UBS faces questions on $2b loss oversight

On Wednesday, the world of Adoboli 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” e-mail to bank officials, saying that he did not have the information they wanted.

Adoboli 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. 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 over in 2009.

The Financial Services Authority, Britain’s equivalent of the Securities and Exchange Commission, and Swiss market regulators said on Friday 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 Sustainable Risks, a risk management consulting firm, 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.

This weekend, UBS managers are continuing 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. 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 authorized 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 sfet to roll over, raising questions from the back office of UBS.

The son of a former United Nation’s official, Adoboli spent his childhood globetrotting, from Ghana to Israel 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, which shook financial institutions around the world, including UBS.

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 Corporation, 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.

His personal life was also flourishing. Adoboli, until about four months ago, lived in a stylish building adjacent to London’s famous Brick Lane, a bustling thoroughfare known for its nightlife and curry houses. Neighbours there remembered his occasional lively parties.

On Wednesday, early in the afternoon, Adoboli sat at his desk and typed an e-mail to several members of the firm’s compliance department. Two people with knowledge of the e-mail described it as “confessional.” He wrote that he did not have the data they had asked for and gave details of what he had done, these people say.

The e-mail was quickly forwarded to the firm’s legal office, which dispatched a small team to Adoboli’s apartment. They peppered him with questions for hours, hoping to learn more. At the bank, employees began to pore through Adoboli’s trades. It quickly became clear the losses in Adoboli’s account were huge.

Top UBS executives were alerted to the situation and they contacted regulators in Britain and Switzerland. UBS lawyers left Adoboli’s apartment late Wednesday night. UBS also alerted the London police, who arrested Adoboli.