Trial to Begin for Former UBS Trader Accused of Hiding Huge Loss

[AntiPAPunk]

SEPTEMBER 13, 2012, 8:38 PM

Trial to Begin for Former UBS Trader Accused of Hiding Huge Loss
BY MARK SCOTT

Kweku M. Adoboli, a former UBS trader, is charged with fraud and false accounting in connection with a $2.3 billion loss.

LONDON — UBS will face the harsh glare of the spotlight again on Friday, as opening arguments begin in the trial of a former trader accused of hiding a multibillion-dollar loss at the investment bank.

Kweku M. Adoboli, 32, the former trader, faces charges of false accounting and fraud in connection with a $2.3 billion loss at the bank. He has pleaded not guilty.

“As uncomfortable as the entire trial will be for UBS, it will show us what the consequences are when misconduct occurs or when individuals do not take their responsibilities seriously,” the bank’s chief executive, Sergio P. Ermotti, said in an internal memo made public by the firm.

UBS, which has struggled to regain its footing since the financial crisis, has been plagued by a number of scandals in recent years.

In 2009, the investment bank, based in Switzerland, agreed to pay $780 million to settle a tax fraud case with American authorities. Three former UBS executives were convicted earlier this year for rigging bids in the municipal bond market.

The bank has also been ensnared by a global investigation into rate manipulation. UBS, which is one of more than a dozen institutions under investigation, struck an immunity deal with authorities.

The case against Mr. Adoboli has only added to the questions about the bank’s oversight and risk management.

After the financial crisis, UBS, which had been hobbled by bad real estate bets, vowed to overhaul its internal controls. But the bank disclosed two years later that it had “discovered unauthorized speculative trading,” and Mr. Adoboli was arrested. According to the charges, his activities spanned more than three years, starting in 2008.

UBS subsequently conducted an internal investigation into the loss. The review showed that the firm’s risk controls had raised red flags about unusual trading activity, but that managers had failed to adequately follow up. “We have to be straight with ourselves,” Mr. Ermotti, the chief executive, said in 2011. “In no circumstances should something like this ever occur.”

The UBS trading scandal echoes past cases.

In 2010, Jérôme Kerviel, a trader at the Paris-based bank Société Générale, was convicted of generating more than $6 billion in losses. He is appealing the matter. Another trader, Nicholas W. Leeson of Barings Bank, racked up $1 billion in losses, prompting the failure of the British institution in 1995. Mr. Leeson pleaded guilty and served four years in prison.

Mr. Adoboli started his finance career at UBS. He joined the bank as an investment adviser trainee in London shortly after graduating from Nottingham University in 2003, and eventually worked his way up to the Delta One desk, a plain-vanilla version of derivatives trading. Traders in this group create investments that track specific financial assets like a basket of company stocks.

Mr. Adoboli fired his lawyers at Kingsley Napley, the firm that had previously represented Mr. Leeson. Mr. Adoboli is now represented by Bark & Company, another law firm in London.

If convicted, he could face up to 10 years in prison. The trial is expected to last up to eight weeks. Both current and former UBS employees could be called as witnesses, though the firm has not been accused of any wrongdoing.

Legal restrictions in Britain limit the information that can be reported about the case to avoid biasing the proceedings. UBS and a lawyer for Mr. Adoboli declined to comment.

When the trading scandal erupted last year, it reverberated through the upper ranks of UBS. The chief executive, Oswald J. Grübel, whom UBS had recruited to oversee its turnaround, promptly resigned. The co-chiefs of global equities, the division where the loss occurred, also left the firm.

The firm’s profit also suffered. After disclosing the trading losses, UBS reported that quarterly earnings dropped 39 percent to $1.2 billion.

The blowup has worsened the bank’s financial woes. Like other European banks, UBS is dealing with the sluggish economy and the sovereign debt crisis in Europe.

With investment banking operations slumping, institutions have moved swiftly to lay off staff and revamp their strategies. UBS has announced 3,500 job cuts, with about half expected in the investment banking division. It has also shifted its focus toward wealth management.

“The banks are slowly realizing there are parts of their businesses that just don’t make money,” said Pete Hahn, a fellow at Cass Business School in London. “A fundamental rethink is under way.”

