The Adoboli trial will shine a light on controls and culture at UBS

Written by James Thomas on Wednesday September 19, 2012

It’s early days in the Kweku Adoboli trial, which started last week, but it looks as though the outcome (and its broader fallout on UBS and the banking sector) will hinge to a large extent on how much of a “rogue” Adoboli is.

The 32-year-old, who is charged with losing the bank $2.3bn through unauthorised trades between October 2008 and September 2011, has pleaded “not guilty” to two counts of false accounting and two counts of fraud by abuse of position. His defence looks likely to rest on the claim that his behaviour was not dishonest because it was undertaken with the knowledge and approval of his colleagues.

The prosecution, meanwhile, will point to his “bombshell email”, which he sent last September to a UBS accountant, in which he stated: “I will expect that questions will be asked as to why nobody else was aware of these trades. The reality is that I have always maintained that these were EFP trades to the members of my team... I take full responsibility for my actions.”

Taking this line, Sasha Wass QC, acting for the CPS, suggested last week: “The bank ought not to be unduly criticised for trusting [Adoboli]. They respected him and he abused their trust to cheat them for his own eventual gain." She added that: "There is no system in the world that can stop a dishonest person in a position of trust abusing that trust". Doubtless UBS would be happy for the jury to see it the same way, but it seems certain that the broader issues of controls and culture at the bank will play a role in the outcome of the case.

Indeed, the defence have already begun to construct a case to suggest that Adoboli’s false accounting was an open secret amongst his colleagues. Earlier this week they presented evidence of instant messages between Adoboli and John Hughes, a former colleague on the “Delta One” ETF desk at UBS, in which Mr Hughes referred to the “umbrella” fund that Adoboli was apparently using to hide his losses.

The defence has also drawn attention to the bank’s culture, which, they argue, was excessively revenue driven. They point to an occasion on which Adoboli exceeded the bank’s internal trading limit of $100m by 100%, and suggest that, because he had made a profit, he only received a warning from management.

Next is the matter of Adoboli’s personal spread-betting, through which he lost a reported £123,000, meaning that prior to his arrest he was apparently overdrawn and relying on payday loans to support himself. UBS had banned the practice of spread-betting among its traders in May 2011, but despite twice warning Adoboli over the matter the bank failed to follow up with disciplinary action.

In many ways UBS is in a “no win” situation here. On the one hand, if it is shown that Adoboli acted entirely alone, the implication will be that the bank’s systems and controls were severely lacking if a single individual was able to bypass them for such an extended period of time to such devastating effect. On the other hand, if it is shown that others were complicit in, or turned a blind eye to, Adoboli’s behaviour, serious questions must be asked of the culture of the organization.

While a single man stands charged for the UBS scandal, effectively the controls and culture of UBS, and perhaps the banking sector more broadly, are also in the dock. Doubtless the industry will watch with interest as the trial continues to unfold.