Almost every person with deep knowledge or interest in finance has heard about the great story of Nick Leeson, the first rogue trader who had been put into light after unauthorized derivative trading in the mid-nineties. Although many cheaters then learned the lesson that fraud is punishable, there have still been numerous (even more grand) cases of when one person can „make a difference” by distorting financial markets and accumulating huge losses, regardless of whether this is done in personal interest or in favour of the bank. This week’s case with UBS proves that „rogue-traderism” is still alive, and traders an exploit loopholes even in times when everything is tightly regulated. We present a short recap of what happened and the potential causes for such huge losses incurred in such a short period of time.
A 31-year-old Ghanaian UBS employee Kweko Aduoboli working in the London office has been charged on charges of “abuse of power in the fraud and false accounting”, Stock Market Today reports. The case was immediately followed in the London Central court, where the guy burst in tears of his past commitments. In the first hearing he was brought accusations of fraud and false accounting. Even though the bank blamed a rogue
trader, some inside the firm knew enough to question his trading fairly early on in the alleged scheme, according to a person familiar with the situation. However, either for fear they might be accused themselves or for some other reason the disaster had not been prevented earlier.
UBS in its first press release on Sunday said that the loss resulted from “unauthorized speculative trading in various S&P 500, DAX, and EuroStoxx index futures over the last three months.” However, the UK authorities and invited auditor companies have strong reason to think that the fraudulent scheme dated back to 2008 and they are completely in contra to UBS’s views that the rogue trader acted alone, rather than being covered by his co-workers who in fact knew about his dealings.
Interestingly, the bank then announced in its statement that the positions taken by the trader “were within the normal business flow of a large global equity trading house as part of a properly hedged portfolio,” but the risk of them was masked because the trader also took out fictitious offsetting exchange-traded-funds positions. It all started with a small loss during a speculative action around two months, which Mr. Adoboli then tried to cover by entering a series of risky trading covering the positions with ETF futures.
As WSJ explains the situation that „to avoid showing naked „or revealing his hedging strategy with ETF futures”, or unhedged, trades that would have gotten him in trouble, he needed to show that his trades were offset with bets in the opposite direction of his real trades, according to people familiar with the matter. To do so, he recorded on the company”s books transactions that never took place, according to people familiar with the situation.”
Yet the market overturn in the past months severely undermined his situation which soon became uncontrollable. In other words, he faced the same fate as Nick Leeson who betted on the rise of NIKKEI 225 stocks, yet his plans were devastated after the earthquake in Japan bringing a total of 800 Million pound sterling losses to Barrings, one of the oldest British banks.
More interestingly, the guy did not just conform with the classical ”I’m sorry” note (as Nick Leeson did. UBS said the rogue trader, following inquiries from bank officials who were reviewing his positions, revealed his unauthorized activities Wednesday. Around midday that day, he went home and wrote an email from his personal account to his boss, John Hughes, admitting to the unauthorized trades and providing Mr. Hughes with details of what he had done, according to a person familiar with the events.
The issue is still investigated, so we can expect further updates coming on what really happened in this witty financial scheme. iFund will be the first to inform you so stay tuned for the news.