 

[Westwood]

UBS rogue trader who 'gambled away £1.4billion in biggest-ever City fraud believed he had the magic touch' as he tried to boost his ego and bonus

• UBS trader Kweku Adoboli, 32, allegedly invented fake deals to conceal his huge losses
• Adoboli 'gambled away' £1.4billion in two years - knocking 10 per cent, or £2.8billion off UBS's share price
  
• Southwark Crown Court heard the banker, charged with fraud and false accounting, hoped to increase his bonus and position within the company

By SUZANNAH HILLS PUBLISHED: 10:30 GMT, 14 September 2012 | UPDATED: 15:16 GMT, 14 September 2012

'Rogue trader': Former UBS banker Kweku Adoboli allegedly lost his bank £1.4 billion in Britain's biggest banking fraud

A City trader who believed he had a ‘magic touch’ gambled away £1.4 billion in Britain's biggest ever alleged banking fraud, a court heard today.Investment banker Kweku Adoboli, 32, allegedly invented fictitious accounts to conceal the massive losses he was making at Swiss bank UBS from risky deals.Southwark Crown Court heard the ‘rogue trader’ was ‘fraudulently side-stepping’ his bank’s rules but then cooked the books to make it look as if the money he was gambling was being balanced by cash coming in.

His losses totalled £1.4billion – wiping around 10 per cent or about £2.8billion off UBS’s share price.He is accused of two counts of fraud and two counts of false accounting while working for Swiss bank UBS between October 2008 and last September.Prosecuting, Sasha Wass QC said: ‘He lost his bank $2.3 billion (£1.4 billion). He fraudulently gambled it away. He also in doing so wiped around 10 per cent or about 4.5 billion US dollars (£2.8 billion) off the bank's share price.‘He did all of this by exceeding his trading limits, by inventing fictitious deals to conceal this and then he lied to his bosses.‘Mr Adoboli's motive for this behaviour was to increase his bonus, his status within the bank, his job prospects and of course his ego.‘

Like most gamblers, he believed he had the magic touch. Like most gamblers, when he lost, he caused chaos and disaster to himself and all of those around him.’Adoboli, from Whitechapel, east London, is accused of losing the money in Britain's biggest alleged banking fraud.He worked for UBS's global synthetic equities division, buying and selling exchange traded funds (ETFs), which track different types of stocks, bonds or commodities such as metals.UBS discovered in September last year that Adoboli's deals had caused the bank a loss of £1.4 billion after ‘his fraud had unravelled’.Ms Wass said: ‘To put the huge trading loss in some sort of perspective, 2.3 billion US dollars is enough to pay a year's salary for nearly 70,000 new nurses or two Wembley stadiums or perhaps even six new hospitals.‘This colossal loss arose purely as a result of Mr Adoboli's fraudulent deal making, which amounted as you will see, to nothing more than gambling.'

'Motive': A court heard UBS investment banker Kweku Adoboli hoped to boost his bonus and position within the company as well as ego

Allegations: Kweku Adoboli is accused of making unauthorised trades when he worked for Swiss bank UBS in their London office

She told the jury that Adoboli had ‘fraudulently side-stepped’ the bank's rules that banned high risk and unauthorised investments.His bank sets a daily trading limit for the ETF desk of 100 billion US dollars while using hedging to reduce risk - buying one type of investment and simultaneously selling a similar one to mitigate any loss.

But prosecutors claim Adoboli failed to hedge several of his investments in order to make a bigger profit and larger bonus for himself. Ms Wass said: 'When you put your life savings in a pension fund you do not expect an investment banker to gamble it on the toss of a coin. You expect him to limit the downside and maximise the growth of the investment for your old age.'

She said there was a 'fundamental difference' between a gambler and an investment banker. 'A gambler takes uncertain risks playing games of chance risking all, whereas an investment banker is investing money or making trades taking extreme care to reduce his risk as much as possible by insuring or hedging against loss when a price falls.

On trial: Kweku Adoboli, centre, arrives at Southwark Crown Court where he is accused of the biggest bank fraud in British history, flanked by his lawyers

Handcuffed: Kweku Adoboli, 32, is accused of two counts of fraud and two counts false accounting over the course of two years while working at UBS

'The gambler relies on chance, he wins or he loses. The investment bank trader is investing to make his bank's or his clients' investments grow and he goes to great lengths to ensure that he cannot lose all or even a substantial amount of his investor's stake.'One is trying to protect and increase wealth on behalf of others, and the other is relying on good fortune with no investment element, with absolutely no insurance.'She said Adoboli fell into a 'gambling mindset' - describing a martingale system that involves doubling a bet after each loss to try and recoup the all the money.

She added: 'It takes very deep pockets to continue to run such a system: pockets the size of the UBS bank. It is these pockets, these resources that Mr Adoboli was using to back his bets. 'He was certain his prediction of the way the market was moving was correct and when the market moved in the opposite way and his bets lost, he simply increased his bets. 'Given the size of the unhedged bets that Mr Adoboli was undertaking, the doubling of the sums necessary to recover, the losses he was making very rapidly reached into the billions.'She said at one stage he was at risk of losing the bank nearly 12 billion US dollars of unhedged investments.

