Who Is Guarding The Henhouse At UBS?
It is reported that a 31 year old rogue trader for UBS AG, Switzerland’s largest bank, has caused $2 billion in losses through unauthorized trading, according to Bloomberg and other sources. The loss will likely cause UBS to be unprofitable in the third quarter, according to the release. In a brief statement, UBS reported that the loss occurred due to unauthorized trading in its investment bank and that it intends to fully investigate the matter and will pull out all the stops to get to the bottom of it. The amount of the loss seems to be a moving target, since it has increased to $2.3 billion virtually overnight and stands in the way of UBS bonuses, according to latest reports.
London Police has arrested 31 year old Kweku Adoboli for the possible fraudulent transactions. Adoboli had apparently been working at UBS’s European Equity Trading Division for the last five years or so after a three year stint as a trade support analyst. Records reflected that he studied computer science and management at England’s University of Nottingham, where he graduated in 2003. Adoboli is said to be a 31 year old African male who enjoys fine wines, photography and cycling. Up until 4 months ago he lived in an upscale loft near the UBS headquarters in London, which had a hefty monthly tab of 4,000 pounds or U.S. $6,320.
The magnitude of this loss comes at a time when UBS is trying to recover from subprime losses and the financial crisis of 2008. It elicits memories of the Societe Generale trader, Jerome Kerviel, who was discovered to have lost euro 4.9 billion or U.S. $6.7 billion. The similarities are interesting, in that Kerviel was also a trader in his thirties whose responsibilities involved massive amounts of money. He ended up getting convicted of forgery, breach of trust and unauthorized computer use in 2010 for covering bets worth almost euro 50 billion or U.S. $68 billion, in late 2007 and early 2008. Last year he was permanently banned from the financial industry, sentenced to three years in prison and ordered to pay the bank back for $6.7 billion he lost.
Interestingly, an article in Forbes made a comparison of the treatment traders get when they cause losses versus their superiors. In all likelihood, Kweku Adoboli will have to go through a criminal trial and face time in prison for the losses he caused. Whereas, the industry executives who were at the helm when the firms lost some $25 billion on mortgage backed securities (MBS) avoided trial or prison time. The distinction between how the two are judged is simple. The executives are not going to face criminal prosecution for making bad decisions unless they have committed fraud or it can be proven that they turned a blind eye to the fraud under their watch, as long as they used reasonable business judgment and followed company procedure. Simply put, losses incurred as a result of a bad decision is not evidence of a crime. On the other hand, traders are bound by Sarbanes-Oxley and the Dodd-Frank reform act, among other rules and requirements that make it easier to escalate a bad decision up to a criminal matter. According to a former U.S. Securities and Exchange Commission (SEC) lawyer, the “intentional disregard for any one of those (rules) is compelling evidence of criminal activity.”