Adoboli Exposed UBS to $12 Billion Risk, UBS Official Says

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Former UBS Trader Kweku Adoboli
Former UBS trader Kweku Adoboli has pleaded not guilty and his lawyers have sought to show the jury that others knew about the account. Photographer: Chris Ratcliffe/Bloomberg

Kweku Adoboli booked tens of thousands of real and fake trades during the summer of 2011 that exposed UBS AG to losses that may have escalated to $12 billion within weeks, a bank executive told a London court.

Adoboli booked fake futures and ETF trades to make it appear as if he had hedged the risk of his real transactions that far exceeded his limits, Ruwan Weerasekera, chief operating officer of securities at UBS’s investment bank, testified today. The potential loss was about $1.5 billion in late June 2011, and soared to $12 billion by early August, he said.

“Adoboli created the view that the actual trades were hedged trades by booking fictitious trades which offset the real position,” said Weerasekera, who testified that as many as half of Adoboli’s transactions were fabricated.

Adoboli is on trial for fraud and false accounting for allegedly causing a $2.3 billion trading loss at Zurich-based UBS. Prosecutors say he created an internal account while working on the bank’s exchange-traded funds desk in London where he parked trading profits to cover future losses. Adoboli, 32, has pleaded not guilty and his lawyers have sought to show the jury that others knew about the secret fund.

Short Position

During the week from June 23 to June 30, 2011, Adoboli took a short position and booked fictitious futures hedges that the market would go up. During that time, the risk to UBS was nearly $1.5 billion, Weerasekera said.

Adoboli switched his position July 1 and made investments that counted on the market going up, with the risk to the bank reaching $9.4 billion by Aug. 2 and $12 billion on Aug. 8.

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. He extended the settlement dates of the ETFs multiple times, Weerasekera said.

The risk hovered around $7 billion during the month before Adoboli’s arrest, he said.

Jurors passed notes to the judge asking whether Adoboli would have been fired if had been able to cover his trades and the markets weren’t as volatile as they were in 2011. In addition, they asked how the back office didn’t question the large amount of money generated by Adoboli’s desk.

Weerasekera said he believes the trades would have been discovered no matter the size of the losses.

Questions Stage

“It was getting to the stage where there were a large number of questions being asked of the desk and Mr. Adoboli in particular,” Weerasekera said.

The bank found three types of activities after Adoboli’s September 2011 arrest, Weerasekera said at the trial, which is in its fourth week. The former trader had real trades that risked the bank’s money, fictitious futures and ETF transactions and trades that were booked late or in other ways that didn’t comply with UBS protocols, he said.

Adoboli also booked fake ETF trades as a mechanism to hide the movement of cash to and from the so-called umbrella account, where others witnesses have said he hid trading profits to cover later losses.

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