2011 UBS rogue trader scandal
Encyclopedia
In September 2011, the Swiss bank UBS announced that it had lost over 2 billion dollars, as a result of unauthorized trading performed by Kweku Adoboli, a director of the bank's Global Synthetic Equities Trading
team in London
.
On September 24, 2011 Oswald Gruebel, the CEO of UBS resigned "to assume responsibility for the recent unauthorized trading incident", according to a memo to UBS staff. On October 5 Francois Gouws and Yassine Bouhara, the co-heads of Global Equities at UBS, also resigned.
It later emerged that UBS had failed to act on a warning issued by its computer system about Adoboli's trading.
referred to the case as one of the biggest ever seen at a Swiss bank. Adoboli has retained the law firm of Kingsley Napley
, which previously advised Nick Leeson
.
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. 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%.
It has been reported that Adoboli informed UBS of his unauthorized trades, and then the bank informed the Financial Services Authority and the police. On 16 September, it was announced that City of London Police charged Adoboli with fraud
by abuse of position and false accounting.
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.
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.
He graduated from the University of Nottingham
, where he studied computer science and management, in 2003. 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.
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”.
Kweku's father, John Adoboli, is a former Ghanian 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."
", ETF
cash positions.
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. The exploitation of this process allows a party in a transaction to receive payment for a trade before the transaction has been confirmed. While the cash proceeds in this scheme can not be simply retrieved, the seller may still show the cash on their books and possibly use it in further transactions. The process of orchestrating fails to deliver
trades may then be used in a carousel of transactions. Unlike in the United States, no data about the volume of fails-to-delivers is available for Europe. 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.
In October 2011, Sergio Ermotti
the interim CEO of UBS, after the departure of Gruebel, 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.
reported UBS to be "in disarray" following the departure of the CEO as a result of the scandal. Ten days later the co-heads of Global Equities at UBS, Francois Gouws and Yassine Bouhara, also resigned.
UBS stated that no clients 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.
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.
Delta One
Delta One products are a class of financial derivative that have no optionality and as such have a delta of one - that is to say that for a given percentage move in the price of the underlying asset there will be a near identical move in the price of the derivative...
team in London
London
London is the capital city of :England and the :United Kingdom, the largest metropolitan area in the United Kingdom, and the largest urban zone in the European Union by most measures. Located on the River Thames, London has been a major settlement for two millennia, its history going back to its...
.
On September 24, 2011 Oswald Gruebel, the CEO of UBS resigned "to assume responsibility for the recent unauthorized trading incident", according to a memo to UBS staff. On October 5 Francois Gouws and Yassine Bouhara, the co-heads of Global Equities at UBS, also resigned.
It later emerged that UBS had failed to act on a warning issued by its computer system about Adoboli's trading.
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 FINMASwiss Financial Market Supervisory Authority
Swiss Financial Markets Authority is the Swiss government body responsible for financial regulation. This includes the supervision of banks, insurance companies, stock exchanges and securities dealers as well as other financial intermediaries in Switzerland.FINMA is an independent institution...
referred to the case as one of the biggest ever seen at a Swiss bank. Adoboli has retained the law firm of Kingsley Napley
David Napley
Sir David Napley was a famous and influential solicitor in England.-Background:Sir David Napley was born in London of Jewish ancestry. He began his articles in 1935 at the age of only 16...
, which previously advised Nick Leeson
Nick Leeson
Nicholas "Nick" Leeson is a former derivatives broker whose fraudulent, unauthorized speculative trading caused the collapse of Barings Bank, the United Kingdom's oldest investment bank, for which he was sent to prison...
.
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. 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%.
It has been reported that Adoboli informed UBS of his unauthorized trades, and then the bank informed the Financial Services Authority and the police. On 16 September, it was announced that City of London Police charged Adoboli with fraud
Fraud
In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
by abuse of position and false accounting.
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
DAX
The DAX is a blue chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. Prices are taken from the electronic Xetra trading system...
and S&P 500
S&P 500
The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock...
indexes.
According to Business Insurance, as in the case of the unauthorized trades by Nick Leeson
Nick Leeson
Nicholas "Nick" Leeson is a former derivatives broker whose fraudulent, unauthorized speculative trading caused the collapse of Barings Bank, the United Kingdom's oldest investment bank, for which he was sent to prison...
at the Singapore office of Barings Bank
Barings Bank
Barings Bank was the oldest merchant bank in London until its collapse in 1995 after one of the bank's employees, Nick Leeson, lost £827 million due to speculative investing, primarily in futures contracts, at the bank's Singapore office.-History:-1762–1890:Barings Bank was founded in 1762 as the...
, the Adoboli incident took place at a location away from the bank's central office, where the risk management systems are typically stronger.
