2011 UBS rogue

trader scandal

Kweku Adoboli illegally traded away over US$2 billion

dollars at Swiss bank UBS.
The 2011 UBS rogue trader scandal
caused a loss of over US$2 billion dollars
at Swiss bank UBS, as a result of
unauthorized trading performed by Kweku
Adoboli, a director of the bank's Global
Synthetic Equities Trading team in London
in early September 2011.[1][2]

On 24 September 2011, Oswald Grübel, the

CEO of UBS, resigned "to assume
responsibility for the recent unauthorized
trading incident", according to a memo to
UBS staff.[3][4] On 5 October Francois
Gouws and Yassine Bouhara, the co-heads
of Global Equities at UBS, also resigned.[5]
It later emerged that UBS had failed to act
on a warning issued by its computer
system about Adoboli's trading.[6][7][8]

After two delays requested by Adoboli and

a change of legal representation, Adoboli
pleaded not guilty to two counts each of
fraud and false accounting on 30 January
2012. He was released on conditional bail
after a bail application at Southwark
Crown Court on 8 June 2012. He was later
convicted of both counts of fraud and
sentenced to seven years imprisonment.
He appealed against both conviction and
sentence.[9]

The trading incident

On 15 September 2011, Adoboli was
arrested under suspicion of fraud in
connection with a loss of a then-estimated
US$2 billion, reportedly due to
unauthorized trading at the Swiss group’s
investment bank. A spokesperson from the
Swiss banking regulator FINMA referred to
the case as one of the biggest ever seen at
a Swiss bank.[1] Adoboli had originally
retained the law firm of Kingsley Napley,
which previously advised Nick Leeson.[10]
However, he has now changed his legal
representation to Bark & Co and Furnival
Chambers, with the fees being paid by
legal aid.[11] On 30 January 2012 he
pleaded not guilty to two charges of fraud
and two charges of false accounting and
faced up to 10 years in prison if convicted
of all charges.[12]
The loss to UBS was described as
"manageable" although it might cause UBS
to report a net loss in the following
financial quarter. The bank's net earnings
for the year ending June 2011 were $6.4
billion[13] with a gross profit of
approximately $1.1 billion reported by UBS
for the third quarter of 2011.[14][15] On 15
September, the day of Adoboli's arrest, the
price of the stock of UBS closed down
10.8%, while the price of other European
bank stocks rose between 3–6%.[16]
It has been reported that Adoboli informed
UBS of his unauthorized trades, and then
the bank informed the Financial Services
Authority and the police.[17] On 16
September, it was announced that City of
London Police charged Adoboli with fraud
by abuse of position and false
accounting.[18]

On 18 September 2011, UBS issued a

statement which revealed the losses from
the alleged unauthorized trading stood at
$2.3 billion. The rogue trader reportedly
racked up the losses by speculating on
EuroStoxx, DAX and S&P 500 indexes.[19]

The prosecutor in Adoboli's trial, Sasha

Wass, stated that Adoboli "was a gamble
or two from destroying Switzerland's
largest bank for his own benefit."[20]

According to Business Insurance, as in the

case of the unauthorized trades by Nick
Leeson at the Singapore office of Barings
Bank, the Adoboli incident took place at a
location away from the bank's central
office, where the risk management
systems are typically stronger.[21]

The accused trader

Kweku Adoboli was born 21 May 1980.[22]
His family home was in Tema, Ghana, but
he has lived in the UK since 1991 and been
described as "British by culture, citizenry
and fame."[23]

He graduated from the University of

Nottingham, where he studied computer
science and management, in 2003.[1] Prior
to this, he studied at Ackworth School (a
Quaker-run private boarding school near
Leeds), where he was Head Boy between
1997–1998, the year he graduated.[24]

According to the Daily Telegraph, shortly

before the news of the incident broke,
Adoboli had posted on his Facebook
account that “I need a miracle”.[25]

Kweku's father, John Adoboli, is a former

Ghanaian official at the United Nations. On
the day of his son's arrest, he expressed
the family's shock and disbelief: "We are
all here reading all the materials and all the
things being said about him. The family is
heartbroken because fraud is not our way
of life."[26]

