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Kweku Adoboli, a 31-year old trader in UBS’s London-based exchange traded funds business, was arrested on Thursday morning in connection with a $2bn loss due to unauthorised trading at the Swiss group’s investment bank.
UBS declined to comment, other than saying the loss had been caused by “a trader” and the matter was under investigation.
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The bank’s board is to meet later on Thursday to discuss the situation.
In a public statement, UBS warned that the discovery – potentially the third largest trading scandal at a bank after the €4.9bn ($6.8bn) hit caused to Société Générale by Jérôme Kerviel in 2008 and a $2.6bn loss at Sumitomo Corporation in 1996 – could prompt it to report an overall loss for the group when third-quarter figures are revealed in October.
“No client positions were affected,” it said.
Officials at UBS discovered the trades at about mid-afternoon on Wednesday, according to people close to the matter. Mr Adoboli’s boss, John Hughes, has already resigned.
Both Mr Hughes and Mr Adoboli were directors in UBS’ Global Synthetic Equities Trading team and engaged in a form of complex derivative trading activity – known as ‘Delta One’ – identical to that carried out by Mr Kerviel.
City of London police arrested Mr Adoboli at 3.30 on Thursday morning and took him to Bishopsgate police station under suspicion of fraud by abuse of position.
“Around 1am the City of London police was contacted by UBS about an allegation of fraud by one of their employees,” commander Ian Dyson said late on Thursday afternoon. The individual arrested would remain in custody while detectives investigated the matter, Mr Dyson said.
Mr Adoboli’s last update to his Facebook page, dated September 6, simply reads “need a miracle”. Since news of his arrest broke, friends of Mr Adoboli have flooded his profile with messages of support.
News of the loss is likely to have wide-ranging repercussions for UBS, and will spur critics of investment banks’ lucrative, but sometimes risky trading activities.
Both Finma, the Swiss banking regulator, and the UK’s FSA have already been in contact with UBS. A spokesperson for Finma said: “From the scale of this case, you can be sure that it’s the biggest we’ve ever seen for a Swiss bank.”
The UK’s Serious Fraud Office is also considering whether to open an investigation. The SFO is understood to be particularly interested in what role ETFs may have played in a potential fraud.
Internally, UBS’ management have been at pains to play down the damage the losses have caused.
In a letter to staff, Oswald Grübel, chief executive, said this latest setback to UBS – which lost more than €50bn in the US subprime crisis – would not affect the bank’s “fundamental strength”.
“We understand that you have already had to contend with unfavourable, volatile markets for some time now,” Mr Grübel wrote. “While the news is distressing, it will not change the fundamental strength of our firm.”
Analysts had forecast net profits of about SFr1.3bn ($1.5bn) for the quarter, but are now revising their outlook. UBS shares, down nearly 85 per cent in the last five years, fell 10.8 per cent to close at SFr9.75 in Zurich.
Analysts at Goldman Sachs said the trading losses were a reason to “sharply scale back” investment banking at UBS.
“The key area of damage in our view is reputational and extends beyond the investment bank, into UBS’s private banking business,” the Wall Street bank said in a note to clients.
UBS’ investment banking division has only just begun to recover from near-disastrous losses during the financial crisis.
Some stability has returned at the unit under Carsten Kengeter, the former Goldman Sachs executive who joined in 2009.
The bank’s last annual report said that “increased risk taking” had been authorised since 2010 “for incremental trading activity.”
However, some Swiss politicians, still angered by the state bail-out of UBS in late 2008, are likely to take the trading scandal as “proof” that the bank should focus exclusively on its less risky private banking and fund management activities.
Uncomfortably for UBS, news of the losses come on a day when the lower house of the Swiss parliament is set to debate amendments to banking laws to reduce the risks from groups viewed as “too big to fail”.
The news will also prompt doubts about Mr Grübel, the veteran Credit Suisse chief executive who came out of retirement in February 2009 to head UBS.
Mr Grübel joined UBS with a simple message for the bank’s traders: “Don’t lose any money” – a dictum that was modified last year amid rebounding markets to “still don’t lose any money, but do more.”
As a “hands on” manager and a former trader himself with an acknowledged “nose” for the markets, Mr Grübel will find Thursday’s revelation particularly unwelcome, say peers.
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