Adoboli’s Fate Decided at Wine Bar as UBS Market Bets Unraveled
On a cool late summer evening last year in London’s financial district, with the euro-zone crisis worsening and Greece tottering on the edge of default, Kweku Adoboli says he asked the three traders who worked with him at UBS AG (UBSN)’s exchange-traded funds desk to join him for a drink.
Adoboli said in a post on his Facebook page that he needed “a miracle” as his bets on the market imploded. That night at a wine bar across the street from their office, Adoboli asked John Hughes, the senior trader on the ETF desk, and two junior traders, what to do.
The others decided he should take the blame for billions of dollars in losses and an elaborate web of secret trades in what he called an umbrella account that once held $40 million in hidden profits.
“I knew I was going to lose my job anyway, I had already resigned myself to that, so fair enough,” the 32-year-old Adoboli testified last month about the meeting, which the other traders deny took place.
Two days after the alleged meeting, on Sept. 14, 2011, Adoboli told a UBS accountant that he was responsible for causing the losses, which totalled $2.3 billion once the trades were unwound, leading to one of the highest-profile banking trials in British history. Prosecutors said the risks at one point approached $12 billion and threatened the survival of UBS, the largest Swiss bank.
Adoboli was found guilty of fraud and sentenced to seven years in prison yesterday after a two-month trial at a London criminal court. Judge Brian Keith said Adoboli had to serve at least half the sentence. He was cleared of four counts of false accounting, where he was accused of booking fake hedges to hide the risk of his real trades, and keeping profits off the books in an internal account to cover future costs of running the desk.
Evidence at the trial suggested Adoboli was driven to be a star trader and had a personal spread-betting habit. When he turned himself in, despite making 360,000 pounds ($573,000) in salary and bonus the previous year, he was in debt with three overdrawn bank accounts.
Sasha Wass, the lead prosecutor, called Adoboli arrogant, reckless and an “accomplished liar” who “played God” with the bank’s money to boost his ego and wallet through larger bonuses.
The case also shined a light on UBS (UBSN)’s oversight of its trading floor. The bank, which had a team of about eight lawyers and public-relations representatives at the trial, is being investigated by U.K. and Swiss regulators for failing to detect the trades over three years.
“If there’s one thing that we learned in this case, it’s that the investment-banking industry needs to take a good, long, hard look at itself,” Adoboli’s lawyer, Charles Sherrard told the judge before sentencing yesterday.
Eleven UBS employees resigned or were fired in the wake of the trading loss. That includes former Chief Executive Officer Oswald Gruebel and the co-heads of global equities, Yassine Bouhara and Francois Gouws. Chief Financial Officer Tom Naratil testified during the trial that while 550 job cuts last year weren’t directly linked to Adoboli, “a loss of $2.3 billion would affect staffing levels.”
Under a reorganization announced last month, UBS will cut 10,000 jobs, or about 15 percent of its workforce, over three years and shrink its investment bank.
The alleged meeting at the bar was central to Adoboli’s defense that others knew of his actions and he wasn’t dishonest. Everything he did was intended to make money for the bank, he told the jury.
Adoboli, the son of a United Nations official, broke down several times during his eight days of testimony when asked to talk about people close to him or his former co-workers, and while others were giving evidence.
Hughes and the junior traders, Simon Taylor and Christophe Bertrand, denied the meeting at All Bar One ever took place when they testified. Exit logs from the bank show the four left within minutes of each other that September day. Adoboli said his lawyers asked for surveillance footage from the entrance of UBS, and were told by the bank that it was no longer available.
In text messages with his girlfriend that evening, he told her that he was “upset because the boys have sold me down the river.”
Adoboli confessed to the losses, which he estimated were around $1.8 billion, in a September 2011 e-mail to a UBS accountant who had questioned his trades. Adoboli testified that he sent the e-mail from his apartment, after telling Hughes he was going to confess and say no one else knew what he was doing.
“He said, ‘I’m really sorry Kwek, but tomorrow we’re going to disown you,’” Adoboli told the court during the trial.
During his testimony, Hughes painted different pictures of Adoboli, at one point saying colleagues considered Adoboli a lunatic and at others saying he “loved” the former trader.
