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UNITED STATES OF AMERICA
BEFORE THE BOARD OF GOVERNORS
OF THE FEDERAL
WASHINGTON,
RESERVE SYSTEM
D.C.
__________-----_______________-x
DOCKET NO. 98-032-B-1
98-032-CMP-I
In the Matter of
GUILLAUME HENRI ANDRE
FONKENELL
An Institution-AfHiated
Party of
BANKERS TRUST COMPANY
New York, New York
Notice oyCharges
and of Hearing and Notice
of the Assessment of a Civil
Money Penalty Issued
Pursuant to Sections 8(b)
and (i) of the Federal Deposit
Insurance Act, as Amended
_______________________________y
The Board of Governors of the Federal Reserve System (the “Board of
Governors”)
is of the opinion and has reasonable cause to believe that
(A)
Guillaurne Henri Andre Fonkenell (“Fonkenell”), a former Vice President
of Bankers Trust Company, a state member bank ifor purposes of this Notice. Bankers Trust Sie\~,
York Corporation
and its subsidiaries. including Bankers Trust Company collectively will be
referred to as “BT”), knowingly and recklessi! breached his fiduclap
violations of law and unsafe-and-unsound
sale of leveraged derivatives transactions
duties and engaged in
bankIng practices in connection
( “LDTs” )
with the marketing and
Fonkenell also knowingly and recklessly
breached his fiduciary duties, and engaged in vloiations of law and unsafe-and-unsound
banking
practices with respect to entries he caused to be made in BT’s books and records
(B)
Fonkenell conspired to and did engage in a scheme to defraud in
connection with the sale and marketing of LDTs to the Indonesian companies. P T Adimitra
Rayapratama
(“Adimitra”j and P.T. Dharmala Sakti Sejahtera (“Dharmala”).
This scheme
included the following conduct:
(I) Fonkenell and others conspired to and did engage in a fraudulent
scheme to induce Adimitra and Dharmala to enter into certain LDTs by misrepresenting
material risks of those transactions.
the
who was a marketer, requested
L’
that Fonkenell, a trader, alter the format of an LDT structure so as to hide the leverage in the
transaction Corn prospective
newly formatted
clients.
A colleague of Fonkenell’s,
Fonkenell did after the appearance of the LDT, and the
structure was presented to Dharmala and Adimitra in proposal letters sent by the
marketer; and
(II) The reformatted
presentations
components
to Adimitra and Dharmala.
formula created by Fonkenell was used in marketing
In those presentations,
of the LDT structure was misrepresented
the function of certain
SC as to conceal the leverage in the LDT
from Adimitra and Dharmaia
Fonkenell, with the assistance of others, manipulated BT’s books and
(0
records so as to misstate materially the amount of trade date profit generated with respect to
another transaction he executed
By reason of the practices set forth in Paragraphs B and C above,
(D1
Fonkenell received pecuniary gain or other benefit, and BT suffered more than minimal loss, as set
forth below:
6
‘\
(11
Fonkenell conspired to and did fraudulently induce Adimitra and
i
Dharmala to enter into LDTs for the ultimate purpose of generating high revenue for BT so that
2
he could be awarded a substantial bonus.
In 1994, Adimitra and Dharmala collectively suffered
losses in excess of one hundred million dollars, a portion of which was ultimately absorbed by BT
(II)
BT’s management
Fonkenell manipulated
BT’s books and records in order to present
with a more favorable impression of his abilities as a trader, for the ultimate
purpose of increasing his bonus.
These actions adversely affected, or had the potential to
adversely affect BT’s risk management
Accordingly,
operations.
L’
the Board of Governors herebi institutes this proceeding
issuing this combined Notice of Charges and of Hearing
by
and Notice of Assessment of a Civil
Money Penalty (the “Notice”) for the purpose of
(I)
assessing a civil money penalty against Fonkenell pursuant to
Section S(i) of the Federal Deposit Insurance Act, as amended (“FDI Act”), 12 U S C $ 18 IS(i ).
(II)
determining whether an appropriate order should be issued,
pursuant to Section 8(b) of the FDI Act, 12 U S C 5 1818(b), requiring Fonkenell
to
permanently cease and desist from serving in any capacity as an institution-affiliated
party of an
institution or agency specified In SectIon 8(e)(7)(A) of the FDI Xct ( 12 I-’S C $ IS 1S(e)i7)(.4i 1,
including a bank, bank holding cornpan!‘, or nonbank subsidiar),, lvithout Federal Reserve
approval, and serving as an Institution-affiliated
party of any institution or agency specified in
section S(e) (7) (A) of the FDI &zt. ( 12 U S C $ 1818 (e) (7) (A)), including a bank, bank
holding company, or nonb,ank subsidiary, where his duties include, directly or indirectly
(a) participating I? the structuring of derivative transactions for marketing or sale to customers,
(b) advising any customer regarding the purchase, sale or structuring
of a derivative transaction,
(c) preparing marketing materials regarding derivativ,e transactions
In support of this Notice, the Board of Governors alleges the following
.JURISDICTION
1
1994
Fonkenell was employed by Bankers Trust Company from 1990 through
During the time he was employed by BT, Fonkenell worked %,a trader based in New
York. As a trader, Fonkenell was responsible for managing trading positions held by BT as well
as structuring transactions
coordinating
to be marketed to BT’s clients
Fonkenell was also responsible for
with employees in BT’s operations area to ensure that the value of transactions he
executed were appropriately
recorded in the books and records of the bank
1994, Fonkenell was an opttons trader on BT’s dollar dertvativ,e desk
L’ise
From 199 I through
Fonkenell held the tltlc ot
Prestdent when he resigned fri>nl PIi‘III \la> i W-l
?