Risking it all: Southwark Crown Court heard Adoboli stopped behaving like an investment banker and fell into a gambling mindset

‘He was lying to the bank, both to his senior managers, his risk control department, and the accounts department.‘In effect he was risking the very existence of the bank by gambling its resources, ultimately for his own benefit.‘Mr Adoboli had ceased to act as a professional investment banker and had begun to approach his work as a naked gambler. He had become what is sometimes referred to as a rogue trader.’But she claimed he had gone beyond the behaviour of a ‘mere rogue trader - faking records over a two and a half year period.

THE 'BOMBSHELL EMAIL'

The court heard Kweku Adoboli eventually had to own up to what he had been doing and sent this email to chartered accountant William Steward:

'Dear Will,

It is with great stress that I write this mail. First of all the ETF (Exchange Traded Funds) trades that you see on the ledger are not trades that I have done with a counterparty as I previously described.

I used the bookings as a way to suppress the PnL losses that I have accrued through off-book trades that I made. Those trades were previously profit making, became loss making as the market sold off aggressively through the aggressive sell-off days of July and early August.

Initially, I had been short futures through June and those lost money when the first Greek confidence vote went through in mid-June. In order to try and make the money back I flipped the trade long through the rally.

Although I had a couple of opportunities to unwind the long trade for a negligible loss, I did not move quickly enough for the market weakness on the back of the first back macro data and then an escalation Eurozone crisis cost me the losses you will see when the ETF bookings are cancelled. The aim had been to try and make the money back before the September expiry date came through but I clearly failed.

These are still live trades on the book that will need to be unwound. Namely a short position in DAX futures [which had been rolled to December expiry] and a short position in S and P 500 futures that are due to expire on Friday.

I have now left the office for the sake of discretion. I will need to come back in to discuss the positions and explain face to face, but for reasons that are obvious, I did not think it wise to stay on the desk this afternoon.

I will expect that questions will be asked as to why nobody else was aware of these trades.

The reality is that I have always maintained that these were EFP trades to the member of my team, BUC, trade support and John Di Bacco (Adoboli's manager).

I take full responsibility for my actions and the s*** storm that will now ensue. I am deeply sorry to have left this mess for everyone and to have put my bank and my colleagues at risk.

Thanks, Kweku.'


Initially, the court heard he had been getting some success and was getting away with it but then 'his system crashed like a car hitting a wall at high speed' and he was forced to admit what he had been doing.Ms Wass continued: ‘He faked bookings, he created false accounts and conducted himself as a master fraudster, deliberately and systematically deceiving and defrauding the bank which was employing him.‘As Mr Adoboli was later to admit, he had been cooking the books and deceiving the bank since 2008: two and a half years before he was caught.’

Adoboli initially told colleagues he was 'deeply sorry' but now denies any criminal responsibility claiming his bosses and colleagues on the Exchange Traded Fund Desk were party to the fraud, the jury were told. In a 'bombshell email', he allegedly wrote: 'I take full responsibility for my actions and the s*** storm that will now ensue.

'I am deeply sorry to have left this mess for everyone and to have put my bank and my colleagues at risk.'Ms Wass said: 'The importance of this email is clear - the bank was facing an immediate catastrophe. It stood to lose billions of dollars.

'In the email Mr Adoboli clearly admits that - he fabricated deals, he invented non existent clients, he broke the rules, he lied to the supervisor, he hoodwinked colleagues.'All hell was about to brake loose.' When the email was circulated to bosses they demanded he return to the offices immediately and a series of emergency meetings ensued.

The public school-educated former head boy worked his way up from a graduate job at the bank that he started in 2003.He became a trader in December 2005, was promoted to associate director in March 2008 and then director in March 2010.

Moving into trading meant he had the chance to earn million-pound bonuses, Ms Wass said, and his salary rose 'dramatically' as his career progressed. In 2007 he earned £40,000 and a bonus of £55,000, in 2008 he earned £50,000 and a bonus of £15,000.The prosecution claim his gambling started in 2008 when he made a trading loss of 400,000 US dollars, and falsified records to cover it up.Then in 2009 he earned £100,000 with a £95,000 bonus and in 2010 his salary was £110,000 and his bonus was £250,000.

The rise in the final two years was because he had begun to 'fraudulently gamble the bank's money', jurors were told.Ms Wass said: 'Mr Adoboli's supposedly skilful and successful trading record had been a complete fabrication. He had been receiving his huge salary and increasingly generous bonuses on the back of a lie.''The reality was that he was simply a cheat manipulating the bank's account for his own reward.'She added: 'Mr Adoboli was a long-term and trusted employee. The colleagues checking on him respected his trading skills, they would have been aware that he was increasing the desk's trading profits.

'They chatted with him every day and would have had no reason to suspect that he was not only endangering the very survival of the bank, but...their own jobs.'
The trial continues.
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