The accused trader
Kweku Adoboli was born 21 May 1980. 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."He graduated from the University of Nottingham
University of Nottingham
The University of Nottingham is a public research university based in Nottingham, United Kingdom, with further campuses in Ningbo, China and Kuala Lumpur, Malaysia...
, where he studied computer science and management, in 2003. Prior to this, he studied at Ackworth School
Ackworth School
Ackworth School is an independent school located in the village of High Ackworth, near Pontefract, West Yorkshire, England. It is one of eight Quaker Schools in England. The school is a member of the Headmasters' and Headmistresses' Conference and SHMIS . The Head is Kathryn Bell, who succeeded...
(a Quaker
Religious Society of Friends
The Religious Society of Friends, or Friends Church, is a Christian movement which stresses the doctrine of the priesthood of all believers. Members are known as Friends, or popularly as Quakers. It is made of independent organisations, which have split from one another due to doctrinal differences...
-run private boarding school near Leeds), where he was Head Boy
Head boy
Head Boy and Head Girl are terms commonly used in the British education system, and in private schools throughout the Commonwealth.-United Kingdom:...
between 1997–1998, the year he graduated.
According to the Daily Telegraph, shortly before the news of the incident broke, Adoboli had posted on his Facebook
Facebook
Facebook is a social networking service and website launched in February 2004, operated and privately owned by Facebook, Inc. , Facebook has more than 800 million active users. Users must register before using the site, after which they may create a personal profile, add other users as...
account that “I need a miracle”.
Kweku's father, John Adoboli, is a former Ghanian 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."
Mechanics of the incident
According to UBS, Adoboli had disguised the risk of his trades by using "forward-settlingSettlement (finance)
Settlement of securities is a business process whereby securities or interests in securities are delivered, usually against payment of money, to fulfill contractual obligations, such as those arising under securities trades....
", ETF
Exchange-traded fund
An exchange-traded fund is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as the S&P 500 or MSCI EAFE...
cash positions.
According to the Financial Times
Financial Times
The Financial Times is an international business newspaper. It is a morning daily newspaper published in London and printed in 24 cities around the world. Its primary rival is the Wall Street Journal, published in New York City....
, and other sources, Adoboli is suspected to have used the fact that some ETF transactions in Europe are not issued confirmations until after settlement
Settlement (finance)
Settlement of securities is a business process whereby securities or interests in securities are delivered, usually against payment of money, to fulfill contractual obligations, such as those arising under securities trades....
has taken place. The exploitation of this process allows a party in a transaction to receive payment for a trade before the transaction has been confirmed. While the cash proceeds in this scheme can not be simply retrieved, the seller may still show the cash on their books and possibly use it in further transactions. The process of orchestrating fails to deliver
Fails to deliver (finance)
In finance, the term failure to deliver typically refers to the inability of a party to deliver a financial instrument, or meet a contractual obligation. A typical example is the failure to deliver shares as part of a short transaction, for which Regulation SHO was designed as a remedy in the...
trades may then be used in a carousel of transactions. Unlike in the United States, no data about the volume of fails-to-delivers is available for Europe. CNN and World Finance
World Finance
World Finance is a financial magazine produced every two months by World News Media, based in the UK. It works in partnership with Reuters to provide news and data, and with Project Syndicate to provide commentary from international personalities. The magazine has included contributions from...
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.
In October 2011, Sergio Ermotti
Sergio Ermotti
Sergio Ermotti is a banker and manager in Switzerland, currently Group CEO of UBS.- Personal life :Ermotti left school at age 14. He decided to follow in the footsteps of his father, who worked at the bank, thus beginning his career as a young apprentice at the Corner Bank in Lugano...
the interim CEO of UBS, after the departure of Gruebel, 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.
The fallout
On 24 September 2011 Oswald Gruebel, the CEO of UBS resigned "to assume responsibility for the recent unauthorized trading incident", according to a memo to UBS staff. BloombergBloomberg L.P.
Bloomberg L.P. is an American privately held financial software, media, and data company. Bloomberg makes up one third of the $16 billion global financial data market with estimated revenue of $6.9 billion. Bloomberg L.P...
reported UBS to be "in disarray" following the departure of the CEO as a result of the scandal. Ten days later the co-heads of Global Equities at UBS, Francois Gouws and Yassine Bouhara, also resigned.
UBS stated that no clients 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.
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.
External links
- UBS trading scandal collected news and commentary at The Financial Times
- Special Report: How a rogue trader crashed UBS, ReutersReutersReuters is a news agency headquartered in New York City. Until 2008 the Reuters news agency formed part of a British independent company, Reuters Group plc, which was also a provider of financial market data...