UBS fraud: rogue trader followed in Kerviel's footsteps

 

Fraud went on for three years before detection, according to charges. UBS statement reveals similar pattern to SG rogue trader Jérôme Kerviel Fresh details about the losses suffered by UBS at the hands of a rogue trader – alleged to be exchange-traded funds (ETF) specialist Kweku Adoboli – make the episode look almost identical to the €4.9 billion rogue-trading loss suffered by Société Générale (SG) at the hands of Jérôme Kerviel in 2008. Related articles Market volatility may have brought UBS losses to light UBS rogue-trading losses reopen old wounds JAC reaffirms retail structured products principles with bigger committee Trading positions - November 2010 In a statement on September 18, UBS said: "The loss resulted from unauthorised speculative trading in various S&P 500, Dax and Eurostoxx index futures over the past three months. The positions had been offset in our systems with fictitious, forward-settling, cash ETF positions, allegedly executed by the trader. These fictitious trades concealed the fact that the index futures trades violated UBS's risk limits." The bank also raised its estimate of the losses caused: the total is now $2.3 billion rather than $2 billion, it said. If UBS's statement is correct, the fraud would have a number of similarities to SG's 2008 losses. Kerviel, like the UBS rogue trader, put on large directional trades using equity index futures – in Kerviel's case, on the Dow Jones Eurostoxx 50, Dax and FTSE 100 indexes. And Kerviel, like the UBS rogue trader, hid the fact he had gone far beyond his risk limits by logging fictitious offsetting trades – including forwards and warrant trades. Kerviel chose these because they did not require immediate confirmation or daily margin payments, unlike futures trades, and so would be likely to go undetected for longer. The UBS rogue trader might have chosen them for the same reason. If Adoboli was indeed behind the rogue trades, there are other similarities. Both men were 31 years old. Both had moved to the trading desk after spending some years in the back office – in Kerviel's case, his back-office experience gave him the knowledge he needed to avoid detection. And both had been breaking risk limits for years before they were detected. According to Adoboli's charge sheet, he falsified trading records on ETFs almost constantly from October 2008 to September 2011 – he started work as an ETF trader in September 2006. Early reports that UBS was unaware of the unauthorised trades until the trader admitted them are not true, the bank said: the trader confessed "following inquiries directed to him by UBS control functions that were reviewing his positions" on September 14. This still appears to leave almost three years in which he was able to operate without detection – or at least without UBS acting to stop him. In this respect, too, there could be parallels with the Kerviel case: it emerged in SG's own inquiry report that his unauthorised trades had triggered internal alarms at SG on 93 occasions, but each one had been ignored or discounted by Kerviel's superiors and SG's internal control functions. It's also possible that both Kerviel and the UBS trader were eventually discovered after market turbulence sent their losses so high that the bank's internal controls could no longer fail to notice them. Early speculation that the UBS losses were linked to a directional trade on the volatile Swiss franc now seems to be mistaken, but European equity indexes in particular have also moved dramatically in recent weeks in response to the worsening eurozone debt crisis. Kerviel's own losses followed similar turbulence in the equity markets in January 2008. Two inquiries are now under way at UBS. The bank's own internal inquiry is led by senior independent director David Sidwell, assisted by two other UBS directors – former Swiss Re chief financial officer Ann Godbehere, who acted as interim chief financial officer at Northern Rock after it was nationalised, and Joseph Yam, formerly head of the Hong Kong Monetary Authority. The UK Financial Services Authority and the Swiss regulator Finma will also oversee an inquiry by an unnamed third-party contractor.

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