By Gareth Vaughan
Extraordinary situations where a "rogue trader" is able to cost a bank billions of dollars tend to come about because the trader at the centre of the scandal is able to control more than one step of the dealing process and is probably an outwardly confident person and big earner who is able to placate colleagues, says KPMG audit partner John Kensington.
Kensington, who oversees KPMG's Financial Institutions Performance Survey, said these factors would've been in play with trader Kweku Adoboli who was arrested in London last week after losing UBS US$2.3 billion. He said the same factors were at play here in New Zealand when former ASB banker Stephen Versalko was able to steal NZ$18 million from 30 ASB clients over a nine year period.
Kensington said such fraud through abuse of a person's position required the person to be able control more than one of dealing, confirmation of deals, accounting and recording and settlement of deals.
"That's always it when you get to the bottom of the issue," Kensington said.
On top of this the "rogue" generally has a confident demeanour.
"The dealer is very confident, very highly paid, and drives earnings. Some of the other people (colleagues) are less strong minded and less confident and although they're supposed to check on this guy, he says 'look it's just a loss. I've got another deal that can reverse the loss, you ride with me.' In dealers you have very bright, smart, technical people. Some of the people in the other roles perhaps aren't so confident and are perhaps newer."
Adoboli worked on UBS's Delta One desk, which handles trades for clients in areas such as speculating or hedging the performance of a basket of securities. It also takes risks with the bank's own money in arranging trades. It was the same kind of desk as that worked by Jerome Kerviel, who was behind a 4.9 billion euro loss at France's Societe Generale in 2008.
In a brief initial press release UBS acknowledged the rogue trader loss, without naming Adoboli.
UBS has discovered a loss due to unauthorized trading by a trader in its Investment Bank. The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of USD 2 billion. It is possible that this could lead UBS to report a loss for the third quarter of 2011. No client positions were affected.
Then over the weekend UBS came out with further detail.
On September 15, 2011 UBS announced that it had discovered unauthorized trading in its Investment Bank. This trading was conducted by a trader in its Global Synthetic Equity business in London. The trader in question has been charged by UK authorities with fraud by abuse of position.
Before making a further announcement, we needed to be certain that we understood the positions that were booked and that we knew the amount of our resulting loss. We have now covered the risk resulting from the unauthorized trading, and the equities business is again operating normally within its previously defined risk limits. The loss arising from this matter is USD 2.3 billion.
As previously stated, no client positions were affected. The loss resulted from unauthorized speculative trading in various S&P 500, DAX, and EuroStoxx index futures over the last three months. The positions taken were within the normal business flow of a large global equity trading house as part of a properly hedged portfolio.
However, the true magnitude of the risk exposure was distorted because the positions had been offset in our systems with fictitious, forward-settling, cash ETF positions, allegedly executed by the trader. These fictitious trades concealed the fact that the index futures trades violated UBS's risk limits. Following inquiries directed to him by UBS control functions that were reviewing his positions, the trader revealed his unauthorized activity on September 14, 2011.
UBS's Board of Directors has set up a special committee to conduct an independent investigation of the unauthorized trading activities and their relation to the control environment. The committee will be chaired by David Sidwell, the Senior Independent Director, and will report to the Board of Directors. The other members of the committee are Ann Godbehere and Joseph Yam.
Could it happen here?
News of such a big loss at a bank overseas is likely to lead to local banks asking whether something similar could happen to them, the sort of horror story that's among a bank management's biggest fears.
At ASB, Versalko ran a classic Ponzi scheme which he was able to hide from ASB's systems. He was only found out after a client saw a documentary about New York Ponzi schemester Bernard Madoff and got curious and worried. The client talked to another ASB banker and the fraud was quickly identified. Versalko used the money to buy luxury properties and a portfolio of investment properties. He also spent NZ$3.4 million on two prostitutes, although NZ$1.2 million of that was extortion from one of the prostitutes. He used new money invested to pay the interest on previous money invested.
After a Serious Fraud Office investigation, Versalko was convicted of fraud and sentenced to six years in prison in March 2010.
Versalko was able to pull off most of the roles in the chain of roles, Kensington said. He did deals, accepted money, banked it, sent letters on ASB letterhead, and convinced concerned investors to bring any queries to him because he could deal with them promptly.
"Then (he) got caught out when a query went back to someone else," said Kensington.
Of Versalko, ASB said only a very small number of customers were affected and all were reimbursed. It apologised to the affected customers, and said it had "introduced additional processes and practices to further strengthen our security and protect our customers so that this situation does not happen again."
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