Mechanics of the incident

According to UBS, Adoboli had disguised
the risk of his trades by using "forward-
settling" ETF cash positions.[27]

According to the Financial Times, and other

sources, Adoboli is suspected to have
used the fact that some ETF transactions
in Europe are not issued confirmations
until after settlement has taken place.[2]
The exploitation of this process allows a
party in a transaction to receive payment
for a trade before the transaction has been
confirmed.[28] While the cash proceeds in
this scheme cannot be simply retrieved,
the seller may still show the cash on their
books and possibly use it in further
transactions.[28] The process of
orchestrating fails to deliver trades may
then be used in a carousel of
transactions.[28][29] Unlike in the United
States, no data about the volume of fails-
to-delivers is available for Europe.[28][30]
CNN and World Finance also stated that
some banks have deliberately allowed
certain levels of fails-to-deliver, as a
method of "dealing with financial stress"
so that between accounting cycles the
value of securities sold, but not delivered,
as well as the value of the cash booked,
but not received can be reflected on the
books.[28][29][31]
In October 2011, Sergio Ermotti, the then-
interim CEO of UBS, after the departure of
Grübel, admitted that the computer system
at UBS had detected the unauthorized
trading activities of Adoboli beforehand
and had issued a warning, but the bank
had failed to act on the warning.[6][7][8]

In May 2012, Sergio Ermotti, Group CEO,

spoke at the UBS AGM about the changes
implemented following the scandal.
Ermotti spoke of improved internal
monitoring and deficiencies in the financial
reporting control system that have been
addressed. Ermotti also made reference
to employees that have been replaced or
had pay docked due to serious mistakes
or unreasonable behaviour.[32]

The fallout
On 24 September 2011 Oswald Grübel, the
CEO of UBS resigned "to assume
responsibility for the recent unauthorized
trading incident", according to a memo to
UBS staff.[3][4][33] Bloomberg reported UBS
to be "in disarray" following the departure
of the CEO as a result of the scandal.[34]
Ten days later the co-heads of Global
Equities at UBS, Francois Gouws and
Yassine Bouhara, also resigned.[5]

UBS stated that no client's funds were lost

as a result of the scandal, but according to
The Daily Telegraph, the reputation of UBS
could suffer "significant damage”, and that
the amount lost was almost the same as
the savings UBS had planned via the
elimination of 3,500 jobs.[25]
In mid-November 2011 UBS announced
that it would cut back half of the risk-
weighted assets in its investment bank
over the next five years to reduce risk
exposure in the wake of the trading
scandal.[35] In June 2012 UBS announced
that their ongoing investigation has
resolved the weaknesses that made this
unauthorized trading possible. Along with
their auditors, Ernst & Young Ltd., UBS aim
to confirm this with internal control of
financial reporting in December 2012.[36]
On 26 November 2012, the United
Kingdom's financial regulator fined UBS
£29.7 million ($47.6 million) for system
and control failings that allowed Kweku
Adoboli to cause over $2 billion losses
through unauthorized trading in London.[37]

See also
List of trading losses
2008 Société Générale trading loss
Yasuo Hamanaka caused a loss of
about $2.6 billion, over ten years, in
 unauthorized copper trading on the
London Metal Exchange
Nick Leeson caused a loss of £827
million for Barings Bank, leading to its
collapse
Howie Hubler lost $9 billion in one CDS
trade for Morgan Stanley, the largest
single loss in history

