directors’ breaches and wound up
action for BFS.

6.1 Charges for Leeson

Cheating (Eight Charges)
Leeson cheated his auditors and SIMEX in telling them that he had enough money to cover
his activities. He has also cheated the stock exchange by misrepresenting his positions on the
futures and options market. He has hidden losses of unauthorized trade in account 88888,
which was kept from the higher management.

By Penal Code Section 206 (Appendix A), Leeson has fraudulently concealed the losses he
has incurred. He may be punished with an imprisonment for a term of up to 2 years, or with
fine, or with both.

Forgery of Documents (Three Charges)

Leeson has forged the documents to be submitted to BSL higher management, external
auditors C&L Singapore and SIMEX.

By Penal Code Sections 464 and 465 (Appendix B), Leeson has dishonestly signed the
documents, with the intention of causing it to be believed that the documents were signed by

47
Ron Baker, and SLK, although Leeson knows that it was not the case. For this forgery,
Leeson ought to be punished with imprisonment for a term of up to 4 years, or with fine, or
with both.

Leeson is to face up to 14 years of prison if he is convicted on all 11 charges.

The final sentence for Leeson may be reduced, depending on –

(i) The charges Leeson pleads guilty to;
(ii) The co-operation Leeson has displayed during the course of the investigation; and
(iii) The consideration of the fact that Leeson had not personally benefitted or gained
from these activities.

6.2 Charges for Other Directors

We have pointed out directors that have breached their duty to act honestly and with
reasonable diligence under Companies Act Section 157(1) and duty of care under the general
law duties in their capacity as directors.

These directors are: Peter Norris, James Bax, Simon Jones and Geoffrey Broadhurst.

They have not been honest in matters regarding Leeson as they have either attempted to (1)
conceal the facts from other unknowing personnel, or (2) understate the gravity of the
problems. They have also found to not have exercised reasonable diligence in investigating
the unreconciled figures and had not done supervision proper as they were supposed to.

These directors may be fined up to $5,000 and imprisoned for up to one year.

6.3 Winding Up of BFS

Baring Futures (Singapore) Pte Ltd
As aforementioned, BFS is insolvent and has been revoked of its Futures Broker’s License.
It also has serious internal controls issues thus in our view, BFS should be wound up
pursuant to Section 254(1)(g) of the Companies Act (Appendix C).

48
7. Lesson Learnt
7.1 How to Perfect the Fraud
In this section, we crack our brains to attempt to perfect the fraud. In this case, the plot
would be uncovered sooner or later because more and more personnel are informed of the
huge discrepancy in the figures. We cannot stop people from discovering the figures because
it is a glaring figure that would not escape the eyes of any reasonable man. However, we will
attempt to prevent people from investigating more, so that Leeson could continue to come
up with reasons to cover up for his misconduct.

7.1.1 Threaten His Supervisors on Their Prior Mistakes

We found loopholes in Bax and Norris particularly because they were the most adamant in
trying to spread deceptive or understated beliefs on Leeson’s matters. We strongly believe
that they had losses that they were trying to prevent others from investigating from. Had
Leeson’s tactics been uncovered, it will not take long for theirs to be uncovered as well.

Leeson should have done investigative checks on Norris and Bax to uncover their mistakes,
then threaten them to be on his side. From our interviews, Bax and Norris words carry
substantial weight as they hold high positions, it is highly conceivable that if both of them
consistently attempted to assure the higher management of Barings, this matter would have
been under wraps for a longer period of time.

Leeson also forged an audit confirmation with Bowser in November 1992. He can tap on this
weakness on Bowser to get him on his side.

7.1.2 Set Up Multiple Accounts

Leeson should have set up multiple accounts to hide the losses incurred from the
unauthorized trades. With the loss figure divided into several accounts, it is easier to mask
the losses since the figure is not glaringly massive.

This would be easy for Leeson to do since he has control of both the front and back offices.
What he has done to account 88888, he can create several accounts of the same nature.

We recall that SIMEX’s discovery of account 88888 was because account 88888 was BFS’
biggest client at that point with the highest number of active trading activities. Had we split
the trading activity into several accounts, these accounts would be unlikely to stood out as
being the biggest client. Henceforth, the accounts may be under wraps for a longer period of
time.

7.2 Preventive and Deterrence Mechanisms

In this section, we explore mechanisms that should be undertaken to prevent another case of
a dramatic failure.

49
7.2.1 Private Sector: Engaging Competent Auditors
Baring’s internal auditors failed to probe further the discrepancies in figures and failed to
push for a change in the weak internal controls. It is plausible that these auditors have been
with Barings for a long time, and no longer exercise the high level of professional judgment
and skepticism that were expected of them. It is important to rotate their internal auditors,
just like how external auditors are rotated, to keep a continuous fresh perspective and critical
evaluations.

7.2.2 Private Sector: Segregation of Duties

Barings collapsed at the foot of Leeson because he was able to control both sides of the
balance sheet. There should be a clear segregation of duties between the front-end and back-
end operations.

In any course of work, segregation of duties is crucial to avoid domination and manipulation
by a single individual. Segregation of duties serves two key purposes: (1) To ensure there is
oversight and review to detect errors, and (2) To prevent fraud or theft perpetuated by one
single person.

Even if there is no budget to hire a new employee to take care of the segregated duty, private
sectors should consider authorization done by personnel of other department that would not
have a conflict of interest or opportunity to manipulate the figures.