Fonkenell \v,~s at all trmes pert~r,en: hereto an institutton-afliliated
Bankers Trust Company, as detined for the purpo‘;es (Tfthis Notice b\, Section 3(u)
.\ct. 12 I. S C $ 1S13(u)
-I< AI)!n,titliri~~n-rittiIldtec! ?xt\
IS subtect to the cease-and-desist
v i ;I\ pi m~nt’~ perxltv
.L~~
pan’ ,,:‘
ofthe i-D1
oi Banhers Trust Cornpan\. F~~IIK;.;::::!
assessment prc>\Istons of the I-111 A;;
12 L’S C +$ ISIS(b) and(i)
3
(a) The Board I)r‘C;o~ernors 1s the approprtate
Federal bankins arehi\
take actton against an instltutlon-~~ttil~ateci pan\’ of a state member insured bank pursuant ;(I
Section 3(q) ofthe FDI Act. 12 I s C 9 lSl.:~q~
:i’
The Board of Governors
lb)
has jurisdiction
over Fonkenell for
purposes of this proceeding.
FACTUAL
1.
ALLEGATIONS
Background
4
Fo&enelI was, at all times relevant to this Notice, an options trader on the
dollar derivative desk of Bankers Trust Company.
5.
‘r’
A derivative is a financial product, the value of which is based on another
financial instrument or index, often an interest rate, foreign exchange rate, or the yield on
a security
derliatlve
with
A.
Leveraged Derivative Transactions
6
A
either
7
For example.
Leverage
financms
explicit
or Implicit
an in\,estment
the financial
The pa\‘ments
9
One method
extending
There
the maturity
ofthe
the le\.erase
movements
that c,lpture
components
0~ er the Ilfe of the transaction
to a \,arlable
transaction
m the LDT’s
has the effect
ofan
transactlon
expressed
In the form
of the LDT
and
and at maturlt>
ie\,erase
to a derl\,arlve
formula
For certain
ofincreasIng
in\sestment
ofthe In\‘estmenr
are generally
the tinanclal
means ofaddins
return
on d derlLat[ve
nssoclClted Lvlth an LDT
are numerous
is to add a multiplier
both the risk and the potential
~~t’;llarkt’t
formulae
arrangements
components
bvith debt increases
the Impact
or more mathematical
describe
le~eraye
LeL.erage Increases
tends to Increase
s
of one
leveraged derivative transaction (“L.DT”J is generally considered to be n
the leverage
transactlon
structures.
10
Beginning in 1992, and accelerating
marketed LDTs to its corporate
customers
through
1993 and 1994, BT sold and
as a means of hedging exposure and also as a way to
take positions on one or more markets such as interest rates or foreign exchange
11
transactions
While many of BT’j customers wanted to enter into highly leveraged
in order to take advantage of the higher potential returns, others wished to avoid the
high risk inherent in such trades.
12.
‘d’
Fonkeneli was expected to develop
and in response to requests or suggestions
13
derivatives.
new ideas
from marketers.
Marketers were responsible for working with traders to develop and price
They were expected to be able to understand a customer’s objectives and to have
sufficient technical knowledge
14
of LDTs to express those objectives to traders
In the conteyt of Bl“.;, derlv atrve busrness, highly leveraged transactrolls
were generallv more profitable than unle\ eraged transactions
encouraged
for trades, both on his own
to create new dertv,ati\,e structures Incorporating
Traders were according]!,
high degrees of leverage
The
extent to which a trader succeeded In de\elop~n~ trades that iic’re profitable to BJ RX a
significant factor used bv BT‘i rnana~ernerlt to determine a trader’s bonus
Fonkeneil \\.as di+‘~r~
of this correlation
I’
Ever-v derlv,atlve sold h> BT to one of
its
customers was an arms-length
transaction
BT did not typtcallv undertake an! ilduclarv obligartons towards its sophrsucated
counterparty
derivative customers
%onetheless. Fonkenell took affirmative steps to mtsrepresent
to BT’s customers the material risks of ct’rtaln transactions
I
B.
Books and Records of the Bank
16
In addition to developing
new trades, Fonkenell was also responsibie for
managing the trading positions contained on the options book to which he was assigned.
Fonkenell’s responsibilities
One of
in managing the options book was to ensure that transactions were
valued consistently with market parameters
17
One parameter that materially affects the valuc,of all options is volatility.
Volatility is a measure of the degree of uncertainty of future price qovements.
responsible for ensuring that all options transactions
Fonkeneil was
on BT’s books and records were valued
using accurate volatilities.
