An alleged trading scheme at UBS AG went undetected for three years before it was finally discovered, triggering a $2 billion loss, British authorities announced Friday as they charged a 31-year-old trader at the Swiss bank with fraud.
Flanked by a newly hired lawyer from a top London firm, Kweku Adoboli briefly gaped at reporters at his court hearing and said little beyond providing his birth date and address. Adoboli, who didn’t enter a plea, dabbed his eyes with a tissue during a 30-minute hearing at the City of London Magistrates’ Court.
UBS trader Kweku Adoboli didn’t enter a plea in a London court as prosecutors began to outline alleged wrongdoing that stretches back as far as October 2008. Adoboli faces charges of fraud and false accounting.
The charges came as an early picture began to emerge of lapses inside one of the world’s largest banks that allegedly allowed a young trader on a small stock desk to cause huge losses over three years, a much longer period than initially suspected.
Alarm bells at the bank went off on Wednesday, when risk-management officials discovered unauthorised trade allegedly made by Adoboli on a desk that specialised in a hybrid mutual funds. During a meeting with Abodoli, risk officials quizzed the trader, who then departed for home, according to a person familiar with the matter. He was arrested at 3:30 a.m. Thursday.
In court Friday, Mr. Adoboli was charged on two counts of false accounting and one of fraud by abuse of position.
According to the court filings, the first and second charges allege that Mr. Adoboli falsified transactions involving exchange-traded funds, or ETFs, between October 2008 and as recently as this month. A third count alleges he committed fraud between January and September of this year.
ETFs are securities that resemble mutual funds but trade like stocks, and are commonly designed to replicate the movement of an index.
Kingsley Napley,?a London law firm representing Adoboli, declined to comment. Years earlier, the firm represented Nicholas W. Leeson, whose trading in derivatives led to the collapse of 223-year-old Barings PLC in 1995. Leeson later served time in prison.
Much remains unknown about Adoboli, his trading activities and how unauthorised trades could have steered under or around UBS’s risk controls, which the bank has sought to bolster after suffering massive losses on mortgages during the financial crisis.
Over the weekend, UBS may paint a fuller picture of how its risk controls failed to prevent the big loss. The bank has directed longtime outside legal counsel Herbert Smith LLP to investigate the matter.
Bank officials are expected to face tough questions as to how there could have been such a scheme dating as far back as 2008. The global financial system went on red alert that year after French bank Soci?t? G?n?rale SA said trader J?r?me Kerviel had caused a $7.2 billion trading loss. Kerviel has been in prison since then.
Regulators in the UK and Switzerland have launched a joint investigation of the losses at UBS.
In Ghana, where Mr. Adoboli’s family lives, shocked relatives were trying to find a way for his father, a retired United Nations personnel officer, to fly toLondon. In an interview, John Adoboli said he first heard of the arrest Thursday when his son’s girlfriend phoned. He said his son had described the job as “stressful” but one he enjoyed.
“Sometimes I would call before I went to bed and he would say, ‘Daddy, I’m still at work,”‘ the father said.
Adoboli, according to people familiar with the situation, worked on a small trading desk called Delta One, its name referring to a measure of trading risk and sensitivity to changes in values. The term “delta” originally was used to measure risk in options to buy or sell stocks.
His desk specialised in ETFs. But the alleged scheme centred not on the trading of those relatively plain-vanilla securities but on the hedging of risk, people familiar with the matter said. The problems ultimately snowballed into an uncontrollable situation, they said. Traders also have speculated that losses were tied to recent sharp movements in the Swiss franc.
ETFs have soared in popularity by enabling investors to bet on wide swaths of the world, including some where it can be hard to invest, with an instrument often cheaper than regular mutual funds. For instance, investors wanting to bet that population growth will lift demand for farm equipment can invest in an ETF that provides exposure to tractor and fertiliser makers.
The popularity of ETFs has drawn scrutiny, however.
In a report published in June, the Bank of England said global banks are exposed to risk in the ETF market because they serve as trading partners in a market “characterised by increasing complexity, opacity and interconnectedness.”
MORE JOB CUTS
The losses could force UBS to reduce the size of its investment banking unit and carry out sweeping job cuts, according to reports in Switzerland.
The bank, which had to be bailed out by the Swiss taxpayer after it went bust by the sub-prime mortgage crisis in 2007-08, had hoped to reap the benefits of 3,500 job cuts it announced last month.
Now thousands more jobs could be cut from its global workforce of 65,000.
Having fallen by more than 10 per cent when the losses were revealed on Thursday, UBS shares rallied on Friday, closing up more than 5 per cent at 10.26 Swiss francs.
The latest case raises questions over the level of regulation of the financial sector in Britain, which was tightened after the Kerviel affair.
“I don’t think it’s a breakdown of the whole financial system,” said a senior trader at ETX Capital, Manoj Ladwa.
“The problem is within UBS, because their risk-management systems weren’t quick enough to pick up that this trader had built very big positions.”
Sources: WSJ, Herald Sun