Rogue trading has struck again, costing one of Europe's largest banks up to $2 billion and dealing a blow to its reputation.
London police said Thursday they had arrested 31-year-old Kweku Adoboli, a trader at UBS AG, in connection with alleged unauthorized trades that caused a loss of some $2 billion at the bank. UBS declined to confirm his name.
The bank said the trades would likely cause it to report a loss in the third quarter of 2011. "The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of $2 billion," the bank said in a statement just before the stock market opened.
"It is possible that this could lead UBS to report a loss for the third quarter of 2011. No client positions were affected," it added.
Worse, it raised concerns among investors about the bank's controls and risk management. Shares of UBS tumbled in European trading.
"No rogue trader works in a vacuum, and UBS's management must have taken its eye off the ball to allow a trader to operate on this scale without sufficient supervision and without the systems to monitor his trades," Simon Morris, a partner at UK law firm CMS Cameron McKenna, told Reuters.
"They, and the shareholders, must now pay the bill for this laxness."
The Financial Times said Adoboli was a trader in the bank's exchange traded funds business in London. The newspaper also reported that Adoboli's boss, John Hughes, may have resigned. There was no confirmation of that and a spokesman for the bank told the FT: "For the time being, we have nothing to add."
The newspaper said Adoboli and Hughes were directors in UBS's Global Synthetic Equities trading desk.
Adoboli's profile on the professional networking site LinkedIn showed he spent the past five years working at UBS's European Equity Trading division after three years as a trade support analyst for the bank, the Associated Press reported. He graduated from England's University of Nottingham in 2003, where he studied computer science and management.
A public records search for Adoboli showed that he lives just off of London's Brick Lane, a busy street of curry houses, bars and vintage fashion shops only a few blocks from UBS's U.K. headquarters, which was cordoned off Thursday.
Reuters said his 1,000 pound ($1,600) a month apartment was once a Jewish soup kitchen. The news agency said a man who identified himself as Adoboli's landlord described him as well-dressed and a good tenant, although he was behind on his rent a couple of times.
"He lived here for about 2-1/2 years. He was a very, very nice guy. I have not got a bad word to say about him. He was not the tidiest person but he was a good tenant," Reuters said Philip Octave told reporters gathered outside the apartment in London. "He was very well spoken, his references all passed and he dressed smartly."
Tax evasion case
Peter Thorne, a London-based equities analyst at Helvea, said the loss was financially manageable for UBS, Switzerland's biggest bank.
But he said it was a blow to the reputation of UBS and its management, which oversaw heavy subprime losses during the financial crisis and an embarrassing U.S. tax evasion case in recent years.
"It is amazing that this is still possible," added ZKB trading analyst Claude Zehnder. "They obviously have a problem with risk management. Even when the amount isn't so high it is once more a loss of confidence that casts UBS in a poor light."
"With this they are losing a lot of credit that they had regained with effort," he said.
UBS had started to see client confidence return this year after it had to be rescued by the Swiss state in 2008 following massive losses on toxic assets held by its investment bank.
UBS announced last month it is to ax 3,500 jobs to shave $2.3 billion off annual costs as it joins rival investment banks in reversing the post-crisis hiring binge and preparing for a tough few years.
Investment banks worldwide have been hit by slow trading due to the debt problems in the euro zone and United States, as well as regulations aimed at forcing banks to hold more capital to protect them from future shocks after the 2008 global financial crisis.
UBS expects to book a restructuring charge due to the job cuts of some 550 million francs, and around 450 million francs of this will be booked in the second half of the year, with the majority recognized in the third quarter.
UBS isn't the first to be hit by a massive loss allegedly caused by a single rogue trader.
Societe Generale, France's second-largest bank, stunned investors in 2008 when it revealed that one of its staff had lost the bank €4.9 billion ($6.7 billion) through a complex scheme of unauthorized trades.
The trader, Jerome Kerviel, was convicted in October 2010 on charges of forgery, breach of trust and unauthorized computer use for covering up bets worth nearly €50 billion between late 2007 and early 2008. He was also banned for life from working in the financial industry and ordered to pay back the the vast amount he had caused his employer to lose.
His fraud eclipsed that of previous so-called "rogue traders."
One of the most infamous was Nick Leeson, a British trader working for Barings Bank in Singapore.
He made unauthorized futures trades that lost more than $1 billion and led to the vulnerable bank's collapse in 1995.
Leeson served three-and-a-half years of a six-and-a-half year sentence in Singapore.