18
During 1993, a liquid market in volatilities was in existence.
any given time, the market for a particular volatility varied within a trading range
Fonkenell was permitted and expected to exercise his professlnnal judgment
However, at
Therefore,
in determining the
appropriate L,olatilitles to be entered on BT‘s books and records
19
“Yew deal” profit was used b!, RT‘s management
the antlclpated protit on a newly hooked transactlon
allocations given to marketers
as an approximation
ot‘
It \\as also used as the basis for the profit
These protit allocatlons \iere used as a benchmark to determine
the profits generated by an indi\,ldual marketer
20
A factor in determIning a trader’s compensation
that trader participated in generating for BT
was the amount
of profits
In this regard. a trader would be given credit for
ne\\ deal profit generated by a transaction that he or she helped to structure
atso he given credit for profit generated as a result It‘managlny
He or she would
positions in his or her trading
book
On the other
trader
was unable
transaction
hand, a trader‘s
compensation
to manage his or her trading
throughout
would
book
by the perception
so as to maintain
Fonkenell
the life of the trade
be affected
was aware
the expected
of the factors
that the
profit
affecting
of a
his
compensation
Alteration of the Libor Barrier Swap So As to Hide the Leverape in the
Transaction
II.
21
On or about January
message to be sent to a marketer
in Malaysia,
Singapore
a new trade,
known
who sold and marketed
and Indonesia
as a “Libor
18, 1994, Fonkenell
(the “January
barrier
cau%d
derivatives
18 E-Mail”)
swap,” to be presented
an electronic
to BT’s
mail
corporate
The subject
customers
of the message was
to that marketer‘s
Indonesian
customers
7-l
--
option
component
The I.ibor
.At maturltv.
17
-3
payment.
L’nder
BT and the customer
ofthe
and thus the amc,unt the ;u~tomc’r
barrier
Januan
~~3s -I ‘<O ‘I
1S E-Lla~l
2-l
during
swap v.‘as a t>‘pe of swap transaction
the terms
crossed a specified
of an
harrier
express
rtiultipllcr
dtlrlnc
Libor
in the 5prt’di-i t;~rmula
increase
expressed
L_tbor
as the multiplier
18 E-hIail
9r1
rate payments
interest
b\ a “spredd”
The barrier
Libor
the spread would
I il * (h-month
IS
in the Januar)i
If6-month
Interest
slvap. the customer’s
oL{ed BT. ivould
The prcoposal contaIned
the le\eraye
barrier
exchange
rile tirsr \ ear of the transactIon
the first year oi the transactlon,
In this formula.
would
that Included
rate
~f[.~bor
Fpeslfied
Leas le\,eraged
in the’
bv \‘lrtue
?\ere to trade above 4 ‘!“,I
be equal to
-
-3 759
0)
” IO” at the beylnnlng
cut’
the formula
I
25
Mer
receiving the January I8 E-Mail,
marketer to whom it was sent
the
requested that Fonkenell alter the spread formula in the January 18 E-Mail so as to “hide the
leverage” in the formula.
26
telephone
with
On or about January 19, 1994. Fonkenell
a colleague
based in Tokyo
discussed
the proposal
Fonkenell stated that it was
In that conversation.
He and his c$league
“easy to hide the leverage” in the proposed transaction
over the
discussed possible
means of hiding the leverage, but were unable to agree on a method,of doing so.
27.
Fonkenell stated that he would
work
on the problem.
He and his colleague
agreed that they would discuss the proposal again later
28.
regarding
the proposal
On or about January 24, Fonkenell again spoke with his colleague
contained
had “\+ranted to send something
in the Januarv
18 E-Flail
to [the marketer]
:&>ut.
trade,” but had not had time to finish
29
been shown
component
Fonkenell
on hiding
the leverage,
;o
sent to the marketer
‘Oh. i>ka\
Fonkenell‘s
statrng,
Fonkenell
referenced
eyplarned
hiding
rhat the Libor
presumabl~~ In its iTrl<rnal term.
then asked.
now””
J~CM_I
kno\\.
told his colleague
the leverage
Tokyo
that he
on th1.s
~$ork~ng or1 I:
collea~+e
to se\,eral customers,
it’s okay as it is right
work
Fonkenell‘s
Fonkenell
in
“it‘s
trade had alread!
Lvrth an espiicit
leverage
Do \ct’ need to find a stay ICI hrde the IeL~era~e. i)r
solleague
responded
for another
caused an eiectronrc
in paragraph
barrier
WV
_ :
that Fonkeneil
Lve will
should
tc’
still need to hide the le\,eraoe
_’
marl message. dated January
‘3 I abo\,e t the “Januam
contrnue
23 E-%LZail”)
23. 1994.
Upon
to be
information and belief, although the message was dated January 23, Fonkenell caused the message
to be sent some time after the conversation
with his colleague on January 24
The January 23 E-Mail stated in part that Fonkenell had “thought about
31.
ways to hide the leverage.”
The January 23 E-Mail contained a proposal that in many ways
resembled the proposal contained in the January 18 E-Mail
In the January 23 E-Mail, however,
the spread formula no longer contained an explicit multiplier as a mE?ns of incorporating
leverage
into the transaction.
32.
