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To: accountclosed who wrote (73024)	11/2/1999 7:44:00 AM
From: John Pitera	Read Replies (1) \| Respond to of 86076

Building on my thesis of why Gartner is worth more than a billion... when you need IT quotes and info people go to Gartner. from today's WSJ November 2, 1999 -------------------------------------------------------------------------------- Chase Says Transaction Misstatements Improperly Inflated Trading Accounts By JATHON SAPSFORD and GREGORY ZUCKERMAN Staff Reporters of THE WALL STREET JOURNAL NEW YORK -- In the latest example of trading gone awry at a bank, Chase Manhattan Corp. said a portion of its trading accounts had been improperly inflated through the misstatement of foreign-exchange transactions. Correcting the problem, which Chase attributed to one trader who has been dismissed, would cause a reduction of $40 million in the giant bank's after-tax trading profit for the fourth quarter. The bank wouldn't identify the former trader, but officials familiar with the matter said he was a senior trader in the bank's currency department. Chase is now conducting an internal investigation. An official familiar with the inquiry said the bank believes the trader misstated the value of so-called forward contracts, or derivative financial instruments similar to futures contracts that banks and corporations use to bet on the direction of foreign-exchange rates. The investigation is seeking to determine whether the trader was trying to cover up bad bets or was just negligent. The official familiar with the investigation said the mistaken valuations have been inflating revenues for about a year. That raises questions, the official conceded, over why it took Chase so long to discover the problem. That lag, financial-industry experts said, is all the more worrisome because it occurred at Chase, a bank with a reputation for solid internal controls. If it happened to Chase, "it could happen to anybody," said Frank Schlier, vice president of financial services at Gartner Group, which offers institutions advice on issues that include compliance. The $40 million hit that Chase will take on its trading account is less than a tenth of what the bank commonly makes each quarter from overall trading activities. And it is only a fraction of Chase's $2.9 billion trading revenue for the year to Sept. 30. Chase discovered the mistaken valuation as part of a routine inspection. But the matter serves as a reminder of tough challenges facing banks as markets grow more complex. The institutions themselves also will grow harder to manage now that new legislation has brought down the regulatory walls separating insurers, banks and brokerage firms and allows for more mergers and alliances. "You are going to see more problems like this," said Gartner's Mr. Schlier. Chase said that its investigations have ruled out embezzlement and that no customer accounts were affected. In New York Stock Exchange 4 p.m. trading Monday, Chase shares closed at $83.5625, down $3.8125, though Chase was only one of many financial institutions that saw their share prices fall on interest-rate concerns. "This is disappointing," said Catherine Murray, an analyst at J.P. Morgan Securities Inc. "But we still think Chase is a solid bank with sound controls. We aren't changing our earnings forecasts because of this." The money involved in the Chase matter is smaller than in the other high-profile cases in which other global financial institutions have sustained trading losses this decade. Those cases include Japan's Daiwa Bank Ltd., where a trader hid $11 billion in losses for more than a decade before they were discovered, and Britain's Barings Bank PLC, which failed because of trader Nick Leeson. In both of these earlier cases, traders took bigger bets in a misguided attempt to cover losses that grew as the new bets turned against them. It appears Chase's control systems, to the bank's credit, were strong enough to keep its problem from getting out of hand. Ultimately, though, the experts said no bank can ensure completely against human error. "The systems may be great," said Robert Bostrom, head of the financial-institutions business at law firm Winston & Strawn, "but the systems are only as good as those who put them in place." --------------------------------------------------------------------------------