Swiss powerhouse UBS faces deeper scrutiny on oversight after $2bn loss in rogue trading

Until last week, Kweku M Adoboli was riding high, a young trader for a big bank, with a stylish apartment in a fashionable London neighbourhood and a steady girlfriend.

On Wednesday, the world of Adoboli — whose name in a language spoken in his native Ghana means “born on a Wednesday” — began to come tumbling down around him. After being questioned by compliance officers about some of his trades, he became evasive, later sending a “confessional” email to bank officials, saying that he did not have the information they wanted.

Adoboli, 31, has now been charged with one count of fraud and two counts of false accounting in connection with a $2 billion trading loss at his former employer, the Swiss banking giant UBS. In a brief appearance in a London courtroom Friday afternoon, the trader, dressed in a blue sweater and white shirt, appeared nervous, dabbing sweat from his cheeks and eyebrows, yet briefly offering a smile for reporters. He did not enter a plea, and his lawyer declined to comment.

One of the false accounting charges against Adoboli dates to October 2008 — at the height of the financial crisis and less than two years after he became a trader for UBS. The charge that Adoboli’s rogue trading had been going on for years raises embarrassing questions about the bank’s controls and oversight. After writing down more than $50 billion on bad subprime mortgage investments, the chief executive of UBS, Oswald J Grubel, had pledged to improve the bank’s risk management when he took the reins in 2009.

The Financial Services Authority, Britain’s equivalent of the Securities and Exchange Commission, and Swiss market regulators said that they would begin an independent investigation into the bank’s “control failures.” With the charges going back to 2008, “it would seem there was a systematic pattern of trading,” said Lindsay Thomas, managing director at the risk management consulting firm Sustainable Risks and a former director at the FSA. Before he landed a job on the bank’s trading desk, Adoboli had worked in its back-office support. UBS executives suspect that his knowledge of the bank’s computer systems and protocols enabled him to override the internal controls that would have caught his trading, a person close to the bank said.

Representatives for UBS declined to comment.

This weekend, UBS managers are continued to comb through dozens of trades made by Adoboli. The transactions under the microscope, according to a person briefed on the situation, typically began as client trades, packaged for either a hedge fund or for another arm of the bank.

A management shake-up at the bank — possibly reaching the highest ranks — is expected as a result of the trading scandal. Already this week Adoboli’s manager, John Hughes, left the bank after his trader’s supposed misdeeds were uncovered. The bank is also investigating other employees, primarily those who were supervising Adoboli.

UBS, which is based in Zurich, also has a mechanism to claw back compensation, and one person familiar with this situation but who is not authorised to speak on the record said it was “almost certain” the bank would seek to recover compensation from Adoboli and other UBS staff members.

Unauthorised gains

Any unauthorised gains could have contributed to his year-end bonuses.

Adoboli was the director of exchange-traded funds, an increasingly profitable corner of Wall Street. He would package ETF-related trades for clients. Typically firms like UBS, in an attempt to minimise risk, hedge these types of transactions.

But Adoboli often did not hedge his trades, according to a person briefed on his trading who was not authorised to speak publicly. So rather than reducing the risk, it exposed UBS to big swings depending on the way the trade went, this person said. For a time, the ledger went in Adoboli’s favour.

In recent days, however, a number of his trades, many of which were in the red, were set to roll over, prompting questions from the back office of UBS. Adoboli had started in the back office. The son of a former UN official, he spent his childhood globetrotting before ultimately landing at a Quaker boarding school in West Yorkshire, England.

After studying computer science and graduating from the University of Nottingham in 2003, he accepted a job offer from UBS. He became a trader in 2006 and his star continued to rise during the financial crisis.

The bank, however, sustained huge losses and moved to tighten its compliance systems. In late 2008, the firm tapped Philip Lofts, a UBS veteran to oversee risk. This year, the firm hired Maureen Miskovic, former head of risk control at the State Street Corp., as its new chief risk officer, replacing Lofts, who now runs UBS in the Americas.

Still, despite the extra rigour, Adoboli’s trading scheme apparently flourished.

From 2008 to as late as this week, he supposedly executed countless trades that were not hedged, according to the person familiar with his trading but was not authorised to speak on the record.

-New York Times Syndicate