Under the terms of the proposal in the January 23 E-Mail, if Libor were to
trade above 5% during the first year of the transaction, the spread Lvould be equal to
(h-month Libor / 4 3 125%) -- 1
where
&month Libor is determined
expressed
as the di\,isor
le~eraeed
125’0”
Dividing the formula by 4 3 125’ o 1s marhematlcallv
3;
muitlplylng
“3 3
In thrs fc~rmula. the leverage is
at the end of the tirst !.ear
the formula
by 23 2
Accordingly.
the transaction
outlined
equl\~alent
In the Januan
to
23 E-Jta~i
I<
23 2 times
3-l
In the ei’ent
transactIon
outlined
component
of the transaction
35
in the January
that 1.1bor traded
23 E-hiall.
Lli70~~ 5” #IJurlng
rhe break-e\en
interest
the tirst ;.ear
oi the
rate for the spread
Lvould be -I 3 125’ o
By creating
dl\plsor that was also the break-even
a formula
Interest
In Lvhlch the lwerase
v.as expressed
rate for the spread component
I0
In the form oi <I
of the transaction.
Fonkenell was facilitating rhe stated objective of the marketer with whom he worked of hiding the
leverage.
Fonkenell knew or should have known
36
LDT
structure
transactions
outlined
to BT’s
in the January
prospective
23 E-hlail
that the marketer
to misrepresent
the material
would
use the
ofproposed
risks
clients
The Dharmala Transaction
A.
Marketing the Libor Barrier Transaction
1.
to Dharmala
Dharmala is an Indonesian holding company with subsidiaries engaged in
37
banking, finance and insurance
38
incurred
substantial
In
February of 1994, Dhartnala had an open transaction with BT that had
unrealized
losses
On or about
February
11. I QW,
suggesting 1:hat Dharnlala replace Its open transactlon
BT sent a proposal letter to Dharnlala
\\lth
a
Llbnr bamer SiL’ap(the “Februan
iJ
Proposal”)
The transactIon
of the proposal
exchange
Interest
outlined
in the Januan,
rate payments
contained
‘;
-.
E-\la~l
The customer‘s
In the February l-4 Proposal utilized the structure
.‘\t marunt\‘.
interest
BT nnd the customer
rate payment.
\+ouid
and thus the amount
the
’
customer owed BT, would increase by a “spread” if I,lbor crossed 5 25% during the tirst year ot‘
the
transaction
42
Under the terms of the February 14 Proposal. if Libor were to trade aboL*e
C 2SO.o during the first year of the transaction
the spread Liould be equal to
(h-month I.,ibor
-1 F”o’I
-
I
In this formula, as in the January 23 E-Mail, the leverage IS expressed as a divisor, in this case
IV,’
“4 5%”
43.
In the event that Libor traded above 5 259/o during the first year of the
transaction outlined in the February 14 Proposal, the break-even interest rate for the spread
component
of the transaction
was 4
5%
Thus. if durtng the tirst year of the transaction, Libor
traded above 5 35”; and remai ned aboi,e -1 !OO
component
.
of the transactlon
rose 5 25O/o and
Dharmala
then fell belo\+,
a pavment to Dharmala
1-l
DiL,tdlng
at
the end
ofthat
\i could LJ\L~ J L)dment
>‘ear, as to the spread
to HT
It: on the other
hand. I.~i?or
I
In a
46
marketing presentation
February 14 Proposal, the denominator
in the formula was represented
even interest rate for the spread component
This explanation fraudulently concealed the true
of incorporating
in the spread formula.
The true significance of the 4.5% denominatot_ls
47
a high degree of leverage into the transaction
requires that the spread formula incorporate
for the spread component
‘48
explanation
transactlon
sv.‘ap \\lth
transaction
to Dharmala as the break-
of the transaction in the event that Libor traded above
5 2596 during the first year of the transaction
significance of the denominator
regarding the transaction outlined in the
a denominator
that it serves as a means
Nothing in the transaction
equal to the break-even interest rate
of the transaction
The formula prepared by Fonkenell was used in conjunction
of that formula
in order
to misrepresent
the materlai
r-l&s of the Labor
with
this false
barrier s!+‘ap
to Dharniaia
4i)
On or about
February
\ ji
The transactIon
20. 1994, Dharmala
entered
Into a Labor barrier
BT
outlined
In the Februan
Dharmala
the \,alue of the Labor barrier
about .August
b\’ Dharmala
\\a~ .wb~t3nt1all\
slmllar
to the
1-l Proposal
7
_.
<j
executed
The Libor Barrier Trade Resulted
Losses to Dharmala and BT
5
Llhor txrrler s\sap rapIdI>, lost i alue
sUap \vas negatlk’e to Dharmala
I W4. the \,alue oi the trade had declined
Dharmala
I3
in Substantial
In or about
by approvmately
to approximately
:\pr~l
S38 million
negatl\‘e
SOS million
In or
to
Dharmala eventually tiled a civil action against BT in the Central Jakarta
52
District Court in Indonesia, styled P T Dharmala Sakti Seiahtera v Bankers Trust Company
Dharmala sought rescission of the Libor bamer swap as well as damages, based, inter aj&, on
alleged misrepresentations
regarding the manner m which the spread formula was to be calculated
BT later brought a law suit against Dharmala in the High Court of Justice, Queen’s Bench
Division in Britain, entitled Bankers Trust International
approximately
$65 million in damages.
PLC v. Dhacmala
Sakti Sejahtera, seeking
IF
BT ultimately settled its dispute with Dharmala in return
for a $12.5 million payment from Dharmala
53.
BT’s cost of the settlement with Dharmala was over $57 million to BT BT
also incurred substantial additional costs and expenses arising from the litigation and from
liabilities incurred in hedging
By conspiring
53
induce
Dharmala
financial
the transaction
to enter Into the Labor barrier
harm as Lvell as reputat~onal
I.