7.2.3 Private Sector: Hiring Sufficient Personnel

It is important for the private sectors to hire sufficient competent personnel to oversee the
operations. In the case of Barings, the higher management dismissed any concerns to hire
more hands in order to cut cost. Specifically, Hopkins mentioned that he required more
competent credit personnel and Leeson required more on his trading team as well.

Having sufficient personnel ensures that proper delegation of work can be done for every
employee to perform at their highest productivity. The employees now are conspicuously
overworked and thus are unable to exercise their critical judgment in their work. For
instance, when Leeson requested funds from BSL Settlements, they were quick to accept it
without looking further into it. This may be because they have a lot on hand and thus want to
quickly get over the work to be done.

7.2.4 Government: Amendments to the Futures Trading Act

Government efforts can come in the form of amending the Futures Trading Act. In our
humble view, we recommend for these following points to be mentioned in the Futures
Trading Act:

(i) Inclusion of foreign exchange trading;

(ii) Proper procedure to obtain power to approve futures contracts;
(iii) Government’s authority to refuse to grant or renew licenses in certain
circumstances;
(iv) Proper reporting if there is a failure to maintain minimum financial
requirements;
(v) Void front-running where broker buy futures contract for its own account;

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 (vi) Void trading against customer where broker buy from or sell to its customer any
contract for its own account;
(vii) Void cross-trading where broker execute a customer’s order by offsetting against
the order of another person;
(viii) Stricter licensing procedures; and
(ix) Maintaining a fidelity fund to be administered by the Futures Exchange.

These are to avoid another case of Barings failure.

7.2.5 Third Party: Heightening Controls at SIMEX

SIMEX identified issues with BFS’ activities but did not take quick action to inform
Monetary Authority of Singapore. Instead, they took comfort in the fact that Barings was a
reputable merchant bank. To promote the growth of the futures market in Singapore, SIMEX
may also have been overly liberal in granting increases in position limits.

Thus, on SIMEX’s part, there is a need for close monitoring of financial institutions with
cross-border operations. Notwithstanding the reputation of their clients, SIMEX should have
promptly conducted a full and thorough investigative audit of companies that were
suspicious. At the same time, they should have informed MAS and BSL’s regulator, the SFA.
SIMEX should enforce speedier action.

We recommend for the appointment of an international advisory panel to recommend best

practices. SIMEX could also engage an expert to serve as a consultant to advise on clearing,
risk management and settlements operations. Apart from their regular year-end audits, we
recommend for SIMEX to conduct periodic surprise audits to check the accuracy of the
reports of open positions in individual accounts and their reported margin requirements.

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8. References
James, C. (2020). Arbitrage. Retrieved on 02 April 2020 from
https://www.investopedia.com/terms/a/arbitrage.asp

Leeson, N. (1996). Rogue Trader, Little, Brown and Company. Retrieved on 02 April 2020.

Michael, L. & Nicky, T. (1995). The Report of the Inspectors appointed by the Minister for
Finance – Baring Futures (Singapore) Ptd Ltd, Ministry of Finance. Retrieved on 02 April
2020.

Stephen, F. (1996). The Collapse of Barings, Richard Cohen Books. Retrieved on 02 April
2020.

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9. Appendixes

Appendix A
Fraudulent removal or concealment of property to prevent its seizure as a forfeiture or in
execution of a decree
206. Whoever fraudulently removes, conceals, transfers, or delivers to any person any
property or any interest therein, intending thereby to prevent that property or interest
therein from being taken as a forfeiture or in satisfaction of a fine, under a sentence which
has been pronounced, or which he knows to be likely to be pronounced by a court of
justice or other competent authority, or from being taken in execution of a decree or an
order which has been made, or which he knows to be likely to be made by a court of justice
in a civil suit, shall be punished with imprisonment for a term which may extend to 2
years, or with fine, or with both.

Appendix B
Making a false document or false electronic record
464.—(1) A person is said to make a false document or false electronic record —
(a) who dishonestly or fraudulently —
(i) makes, signs, seals or executes a document or part of a document;
(ii) makes any electronic record or part of any electronic record;
(iii) affixes any electronic signature on any electronic record; or
(iv) makes any mark denoting the execution of a document or the authenticity of the
electronic signature,

with the intention of causing it to be believed that such document or electronic record or
part of a document or electronic record or electronic signature was made, signed, sealed,
executed or affixed by or by the authority of a person by whom or by whose authority he
knows that it was not made, signed, sealed, executed or affixed, or at a time at which he
knows that it was not made, signed, sealed, executed or affixed;

(b) who without lawful authority, dishonestly or fraudulently, by cancellation or

otherwise, alters a document or an electronic record in any material part thereof, after it
has been made, executed or affixed with an electronic signature, either by himself or by
any other person, whether that person is living or dead at the time of the alteration; or

(c) who dishonestly or fraudulently causes any person to sign, seal, execute or alter
a document or an electronic record or to affix his electronic signature on an electronic
record, knowing that such person by reason of unsoundness of mind or intoxication
cannot, or that by reason of deception practised upon him he does not, know the contents
of the document or electronic record or the nature of the alteration.

Punishment for forgery

465. Whoever commits forgery shall be punished with imprisonment for a term which
may extend to 4 years, or with fine, or with both.

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Appendix C
Companies Act
Circumstances in which company may be wound up by Court
254.—(1) The Court may order the winding up if —
(g) an inspector appointed under Part IX has reported that he is of opinion —
(i) that the company cannot pay its debts and should be wound up; or
(ii) that it is in the interests of the public or of the shareholders or of the creditors that
the company should be wound up;

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