“I honestly loved him, and to a certain extent I still do,” said Hughes, who, like Adoboli, at times cried on the witness stand. In an e-mail, Hughes told Adoboli “I love you and loathe you in equal measure.”
Adoboli wrote in the e-mail to the UBS accountant that the ETF trades “are not trades that I have done with a counterparty as I previously described,” but were made to suppress the losses he made through off-book trades.
He said while trades initially made money, the losses mounted as the euro-zone crisis escalated.
“Initially I had been short futures through June and those lost money when the first Greek confidence vote went through in mid-June,” he said. “Although I had a couple opportunities to unwind the long trade for a negligible loss, I did not move quickly enough.”
Adoboli testified that he wouldn’t have been prosecuted if he hadn’t changed his market outlook to positive during the summer of 2011 under pressure from senior managers. His view through July 1 was that the market was going to crash.
He said that when he changed his position under extreme pressure, he “broke” and lost control of his trading. He also felt increasing pressure from senior management to increase profits and to push risk limits.
He said he had multiple conversations with Bouhara, then the co-head of UBS’s global equities business. At one point in April 2011, Bouhara asked Adoboli if he was going to double their profits.
“He said you don’t know you are pushing the boundaries hard enough until you get a slap on the wrist,” Adoboli said. “We pushed the boundaries. We found that boundary. We found the edge. We fell off. I got arrested.”
Ruwan Weerasekera, chief operating officer of securities at UBS’s investment bank, testified during the trial 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 by Aug. 8, after he made unhedged bets that the market would go up.
Adoboli switched his position again from Aug. 11 until Sept. 13, just before the bank discovered discrepancies, this time booking ETFs instead of futures with the bet the market would go down.
“Adoboli’s gambling was so large and so unchecked he could have quite easily approached and even exceeded the limits of the bank’s resources,” Wass, the lead prosecutor, said.
After sending the confession e-mail on Sept. 14, Adoboli returned to the bank and was escorted to meeting room 73. For 11 hours he explained his positions to UBS managers so they could unwind the trades. He said he risked $5 billion on Standard & Poor’s 500 (SPX) futures and a further $3.75 billion in the German futures market.
2:30 a.m. Call
At 2:30 a.m., the bank called the City of London Police.
“Access to Adoboli wasn’t immediate, as the bank had not finished questioning him,” Detective Perry Stokes said in a briefing with reporters. “When Adoboli was met by police he appeared tired and drained.”
Adoboli spent the next nine months at Wandsworth prison in southwest London until he was granted bail in June. He told jurors that he was loyal to UBS “until they called the police.”
Adoboli moved around for much of his early life, from Ghana to Jerusalem and Damascus, before his family sent him to a Quaker boarding school in rural England when he was 12. He attended Nottingham University, where he was hired by UBS as an intern.
Working full-time after graduation, Adoboli said his UBS colleagues replaced his own family. By the summer of 2007, he and Hughes, then in their mid-20s, with 30 months of trading experience between them, were running a $50 billion trading book at the ETF desk.
Adoboli said the desk was struggling to meet its rising costs of running their trading book, which he put at $40 million a year. In late 2008, after realizing he was going to lose money on a trade, he booked a so-called holding trade for the first time to take the losing transaction off his desk’s book to hide the risk while he kept it open in the hopes that the loss would be reversed.
By 2009, he had built up a $6 million off-book gain in the “umbrella.” The account was intended to cover future costs of running the desk and the pot of money increased to $40 million in 2010.
The jurors cleared Adoboli of the accounting charges linked to the umbrella account.
“To be guilty of false accounting the jury had to be satisfied that he was doing it for personal gain,” said Mark Spragg, a lawyer at Keystone Law. “They could have taken the position that he was reporting up the line to people that did know.”
Adoboli said no one knew what he was doing until 2010, when he told Taylor, the junior trader who he considered his “right- hand man.” Taylor was growing increasingly concerned with the rising costs of operating the ETF desk and Hughes’s “slot- machine trading,” where he would pick un-researched investments at random to invest in for proprietary trading.
“I said to him, no need to worry, we have an off-book profit to offset the costs,” Adoboli said.
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