Founded in 1762, Barings was the oldest merchant bank in Britain famed for financing Napoleonic Wars, Louisiana Purchase and the Erie Canal. The 233-year-old bank was brought down single-handedly by its employee, Nicholas William Leeson, a derivatives trader.  After landing the bank with a debt of $1.4 billion – largely through futures trading contracts – Leeson fled for Malaysia.  By the time of the bank’s collapse on 26 February 1995, it had accumulated losses amounting to $2.2 billion.  Leeson was sentenced to six-and-a-half years’ imprisonment in Singapore for two charges of fraud and forgery.

1. Presentation by :
Palash Jain

2.  Abstract of Case :
• Founded in 1762, Barings was the oldest merchant bank in Britain famed for
financing Napoleonic Wars, Louisiana Purchase and the Erie Canal.
• The 233-year-old bank was brought down single-handedly by its employee,
Nicholas William Leeson, a derivatives trader.
• After landing the bank with a debt of $1.4 billion – largely through futures
trading contracts – Leeson fled for Malaysia.
• By the time of the bank’s collapse on 26 February 1995, it had accumulated
losses amounting to $2.2 billion.
• Leeson was sentenced to six-and-a-half years’ imprisonment in Singapore for
two charges of fraud and forgery.

3.  Timeline of Case
17 Sep 1986 : Baring Futures (Singapore) is incorporated.
Jul 1989 : Nick Leeson joins Baring Securities (London).
Apr 1992 : Leeson joins Baring Securities (Singapore).
3 Jul 1992 : Leeson opens account 88888.
Sep 1992 : Losses in account 88888 reach 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 Feb1995 : Discovery of 88888 account.
26 Feb 1995 : Barings London is forced into administration.
27 Feb 1995 : BFS is placed under interim judicial management.
2 Mar 1995 : Leeson is arrested in Frankfurt.
6 Mar 1995 : Barings takeover by Dutch finance group ING Group.
1 Apr 1995 : Futures Trading (Amendment) Act 1995 comes into force.
23 Nov 1995 : Leeson is extradited to Singapore.
1 Dec 1995 : Leeson pleads guilty to two charges and is sentenced to six-and-a-
half years imprisonment in Singapore.
3 Jul 1999 : Leeson is released from prison.

4.  Background of Lesson at Bank
Baring Futures (Singapore) (BFS) was incorporated in Singapore in 1986.
Leeson joined the settlements department of Baring Securities (London).
Is transferred to Singapore 3 years later.
Leeson became a derivatives operations manager in BSS & has authority.
Leeson was inexperienced in trading & thus took an exam from Institute of
Banking and Finance's Futures Trading that qualified him to trade on SIMEX.
In July 1992, Leeson was of one of two traders at the time in SIMEX.
Leeson and his traders had authority to perform two types of trading:
• 1. Transacting futures and options orders for clients or for other firms and
• 2. Arbitraging price differences b/w Nikkei futures & Japan’s Osaka exchange.

5.  Failure of Management & Internal Controls
 As a general manager, Nick Leeson oversaw both trading and back office.
Also, Barings’ senior management came from a merchant banking background,
causing them to underestimate the risks involved with trading.
They did not provide any individual who was directly responsible for monitoring
Leeson’s trading activities.
Due to lack of supervision, Leeson started unauthorized speculation in Nikkei
225 stock index futures and Japanese government bonds.
 These trades were outright trades or directional bets on the market.
This highly leveraged strategy can provide fantastic gains or utterly devastating
losses – a stark contrast to the relatively conservative arbitrage trading that
Barings had intended for Leeson to pursue.

6.  Failure of Internal Controls
An internal audit- conducted for the period 19 July 1994 to 1 August 1994.
 The audit report revealed that BFS was exposed to great risks with Leeson taking
charge of both the dealing and settlement operations.
Bank chose to retain Leeson's position because of his experience and the profits
he generated.
Unknowing the big losses he already incurred & hid in the 88888 account.
 By the end of December 1994, the losses had risen to $373.9 million.
In 1995, a senior auditor found a discrepancy however Leeson managed to
convince the auditors by fabricating a story about a trade transaction between
Barings and US investment firm Spear, Leeds & Kellogg.
He even showed them a doctored payment statement to support his explanation.

7.  The Dummy Account- 88888 Saga
One trader Lesson hired committed an error trade which created a small loss.
To protect his reputation as an expert in trading, Leeson opened an error
account- 88888, for BFS.
The account was originally opened to report error trades made by
inexperienced staff of BFS.
 Nick was appointed assistant director & general manager of BFS in 1993.
 He took charge of not only the front office, which conducted the trading,
but also the back office, which processed the paperwork.
This enabled him to hide his losses and unauthorised trading using the
88888 account.

8.  The Earthquake shatters Hopes……
In 1994, Leeson started dealing in Japanese government bonds, and also dabbled in Nikkei 225
futures and options.
Nick Leeson took a 7 billion dollar value futures position in Japanese equities and interest rates,
linked to the variation of Nikkei.
Despite the enormous losses - Leeson continued to bet heavily in the Nikkei index in January 1995
hoping that it would not fall below 19,000 points.
However, the Nikkei plunged after an earthquake hit Kobe, Japan, on 17 January.
He was "long" on Nikkei. In the three days following the earthquake of Kobé, Leeson bought more
than 20 000 futures, each worth 180 000 dollars.
Leeson started feeling the heat when the Nikkei 225 dropped to 17,785 points on 23 January.
 He continued to raise the stakes, hoping for the market to spring back, but luck was not on his side.
 The market continued to slide further to a low of 17,580 on 23 February.

9.  Fled to Malaysia & Extradited
Knowing that he could not recover the cumulative losses of S$1.4 billion, Leeson fled to
Kuala Lumpur, Malaysia, with his wife on 23 February.
 The total losses amounted to S$2.2 billion at the time of Barings’ collapse on 26 February.
Leeson was jailed by the German court while waiting for the decision for Singapore's
request for his extradition.
 Dutch finance group Internationale Nederlanden Groep (ING) completed the Barings
takeover proceedings on 6 March for mere 1.6 Euros.
Leeson was extradited to Singapore on 23 November 1995.
 He pleaded guilty to two charges of fraud and forgery on 1 December, and was sentenced
to six-and-a-half years in prison in Singapore.
Leeson was released early on 3 July 1999 for good behaviour, after having served only
three-and-a-half years of his sentence.

10.  Aftermath Lessons learnt :
This affair lead to the creation of new jobs such as "compliance officers," has
strengthened the role of risk control within investment banks and has created a
separation between Front, Middle and Back Office functions.
To prevent another similar incident from happening, amendments were made to the
Futures Trading Act, which enabled the Monetary Authority of Singapore to monitor
the activities of traders selling futures contracts more closely.
Also now no single person is responsible for book keeping and recording a
transaction.