References
1. Frank Jordans. "Rogue trader causes
US$2 billion loss at UBS" . Associated
Press. Retrieved 15 September 2011.
2. Megan Murphy (15 September 2011).
"UBS trader Adoboli held over US$2bn
loss" . Financial Times. Retrieved
15 September 2011.
3. UBS CEO quits Reuters, 24
September 2011:
4. Memo to UBS staff Reuters, 24
September 2011
5. "UBS Equities Chiefs Resign in Wake
of Scandal " 5 October 2011
6. Computer Weekly 6 Oct 2011
7. IT-World 7 Oct 2011
 8. "UBS: Our risk systems did detect
£1.3bn rogue trader" . Computer
World UK 6 Oct 2011
9. "Former UBS trader Kweku Adoboli to
appeal against fraud conviction" . The
Guardian. London. 1 March 2013.
10. Fortado, Lindsay (16 September
2011). "UBS Trader Kweku Adoboli
Hires Law Firm That Advised Nick
Leeson" . Bloomberg. Retrieved
16 September 2011.
11. Fortado, Lindsay; Ben Moshinsky (30
January 2012). "Ex-UBS Trader
Adoboli Pleads Not Guilty to $2.3B
Loss" . Bloomberg. Retrieved
30 January 2012.
12. Griffiths, Peter (30 January 2012). "Ex
UBS trader Adoboli denies fraud, faces
trial" . Reuters. Retrieved 30 January
2012.
13. Laurence Knight, Q&A: How do rogue
traders do it? , BBC, 15 September
2011.
14. "UBS reports profit despite trading
scandal" . BBC News. 25 October
2011. Retrieved 7 August 2012.
15. "UBS third-quarter pre-tax profit CHF 1
billion; wealth management
businesses' net new money CHF 7.8
billion; BIS tier 1 capital ratio 18.4%" .
UBS. Retrieved 15 August 2012.
16. Simon Kennedy, "Banks soar in Europe
after liquidity move, UBS uncovers $2
billion unauthorized trading loss" .
Market Watch, 15 September 2011,
12:10 pm EDT
17. "Rogue Trader Kweku Adoboli handed
himself in to UBS" . Investoo.co.uk. 16
September 2011. Archived from the
original on 6 October 2011. Retrieved
16 September 2011.
18. "Kweku Adoboli charged by police over
UBS fraud" . Investoo.co.uk. 16
September 2011. Archived from the
original on 6 October 2011. Retrieved
16 September 2011.
19. "UBS reveals how rogue trader beat
the system" . Investoo.co.uk. 18
September 2011. Archived from the
 original on 23 September 2011.
Retrieved 18 September 2011.
20. "UBS trader Kweku Adoboli 'gambled
away' £1.4bn" . BBC. 14 September
2012.
21. Business Insurance 2 October 2011
22. Trader in UBS scandal was a ‘loyal’
employee Financial Times, 16
September 2011
23. Sule, Ahmed (20 September 2011).
"Kweku Adoboli: Every 'criminal' is
Nigerian, African" . BusinessDay.
 Archived from the original on 16
November 2012. Retrieved
20 September 2011.
24. "Yorkshire Regional News" . itv.com.
Retrieved 15 September 2011.
25. Daily Telegraph 15 Sep 2011
26. "REFILE-Rogue trade suspect's family
"heartbroken" " . Reuters. 15
September 2011. Retrieved
23 September 2011.
27. Daily Telegraph 18 Sep/2011
28. CNN/Fortune 27 September/2011
29. Selwyn Parker Kweko Adoboli is not
Alone in World Finance 20 Oct 2011
[1] Archived 10 November 2011 at
Archive.today
30. As an example, see: SEC Fails-to-
deliver data
31. City Wire 10 Oct 2011
32. "UBS 3 May 2012" . Archived from the
original on 27 August 2014. Retrieved
27 August 2014.
33. Wall Street Journal, 24 Sep 2011
34. Bloomberg 25 Sep 2011: UBS in
‘Disarray’
35. UBS to take axe to investment banking
Financial Times 17 Nov 2011
36. "Update on internal control over
financial reporting UBS 7 June 2012" .
Archived from the original on 27
August 2014. Retrieved 27 August
2014.
37. "UK regulator fines UBS $47 million
over rogue trader case" . Reuters. 26
 November 2012. Retrieved
26 November 2012.

External links
UBS trading scandal collected news
and commentary at The Financial Times
"Kweku Adoboli collected news and
commentary" . The Guardian.
Special Report: How a rogue trader
crashed UBS , Reuters
Retrieved from
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