Yesterday, I began a series of articles highlighting some of the most heinous Wall Street shenanigans that affect investor’s pocketbooks. My first topic was the recent failure of MF Global and how overleveraging can have far-reaching effects, on both corporations and their investors.

Today, let’s turn to rogue trading — a long-accepted Wall Street practice (as long as the profits are piling up!).

A widely accepted definition of rogue trader “is an authorized employee making unauthorized trades on behalf of his employer.” At least, that’s what managers call them when these employees lose scads of company money. But what most investors don’t realize is that the practice is pervasive and can go on for years. And instead of being punished for it, when these “rogues” make their employers tons of money, they’re wined and dined, patted on the back and paid mega-bonuses.

We only hear about them when their big bets go badly awry, such as:

• In 1994, bond trader Joe Jett of General Electric‘s (NYSE:GE) Kidder Peabody tried to hide his trading losses by booking $330 million in phony profits on U.S. government bonds. He was barred from the securities business, ordered to pay back his $8.2 million bonus and a $200,000 fine, but was ultimately cleared of securities fraud charges. The following year, Kidder Peabody was no more — a victim of bad bets in an illiquid bond market.
• In 1995, Barings Bank derivatives broker Nick Leeson singlehandedly caused Britain’s oldest merchant bank to fail, after he repeatedly doubled his positions as prices fell, losing $1.3 billion. He went to prison for more than three years, and the bank that had been founded in 1762 went kaput.
• In 2002, John Rusnak, a foreign-exchange dealer at AIB’s Allfirst subsidiary, was so bullish on the Japanese yen that he neglected to hedge his positions and lost $691 million in the currency markets. He was sentenced to a 7 ½-year sentence, Allfirst was bought and more than 1,100 employees lost their jobs.
• In 2008, Jérôme Kerviel of French bank Société Générale (PINK:SCGLY), changed his strategy, betting that the markets would rise instead of fall (of course, the opposite occurred) and parlayed his unauthorized trades in equity-linked futures into a $7.1 billion loss for the bank. He was sentenced to at least three years in prison and ordered to repay $6.7 billion.
• In September 2011, Kweku Adoboli, equities trader at giant Swiss bank UBS (NYSE:UBS), caused losses of $2.3 billion from his desk at the bank’s Delta One desk —  a profit center common in large financial companies that makes big bets on index arbitrage. Charged with false accounting, Adoboli has until Jan. 30 to enter his plea. (And you may be interested to know he’s getting government assistance for his legal defense.)

These few examples barely scrape the surface of the kinds of huge trades that take place on a regular basis on trading desks at the world’s largest financial firms.

You don’t hear about the ones that make the banks significant sums of money. But it’s common knowledge in this world that those profits are encouraged — and celebrated — and a blind eye is turned to their “unauthorized” nature.

And while it’s certainly fitting that these “rogue traders” are severely punished, what about their supervisors — the same ones who are lauding them when their bets go well?

The answer is not much. Sure, the next rung up — sometimes even the CEO — often lose their jobs, but rarely do they suffer criminal charges or even fines. Yet, they certainly participate in the rogues’ profits.

The problem is systemic. The reason these folks get hired for the trading desks is that they’re risk-takers, and on average, taking huge risks can also bring huge rewards — just like the overleveraging I wrote about yesterday. And just like greed that created the housing boom and subprime mortgage markets and eventually resulted in the biggest financial crisis since the Great Depression.

When the money is rolling in, the powers on Wall Street ignore all the warning signals. It’s only when they’re caught flat-footed by bets gone awry do they promise to clean up their acts.

We’ve heard the same tune since the massive savings and loan failures of the late ’80s. Banking reform is still on the lips of every regulator since the financial meltdown and the 2008 recession. But they really don’t make any long-term changes. Instead, they give lip service to “self-policing,” and hey, you don’t have to be a genius to see how well that’s working. So far, the score is banks score 100, consumers and investors 0.

Tune in next for “5 Ways to Protect Your Portfolio from Wall Street’s Excesses.”