Adlnnl[ra
56
In rnlci-J,muan,
unrealized
57
suggesting
that Xdimitra
swap. Fonkeneil
in rhe fraudulent
scherllc
caused BT to incur
to
~ub~tantlai
Transaction
htarketing
SF
substantial
and particlpatins
harm
The Adimitra
R.
incurred
v, ith others
15 a company
the Libor
organized
of 1994. Adimitra
Barrier
under
Transaction
to Adimitra
the laws of Indonesia
had an open transaction
\\,lth BT that had
losses
On or about January
enter Into a Libor
3I
1994. BT sent a proposal
barrier
swap (the “January
letter
to .Adirnltra
3 1 Proposal”)
58
The marketer who requested that Fonkenell “hide the leverage” and to
whom Fonkeneli sent the January 23 E-Mail prepared or supervised the preparation of the January,
3 1 Proposal.
59
The transaction contained in the January 3 1 Proposal utilizes the structure
of the proposal outlined in the January 23 E-Mail. At maturity, BT and the customer would
exchange interest rate payments
The customer’s
interest rate payrgf)nt, and thus t& amount the
customer owed BT, would increase by a “spread” if Libor crossed 5% during the first year of the
transaction.
60
Under the terms of the January 3 I Proposal, if Libor were to trade above
5% during the first year of the transaction, the spread would be equal to
(6-month Libor ’4 3’%) - 1
In this formula, as in the Januanr 23 fC-\lall. the ieverase IS expressed as a divisor, in this case
61
In the e\ ent that Labor traded ab0L.e 5’o during the first year of the
transaction outlined in the Januan
; I Orc)pl>saI.the break-e\,en Interest rate for the spread
component of the transaction \\ a\ 1 ;’ ,>
61
the formula bv 23 i
Dividing the
t;lrmula
by
1 ~O,O 15
mathematically equivalent to multiplyng
Accordingi~. :he [ransactlon ourlined in the January 3 1 Proposal IS le\ eragrd
23 3 times
63
Upon Informat\on and belief. in a marketing presentation
transaction outlined in the Januan, 3 I Proposal. the denominator
regardmg the
in the formula was represented
.
to Adimitra as the break-even
interest rate for the spread in the event that Libor traded above 54’;
during the first year of the transaction.
significance of the denominator
in the spread formula
The true significance of the J 3O/
/o denominator
64
of incorporating
This explanation fraudulently concealed the true
a high degree of leverage into the transaction
requires that the spread formula incorporate
a denominator
IS that it serves as a means
Nothing in the transaction
equal to .$e break-even irtterest rate
for the transaction.
65.
The formula prepared by Fonkenell was used in conjunction
explanation of that formula in order to misrepresent
with this false
the material risks of the Libor barrier swap
transaction to Adimitra.
66
On or about February 28. 1994, .Adlmltra entered into a Libor barrier swap
67
The transactlon executed by .-Idimi;ra i+as substantially similar to the
transaction outlined in the Januan
7
_.
3 I Proposal
The Libor
to hdimitra
fJ,s
Barrier
Trade
Resulted
in Substantial
Losses
and BT
Adimltra‘s Libor barrier s\\‘ap rapIdly lost iaiue
199-I~BT’s internal valuation of the transaction was approuimatelv
In or about December
negative $75 million to
.Adimrtra
69
Adimitra eventually filed a civil actlon against BT in the United States
Dlstrlct Court for the Southern District of New
Hankers Trust Colnpaal
I’ork, styled p T .Adimitra Rayarxatamau
.Adlmltra sought reclsslon oi the L.ibor barrier swap as well as damages.
1
alleging that BT had committed
fraud by hiding the leverage in the Libor barrier swap and
otherwise concealing the material risks of the transaction
BT ultimately settled its dispute with
Adimitra.
70
The cost of the settlement with Adimitra was approximately
$49 million to
BT. BT also incurred substantial additional costs and expenses arising from the litigation and
from liabilities incurred in hedging the transaction.
71.
L’
In creating an LDT structure in which the leyerage was hidden, Fonkenell
acted together with others to defraud BT’s clients by misrepresenting
the material risks of the
transaction.
m.
Falsifviw BT’s Books and Records So As To Misstate the Profit in the
Transaction
71
:_
On or about YUoL,ember3, 1993, BT entered into an LDT \vtth Proctor
Gamble, Inc (the “P&G Trade”)
option,
received
referencing
In ett‘ecr Itshen P&G entered
both the 30-,,ear
by P&G was embedded
Treasuv
the transaction.
bond and the 5-year Treasury
CC
it sold BT an
note
The premium
into a su’ap
option pnclng
74
recorded
Fonkeneil
\+‘as responsible
on BT’s books and records
was responsible
for ensuring
on the 5-year and the 30-year
for ensuring
In connection
that the P&G Trade was accurateI>
\\lth recording
the P&G Trade,
that BT valued the trade usmg appropnate
Treasuries
\folatilities
Fonkeneil
for the option
Prior to the entry of the P&G Trade, BT’s books and records reflected that
75.
the volatility for the 5-year Treasury was I8 per cent and the volatility for the 30-year Treasury
Fonkenell was aware that. at these levels, the P&G Trade would be valued such
was ten per cent.
that
BT’s books and records would
transaction.
a profit of apnroximately
reflect
This profit would have been recorded
$12 to 13 million for the
as “new deal” profit on BT’s books and
records.
