UBS Co-Workers Knew of Fake Trades, Adoboli Told Lawyer

Kweku Adoboli’s co-workers knew he was making fictitious trades, the former UBS AG (UBSN) banker told an attorney who interviewed him on the night of his arrest in September 2011.

Adoboli told Damien Byrne Hill, a lawyer at Herbert Smith LLP who represented the Swiss bank, that his colleagues on the exchange-traded funds desk were aware of fake trades from May, though they didn’t know the extent of his positions.

Hill’s notes from the discussion with Adoboli, read out by a prosecutor at the former trader’s fraud trial in London yesterday, indicated that while his colleagues were “unhappy” about the trades, they didn’t alert managers.

“I f----d up,” Adoboli said he told the other traders, according to the lawyer’s notes. “I’m trying to make it a bit better.”

Adoboli, 32, has pleaded not guilty to charges of fraud and false accounting over unauthorized trades on which UBS lost $2.3 billion. The former trader admitted hours before his arrest that he had risked $5 billion on Standard & Poor’s 500 futures and a further $3.75 billion in the German futures market, a former manager testified.

John Hughes, the former senior trader on the ETF desk, said Adoboli told him in January last year about an internal account he called his umbrella. Prosecutors allege Adoboli created the account to pool profit from trades he hadn’t booked to use to cover up future losses.

An Umbrella

“You live in blue sky scenarios,” Hughes wrote in an instant-message exchange with Adoboli in January 2011.

“It often rains,” Adoboli responded. “I learned that last year. So I built an umbrella.”

Hughes, 30, testified he thought the umbrella referred to a profit pool that hadn’t been booked and could be used later. He said he didn’t report his colleague, “because I’m stupid.”

“I should have reported him,” Hughes said. “To this day, I wish I had.”

Hughes said he had reported Adoboli for exceeding his trading limits in December 2010 to John Bennie, a senior equities trader at UBS, and afterwards felt guilty about it because Adoboli was “told off.”

Hill’s notes indicated Adoboli admitted building up positions of as much as $10 billion by August 2011 and masking them with fictitious ETF trades. When other traders noticed he was stressed, Adoboli told them it was a result of splitting up with his girlfriend, according to Hill’s notes.

Risk Ethos

Phil Allison, UBS AG’s head of global cash equities, testified that there was “a change of ethos” under former Chief Executive Officer Oswald Gruebel who encouraged more risk taking at the bank, including proprietary trading, to increase profits.

“If a bank doesn’t take any risk, it is incredibly hard to make money, and that is our job,” Allison said. Gruebel thought “there was room for more market risk, which in general was a view I agreed with.”

Gruebel stepped down after the loss the bank attributed to Adoboli.

Allison said he has spent “sleepless nights” thinking about whether he missed red flags that Adoboli may have been placing unauthorized trades.

“We felt we were putting two intelligent individuals in the center of the floor” when the bank put Adoboli and his former colleague John Hughes in charge of the exchange-traded funds desk, Allison said. “It is not one where I’ve thought, ‘Gosh, that’s something I should’ve done differently.’”

Allison said he wished that the bank had “clearly written and documented” their risk limits.

To contact the reporter on this story: Lindsay Fortado in London at lfortado@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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