UBS Fixed Loophole Used by Adoboli, Risk Officer Says

UBS AG (UBSN) fixed a loophole that former trader Kweku Adoboli allegedly used to conceal unauthorized transactions by giving them long-term settlement dates, the bank’s risk officer said at a London criminal trial.

The bank’s system for flagging extended trades with settlement periods longer than 14 days -- and calling their counterparties for verification -- stopped functioning and was reinstated after Adoboli was arrested last year for allegedly causing a $2.3 billion loss, Colin Bell, the bank’s global head of operational risk, said in a London court yesterday.

The extended dates on Adoboli’s fictitious trades “would make them harder to detect at the time,” Bell said. “We focused on putting that control back in place.”

Prosecutors have said Adoboli, who is on trial for fraud and false accounting, hid the risk of his trades by booking fake hedges while he worked at the exchange-traded funds desk in London. He’s also accused of creating a secret internal account, his so-called umbrella, where he parked trading profits to cover future losses. Adoboli, 32, has pleaded not guilty and his lawyers have sought to show others knew of the secret fund.

Bell also testified about the bank’s internal investigation of the trading loss, and his work with KPMG LLP on a broader external probe requested by British and Swiss regulators. Bell said he met with at least 30 employees from KPMG, and that the accounting company’s review was on a “totally different scale” than the bank’s smaller probe. The outside auditor reviewed 2.4 million documents, conducted 170 interviews and covered a period of activity beginning in 2008, he said.

Operation Bronze

Bell was one of four members of an executive committee handling the bank’s internal probe, dubbed Operation Bronze. Ruwan Weerasekera, chief operating officer of securities at UBS’s investment bank and another member of the committee, testified last week that Adoboli booked tens of thousands of real and fake trades during the summer of 2011 that exposed UBS to losses that could have reached $12 billion within weeks.

The bank’s probe was limited to the trades entered into the bank’s system by Adoboli, focusing on the period from June 1, 2011, until the trader’s arrest in September of last year, Weerasekera testified Oct. 11. The review didn’t look at the actions of other traders on his desk or messages between Adoboli and others.

Patrick Meier, a futures execution trader on the bank’s global equity-derivatives desk, who executed some trades for Adoboli, testified yesterday that he wasn’t aware of Adoboli’s so-called umbrella account where he kept profit from unauthorized trades to cover later losses.

To contact the reporters on this story: Erik Larson in London at elarson4@bloomberg.net; Lindsay Fortado in London at lfortado@bloomberg.net

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