L’.
76.
Fonkenell reduced artificially the amount of new deal profit generated by
the P&G Trade, intending to capture that profit at some later point as trading profit and thereby
provide management
with a more favorable
impression
of
also aware that BT’s bonus period would end on November
77
In furtherance
direct
supen4sor
that
profit,
he had informed
his abilities as a trader.
30.
of hrs scheme, on or about
Yovjember
2, Fonkenell
while the P&G Trade \i.ould generate approximately
the marketer
\tho
Fonkenell was
S I2 to 13
told
million II
~sorked on the trade that the trade \+,ould only generate
$7 5 million
[_ater In the dav 11rl \o~ember
78
Lvith a colleague
who \vas emplo>,ed
[I]t
will
million
anvbody
Fonkenell
like. S IO mrliron
So the otfictal
asks t*ou
then asked his colleague
79
from
show
in the operations
Fonkenell
number
2. Fonkrneli
area of BT
but the marketers
dtscussed
Fonkeneli
know
the
P&G transacti~~n
stated
tt at $7
is. like. a bit more than 7
if
e\-en the controllers
to reduce the \~olatrlrtres used to price the
requested
that the \~olattlitl;
I 0 per cent to 9 per cent and that the j olatility
IS
on the 30-year
on the 5-year Treasury
P&G Trade
Treasury
be reduced
be reduced
from
Is
per cent to 17 percent.
approximately
This would result in reducing new deal profit for the trade by
$3 million.
Fonkenell then stated, “[a]nd tomorrow,
remind me tomorrow,
we’ll
move up the bond.”
80.
Fonkenell’s
professional judgment
request
the volatilities be lowered was not based on his
that
regarding market factors, but was instead the result of his desire to lower
artificially the new deal profit for the P&G Trade
81.
L”
Fonkenell stated that he had prospectively
volatility parameter the day after it was lowered
input to BT’s computer
determined to “move up” a
Fonkenell’s actions in altering the volatility
modeling system, without regard to market factors, created a situation in
which BT could not accurately determine the value of certain derivative transactions
of time
adversely
This inability
affect
BT’s
to determine
risk management
Pursuant
82
for the j-year
and the j&year
Trade was approxImateI?
to Fonkenell’<
Treasunes
marked.
$6 7 m~ll~or
affected,
or had the potential
to
operation
Instructions.
his collea_ge
lowered
a[ ihe close of the da>. on November
The new deal pr\>tit rx~~rded
3’
<s
been properly
such L,alues adversely
for a period
on BT’s
tt,d the \olatllltles
the new deal protit
entered
on BT’s
books
and records
the \,olatilities
2
for the P&G
for the 5->,ear and 3@-year Treasuries
books
and records
would
have been In
excess of S 10 million
84
year Treasury
recorded
The next da!,. Lo~er-nbrr
was increased
on BT’s
books
to I8 per cent
and records.
3. as Fonkenell
This increase
to increase
intended.
the \,olatilit>,
caused the value of the P&G
app;oximatelv
S 1 5 million
of the 5.
Trade.
as
85
On or about November 9, 1993, at Fonkenell’s request, the volatility of the
30-year Treasury was raised to 10 per cent. BT’s books and records indicate that BT earned over
$2 million in profit generated by this increase.
86
professional judgment
Fonkenell’s request that the volatilities be raised was not based on his
regarding market factors, but was instead the result of his need to return
the volatilities to market levels after artificially causing them to be layered
87.
created the appearance
The increases in volatility orchestrated
by FoAkenell on November 3 and 9
that Fonkenell was generating profit through his trading activities.
a significant portion of this profit should have been recorded
as new deal protit
from the
In fact,
P&G
Trade
88
of
By intentionally causing false entries to be made on the books and records
BT n,ith the inrent to mislead and defraud
prohibition
on making
false entries
on a bank’s
He also engaged in unsafe-and-unsound
to
B-I’
BT and its ernplo~ et>. Fonkenell
bankins
books
and records
practices
contaIned
and breached
I lolated
the
in I S I’ S C 3 1005
his fiduciary
duties
FONKENELL’S
MISCONDUCT
A. Fonkenell Committed Wire Fraud and Engaged in Unsafe-and-Unsound
Banking Practices and Breaches of his Fiduciary Duties in Connection
With the Sale of the Libor Barrier Trades to Adimitra and Dharmala
As set forth in paragraphs 4 through 71 above, Fonkeneil violated the
89
prohibitions of the federal wire fraud statute, 18 U.S.C
defraud BT’s customers
of transactions
by participating
in and facilitating the misrwesentation
that were sold to those customers.
