Details Emerge Behind $2.3 Billion 'Rogue' Trading; Small Problem Got Bigger.
UBS AG boosted the tally of the loss it suffered from unauthorized trades to $2.3 billion, as details began to emerge to explain how relatively small losses allegedly caused by a junior trader on one of its desks in London snowballed into one of the largest trading frauds ever.
The details and new information emerging Sunday, however, pointed to a new and troubling problem: Even though the bank blamed a rogue trader, some inside the firm knew enough to question his trading fairly early on in the alleged scheme, according to a person familiar with the situation.
In its first detailed statement on the scandal, which UBS disclosed last week, the Swiss bank said Sunday afternoon that the unauthorized activity was conducted by a trader in its Global Synthetic Equity business who it didn't name.
People familiar with the matter have identified the trader as Kweku Adoboli, a 31-year-old Ghanaian who has been charged criminally in the U.K. with fraud and false accounting. He remains in custody. Lawyers for Mr. Adoboli—who hasn't entered a plea—declined to comment Sunday evening.
UBS said Sunday that the loss resulted from "unauthorized speculative trading in various S&P 500, DAX, and EuroStoxx index futures over the last three months."
In the hours after learning of the news, according to people familiar with the matter, UBS officials internally debated when to publicly alert the markets. One concern: Too much information might tip off rivals and make it difficult for UBS traders to unwind the unauthorized positions. But top executives ultimately decided to issue a statement Thursday saying the bank had suffered losses totaling in the "range of" $2 billion. Within three days, the amount had increased to $2.3 billion, underscoring the fluid situation the bank faced as it tried to piece together the losses.
Though U.K. authorities have indicated the alleged scheme may date back to 2008, a person familiar with the matter said UBS believes it started in earnest no more than three months ago.
It isn't clear what the reason for the discrepancy is, but, in the limited description of the charges from prosecutors on Friday, one of false-accounting allegations against Mr. Adoboli dates back to 2008.
UBS Chief Executive Oswald Grübel indicated in a memo to staff Sunday that the alleged rogue trader acted alone. The bank, however, is still investigating whether others there bear responsibility—either because they knew about the unauthorized trades and didn't report them or failed to adequately supervise the trader responsible—this person said.
UBS has suspended the other traders on Mr. Adoboli's desk pending the outcome of its investigation, according to people familiar with the situation.
UBS said in its latest statement that the positions taken by the trader "were within the normal business flow of a large global equity trading house as part of a properly hedged portfolio," but the risk of them was masked because the trader also took out fictitious offsetting exchange-traded-funds positions.
As described by people familiar with the internal investigation UBS is conducting, Mr. Adoboli about two months ago took a speculative position that lost the bank a relatively small amount. Because speculative trading is forbidden on the desk he sat on, known as Delta One, he would have had to immediately enter fictitious trades to cover his tracks or risk being fired, according to a person familiar the investigation.
Mr. Adoboli worked in UBS's equities division, a business that attracts so-called "quants" skilled in using mathematics and computers to execute high-speed and complex trading. But Mr. Adoboli was supposed to be operating a more sedate trading book.
The actual trading that created the losses consisted of using index futures to bet whether European and U.S. stocks would rise or fall. But to avoid showing naked, or unhedged, trades that would have gotten him in trouble, he needed to show that his trades were offset with bets in the opposite direction of his real trades, according to people familiar with the matter. To do so, he recorded on the company's books transactions that never took place, according to people familiar with the situation.
The trader responsible couldn't have chosen a more difficult time to try to make money in the stock market, and the subsequent real bets he made—alternatively that the markets would rise or fall—backfired as volatility in global financial markets raged over the summer, reflecting investor concerns about the European debt crisis, the U.S. economy and the Standard & Poor's downgrade of U.S. government debt. As a result, the loss to snowballed.
"He managed to change his position always at the wrong time," one of the people said.
According to a person familiar with the sequence of events, among the "counterparties" of the fake trades may have been French banks. In recent weeks, banks have been checking their exposures to French lenders, according to people familiar with the banks' operations, as French lenders have been under siege in the latest bout of global volatility. UBS may have gotten a hint of the alleged fictitious trades then, this person said.
According to people familiar with the investigation, UBS risk officials picked up the scent of the alleged fraud in July and again in August, but it isn't clear why the trader wasn't stopped then.
UBS had no rule banning back-office employees from taking on client-facing positions. The bank overhauled its risk-management systems after it had to write down $50 billion in securities trades in 2008 and 2009. That review focused on faults that allowed the bank to concentrate its risk so heavily in one class of securities. The review focused largely on proprietary trading in fixed-income, while the equities business fell under less scrutiny because it had typically been a client business that carried less risk. The overhaul of its risk-control systems didn't address the danger of a current or former back-office employee finding a way to fake trades.
Early last week, risk control officers at UBS began to question Mr. Adoboli, according to a person familiar with the situation. UBS said the rogue trader, following inquiries from bank officials who were reviewing his positions, revealed his unauthorized activities Wednesday. Around midday that day, he went home and wrote an email from his personal account to his boss, John Hughes, admitting to the unauthorized trades and providing Mr. Hughes with details of what he had done, according to a person familiar with the events. Mr. Hughes, who resigned Thursday, couldn't be reached.
UBS executives asked Mr. Adoboli to return to the London office later Wednesday, and the police arrested him at 3:30 a.m. in UBS's London offices.
UBS's external auditors combed through the trades in order to provide a full picture of the losses, working into the weekend, with Mr. Grubel also in the office all weekend.
The bank said Sunday it has identified all the positions stemming from the unauthorized trades and has covered the risk from them.
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