[ by Melanie Gretchen ]

Former UBS trader Kweku Adoboli was a star at the Swiss bank.  Unbeknownst to his employer, his success was rooted in unhedged trades exposing the bank to huge risks, eventually costing the bank $2.3 billion in losses – the largest unauthorized trading loss in British history.

What happened?

Mr. Adoboli grew up overseas;  his father was a UN diplomat who took his family to Syria and Israel.  The younger Adoboli attended a Quaker boarding school in Yorkshire, where he was head boy, and at the University of Nottingham.  At his trial, Mr. Adoboli, 32, was surrounded by friends and his father, John.  Character references from a former girlfriend and his ex-headmaster referred to his honesty, generosity and dependability.

At UBS, Mr. Adoboli worked in the back office.  In 2006, he became a trader with the exchange traded funds desk, where he was identified as a future leader by UBS’s Ascent program.  As his profile rose, so did his pay, from £95,000 ($151,000) in 2007 to £360,000 ($574,000) in 2010.  During his trial, he was described as an "accomplished salesman" who was accessible; he "could explain ETFs to my nan and she’d get it," Rob Pienaar of UBS prime brokerage.  For his part, Mr. Adoboli described the bank as his "family." 

Since then, prosecutors have since characterized his 3-year scheme: a "master fraudster," Mr. Adoboli used payday loans and accumulated spread-betting losses of £123,000 British ($195,515) in his personal life;  with the bank's money, he "fraudulently gambled," via "carefully crafted, deliberate, detailed and sophisticated lies" until he confessed in an e-mail to UBS last September.

Apparently, expectations exceeded his performance.

Here's what happened:

Phase 1: The "umbrella" scheme

• Mr. Adoboli, then 27, and co-worker John Hughes, 27, were unable to manage a $50 billion portfolio
• When he made a $400,000 loss on a trade in October 2008, he opted to hide the loss rather than tell his manager, which evolved into a scheme, whereby profits were held off the books and earmarked to offset rising costs on the ETF desk by being drip-fed back into the desk’s accounts.
• By 2009 and 2010, his $40 million profit encouraged him to do bigger trades, for which he concealed the true risk of his real trades, with fictitious hedging trades and then fake cash-only trades booked to conceal the off-book profits

In his defense, Mr. Adoboli testified that he had the support of the firm, including:

• co-workers on the ETF desk, 2 line managers and others in the back office who knew of his activities and turned a blind eye to his breaching of risk limits as long as he was making profits.
• Yassine Bouhara, who had been recruited from Deutsche Bank to be UBS’s co-head of global equities, and who on 4/11/11 visited the ETF desk, told them they would not know that they had pushed the trading boundaries hard enough until they got a slap on the back of the wrist

Phase 2: Loss #2. Amid the eurozone debt crisis, Mr. Adoboli failed to find his way back to profitability:

• Between June 23 and June 30 of 2011, Mr. Adoboli created a short position betting the markets would fall, and masked his unhedged real trades with a fictitious long position.  At the time, UBS believed its reported risk on June 24 was $53 million, which was actually $147 million.
• On July 1, Mr. Adoboli yielded to senior managers and traders, who pressured him to take a long trading position, one day before his trades would have been highly profitable
• In the market sell-off, his losses accelerated in late July, peaking at $11.8 billion on August 8, when the bank believed its risk exposure was $2.3 million

Phase 3: Discovery. After the call in 2011, Adoboli walked out of the bank’s headquarters and wrote an e-mail confessing he had lost the bank huge sums of money.  However, the true amount eluded him until August 11, when he took another short position between 8/11/11 and 9/13/11 using ETFs with extended settlement dates.  William Steward, a back-office accountant at UBS, had been alerted by a "break" of $3.57 billion where the books did not balance.  Then, the risk exposure was about $7 billion.

What's next. The e-mail Mr. Adoboli sent on 9/14/11, confessing his losses and asserting that no one else was involved, led to 13 hours of interviews he faced with UBS and its lawyers, and his arrest on 9/15/12.  The measures to prevent future activity is sure to take much longer.  

For further details, go to [CNBC, 11/21/12].