an unsafe-and-unsound
5 1343, when he conspired to and did
of material risks
Fonkeneli’s fraudulent conduct also constitutes
banking practice and a breach of Fonkenell’s fiduciary duties to Banker’s
Trust
B. Fonkenell Violated the Law and Engaged in Unsafe-and-Unsound
Banking Practices When He Caused False Entries to Be Made On the
Books and Records of BT In Connection With the P&G Trade
90
As set forth In paragraphs 4 through 20 and 72 through 88 abo\,e,
Fonkenell violated the prohibttion against making false entries on a bank’s books and records
contained in 18 U S C 4 1005 \\,hrn he caused false entries to be made on BT’s books and
records with the Intent to deiraud F-1’hi, x-tlficlallv inflating his bonus
also engaged in unsafe-and-ilnsolind
In so doing, Fonktzncll
h,inhlng practices and breached his fiduc1ar-y duties to RT
ASSESSMENT
91
(a)
Section
OF CIVIL
PENALTIES
8(i) of the FDI Act, I2 U S C 3 I8 18(i), authorizes the
assessment of civil money penalties in the amount of $5.000 per day against an institutionaffiliated party who violates any law or regulation
(b) Section 8(i) of the FDI Act, 12 U S C $J818(i),
authorizes the
assessment of civil money penalties in the amount of $25,000 per day against an institutionaffiliated party who violates any law or regulation,
recklessly engages in any unsafe or unsound
practice, or breaches any fiduciary duty which violation. practice, or breach is part of a pattern
of misconduct,
causes or is likely to cause more than a minrmal loss to a depository
institution, or
results in pecuniary gain or other benefit to such part!
(a) Fonkenell‘s consprracy to defraud BT‘s customers commenced
92
on or
about January 18. 1994 and continued to at least February 20. 1994 as to Dharmala. and to at
least February 28. 1994 as to Adimitra
(b) Fonkeneli‘s actions in causrns false entrees to be made on BT’s books
and records commenced
on or about SoL,ember 2, iii98 2nd contrnued to at least November ~1.
1938
93
enraged
._ L. in violations
(a) As set forth in this Notice. Fonkenell knowingil; and recklessl>
oflaw,
unsafe and unsound practrces. and breaches of tiduciaw duties b\
partrcrpating in a scheme to defraud BT’s lndonesran customers
These violations of laws unsafe
and unsound practices and breaches of fiductarv duttes caused more than a minimal loss to BT by
subjecting BT to substantial litigation risk. Moreover,
to pay significant amounts in connection
Fonkenell’s fraudulent conduct caused BT
with BT’s hedging costs and the litigation which arose
from that misconduct
(b) As set forth in this Notice, Fonkenell knowingly and recklessly
engaged in violations of law, unsafe and unsound practices, and breaches of fiduciary duties by
causing false entries to be made in BT’s books and records.
94.
W
After taking into account the size of Fonkenell’s financial resources, his
lack of good faith, the gravity of the violations described herein, his history of previous violations,
and such other matters as justice may require, the Board of Governors hereby assesses a civil
money penalty of Two Hundred Fifty Thousand Dollars ($250,000) against Fonkenell for
(a) conspiring to and engaging in a scheme to defraud in connection
with the sale and marketing
of LDTs to Adimttra and Dharmala. and (b) manipulating the books and records of BT in
connection with the P&G transactlon for his own benefit and in a manner which ivas adverse to
BT’s risk management
35
systems
The penalties set forth In paragraph
Governors pursuant to Sectlon S(i)
of the
3-l hereofare
assessed by the Board of
FDI Act. IS I’ S C j IS 18(i) Remittance ofthe
penalties set forth herein shall be made Lvithin 60 days of the date of this Notice. in immediately
available funds, payable to the order ofthe Secreta?
Reserve System. Washington,
of the United States
of the Board ofGovernors
of the Federal
D C 2055 1, who shall make remittance of the same to the Treasur),
Notice is hereby given, pursuant to section 8(i)(2) of the FDI Act (12
96
U S C 5 1818(i)(2)) that Fonkenell is afforded an opportunity
Board of Governors
concerning
civil money penalty assessment
this assessment
for a formal hearing before the
Any request for a hearing with regard to this
must be filed with the Secretary of the Board of Governors,
Washington, D.C 2055 I, within 20 days after issuance and service of this Notice.
In the event Fonkenell fails to request a heariw within the aforementioned
97.
20-day period, Fonkenell shall be deemed, pursuant to section 263. L9(c)(2) of the Rules of
Practice, to have waived the right to a formal hearing, and this Notice shall, pursuant to
section 8(i)(2) of the FDI Act, constitute
a final and unappealable order
CEASE-AND-DESIST
98
By reason of the misconduct
referenced in paragraphs 89 and 90 above, a
cease and desist order pursuant to section S(b) of the F-III Act. I:! L. S C $ 1S 18(b), should be
Issued against Fonkenell as a result of his \,lolations o<la..i,. unsafe and unsound practices, and
breaches of fiduciary duties in conspiring
to be made on BT’s
books
evidence
New York,
on the charges
at the Federal
Kesen,e
hereinbefore
specified
to cease-and-desist
should
requiring
to cease and desist from
Fonkenell
BT’s
customers
and in causing
false entrles
and records
Notice is herebl, _elien
99
New York,
to defraud
be issued pursuant
that a hedrlng
v.~li be heid on December
Bank of New t’ork.
In at-de: to determme
to witlc?n
S(b) ofthe
for the purpose
2s. IWS.
of taking
b+rhether an appropriate
FDI Act,
ITI
13 Ly S C
order
ISIS(b).
