Three UBS Unauthorized Trading Cases Found, Lawyer Says

An independent investigation into a $2.3 billion trading loss at UBS AG (UBSN) found three further incidents of unauthorized trading at the bank.

Charles Sherrard, a lawyer for Kweku Adoboli, the former trader accused of causing the loss, said he was told last week that accounting firm KPMG made the discoveries during an investigation into control failures at UBS that was ordered by British and Swiss financial regulators.

Colin Bell, the global head of operational risk control at the Swiss bank, testified at Adoboli’s London trial today that he was aware of the other incidents.

Prosecutors have said Adoboli, who is charged with fraud and false accounting, was responsible for the loss and hid the risk of his trades by booking fake hedges while he worked at the bank’s exchange-traded funds desk in London. Adoboli, 32, has pleaded not guilty.

The three cases “had nothing to do with the ETF desk” or Adoboli and “arose prior to and during the investigation,” Sherrard said. UBS informed the U.K. Financial Services Authority and the Swiss Finma, he said.

“I would draw a distinction here,” Bell said, adding the other incidents may not have involved fraud. “There are many reasons why we would call something unauthorized trading that may be vastly different to what we’re seeing here.”

Two Dismissals

The cases didn’t involve substantial losses and in two of the three instances, the employees were fired, he said. In the other case, the matter was reviewed and the person still works for the bank, Bell said.

“They caused an element of restating of profit and loss,” he said, when asked whether there were any losses caused.

The bank and the regulators requested KPMG refrain from looking into the other incidents, Sherrard said.

UBS’s proprietary trading continues, Bell said, though the bank intends to leave the business entirely. He was responding to questions about why UBS is still trading for its own account when it had made statements that was no longer the case.

“To exit a business isn’t something you do from one day to the next,” Bell said. “Our intent is to exit that business.”

Bell testified earlier in the week that the bank fixed a loophole in its system that allowed Adoboli to conceal unauthorized trades by giving them long-term settlement dates.

Counterparty Verification

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.

The extended dates on Adoboli’s fictitious trades “would make them harder to detect at the time,” Bell said Oct. 16. “We focused on putting that control back in place.”

Bell also testified about the bank’s internal investigation of the trading loss, and his work with KPMG. 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.

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 the bank’s probe was limited to the trades entered into its system by Adoboli, focusing on the period from June 1, 2011, until the trader’s arrest. It didn’t look at the actions of others on his desk or their messages with Adoboli.

The review only focused on that period because that was when the bank lost money, Bell testified today.

“The reality is the nature of this inquiry would never have happened if he’d turned a profit,” Sherrard said.

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