(a) serving in any capacity as an institution-afflliared
agency specified in Section 8(e)(7)(A)
Act , 12 U S C
of the FDI
bank, a bank holding company, or nonbank subsidiav,
(b) serving
Section
8(e)
as an institution-aff3iated
(7) (A) of the FDI Act,
party of an institution or
$ 18 18(e)(7)(A),
without Federal Reserve approval, and
party of any institution
12 U.S.C.
including a
$ 18 18 (e) (7) (‘4).
or agency
specified
in
including a bank, bank holding
company, or nonbank subsidiary, where his duties include, directly o;,indirectly- (1) participating
in the structuring of derivative transactions
for marketing or sale to Fustomers; (2) advising any
customer regarding the purchase, sale or structuring of a derivative transaction; (3) preparing
marketing materials regarding derivative transactions
PROCEDURES
I@0
Fonkenell
of the sem~ce of this Notice,
$ 363 19. with
the OffIce
N U’ ( Washington.
C F R 4
Board
is hereby
as prn\,ided
Pursuant
D C 20551
.-Is provded
herein shall constitute
NotIce.
and authorization
alleged
In the Notice
declslon
a waiver
and to file icith
‘63
(the “OFI,4~~).
263 I 1(a) of the
the Secretary
and appropriate
on the Secretan,
motion.
of the Board
of Governors
conclusions
12
of the
12 C F
within
the allegations
upon proper
20 days
12 C F R
of Practice.
by this Notice
to appear and iontest
within
1700 G Street.
1‘)I c H I ) of the Rules of Practice.
of his right
otTicer,
Rules
shall also b e ien,ed
to tile an .-\ns\ver required
for the presiding
containing such findings
r\djudication
to sectlon
In section
to this Notice
26.: 19 of the Rules of Practice.
tiled is.ith the OFl:‘i
$ 263 l9(c)( I ), the failure of Fonkenell
proL,ided
to file an .4nswer
by section
of Financial Institution
263 I l(a), any .\nswer
ofGo\,ernors
directed
R
the time
of the
to find the facts as
a recommended
1
101
judge to be appointed
The hearing described above shall be held before an administratrve Iau
from the OFIA, pursuant
to
section 263 54 of the Board of Governors
Rules of Practice for Hearing (the “Rules of Practice”),
public, unless the Board of Governors
12 C F R 5 263 54. The hearing shall be
determines that a public hearing would be contrary to the
public interest, and in all other aspects shall be conducted
in compliance with the provisions of the
FDI Act and the Rules of Practice.
102.
Fonkenell may submit, within 20 days of the service of this Notice, to the
Secretary of the Board of Governors,
a written statement detailing the reasons why the hearing in
this proceeding
The failure to submit such a statement within the aforesaid
should not be public
period shall constitute
103
a waiver of any objection to a public hearing
.Authority is hereby delegated to the Secretary of the Board of Governors
to take any and all actions that the presidiny ofiicer would be authorized to take under the Board
of Governors’ Rules of Pracuce with respect to thus Notice and any hearing conducted thereon.
until such time as the presiding ofIicer shall be designated by the 0FI.A as prov,ided hereon
Dated at 15’ashrngton. D C thls?gTdav
of.Lc*
13QS
BOARD OF GOVERWORS OF THE
FEDERAL RESERVE SYSTEhl
Secretary of the Board
I
UNITED STATES OF AMERICA
BEFORE THE BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
WASHINGTON,
_-_--___-__________________
---
D.C
-,y
Docket No. 98-032-B-I
98-032-CMP- I
In the Matter of
GUILLAUME HENRI ANDRE
FONKENELL
An Institution-Affiliated
Party of
BANKERS TRUST COMPANY
New York, New York
____-__-______-________________x
APPROVAL OF AMENDMENT TO NOTICE OF CHARGES AND OF HEARING
AND NOTICE OF THE ASSESSMENT OF A CIVIL MONEY PENALTY
Pursuant to section 265.4 of the regulations promulgated
by the Board of Governors
of
the Federal Reserve System (“the Board”), 12 C.F.R. $ 265.4. I approve the following
amendment to the Notice of Charges and of Hearing and Notice of Assessment
Money Penalty that was issued by the Board in this proceeding
of a Civil
on October 29. 1998 (“Original
?i’otice”):
1. Paragraph 99 of the Original Notice is deleted
3 New paragraph 99 provides:
I.
“99.
Notice is hereby given that a hearing Lvill be held on December 28, 1998, in
ye\+, York, New York, at the Federal Reserve Bank of New York, for the purpose of taking
evidence on the charges hereinbefore
specified in order to determine whether an appropriate
order to cease-and-desist
should be issued pursuant to section 8(b) of the FDI Act, 12 U.S.C.
$1818(b):
(a) requiring Fonkenell to cease and desist from serving as an institution-affiliated
party of any institution or agency specified in Section 8(e)(7)(A) of the FDI Act, 12 U.S.C. $
18 1W(7)(A),
including a bank, bank holding company, or nonbank subsidiary, where his duties
include, directly or indirectly: (1) participating
marketing or sale to customers;
(2) advising any customer regarding the purchase, sale or
structuring of a derivative transaction;
transactions;
in the structuring of derivative transactions for
(3) preparing marketing materials regarding derivative
and
(b) ordering other appropriate restrictions on Fonkenell’s
institution-affiliated
future activities as an
party as are warranted based on the record in this proceeding.”
7
Dated at U’ashington, D.C. this
7-c
-~ day of May, 1999
BOARD OF GOL’ERVORS OF THE
FEDERAI RESERVE SYSTEM