Masters of Fraud Kweku AdoboliKweku Adoboli may not be a household name, but he orchestrated one of the worst frauds in the history of the financial industry. Adoboli started working in London for Swiss banking giant UBS in the mid-2000s. As a trader, he was considered a rising star. But starting in 2008, Adoboli essentially went rogue, eventually costing the Swiss-based investment bank roughly $2.3 billion in trading losses, the largest trading loss in British history.1

Maybe worse than the trading loss is the collateral damage for UBS and its various stakeholders. Following the earnings report that included Adoboli’s trading losses, UBS shares shed over $5 billion of market value for shareholders, which included thousands of pensioners whose own UBS stock.2 It was also a major factor in the Swiss-banks 2012 announcement to cut 10,000 jobs over the next few years. But the reputational damage done to UBS may never be quantified.

Adoboli’s Rise

Kweku Adoboli had an interesting path to of one of Europe’s premier investment banks. Adoboli, the son of a United Nations diplomat, grew up in the African nation of Ghana, eventually making his way to the financial powerhouse, London.3

Adoboli went on to become a star market maker on UBS’ Delta One equity trading desk.4 In the tradition of ‘paying dues’, Adoboli worked for two years in the operations department, known as the back office, despite impressive academic credentials including University of Nottingham and an internship under his belt. After his stint in operations, Adoboli was promoted to the front office, landing as a trader on the firms exchange traded funds desk.5 By the ripe old age of age 27, he was the most senior trader the desk with his direct supervisor, John Christopher Hughes.

The Fraud

The trouble started for Adoboli in 2008, when he tried to cover up a relatively small, $400,000 trading loss. The loss was considered small because he was running a $50 billion book at the time.6 Adoboli was able to mask the losses by creating what’s called an “umbrella”, which place the losses amid a mixture of profitable, yet unrealized, trades within the desk.7 Allegedly unknown to his supervisors, Adoboli would enter a mixture of real and bogus trades using a series of “shadow accounts” he was able to create with his back office system knowledge. He also utilized what he called “off-book trades”.8

The trouble started for Adoboli in 2008, when he tried to cover up a relatively small, $400,000 trading loss. The loss was considered small because he was running a $50 billion book at the time.6

Once, Adoboli was so brazen, he actually created a fake counterparty to conceal one of his larger losses, a $1 billion futures trade.9 Again, his knowledge of how to manipulate the back office operations enabled this. The entire scam was quite elaborate. But it’s what Adoboli did next that made his bad decisions turn catastrophic.

The classic mistake of every desperate gambler, Adoboli began to “double down” on the losses. This strategy can help if you get a snap-back rally because you only have to recover halfway to get back to even. But conversely, since the position is now twice as large, if the trade continues against you the losses compound much quicker. And this is exactly what happened- Adoboli’s $1 billion loss on the futures trade soon ballooned to an incredible $12 billion paper loss!10

With some luck, the losses subsided, somewhat, and the trade eventually ended up with a loss over $2 billion (significantly better than a $12 billion).

Making Ends Meet

Adoboli’s astronomical trading losses for the firm mirrored similar problems in his personal financial condition. This is one of the most interesting aspects of this dark story. Adoboli was earning about $360,000 pounds per year in 2010 while living in a £1,000 per week luxury, 3000 square foot apartment in London.11 He was also known to like to travel and party, with the neighbors repeatedly complaining about late night raves in his apartment.12 But this soon changed.

Adoboli also lost roughly $123,000 of personal money engaging in spread trading through a couple online derivatives trading platforms.13 His cash flow problems had gotten so bad that Adoboli actually turned to payday lenders to get by. Adoboli reportedly took out 8 payday loans with lender names such as Wonga and ‘Pounds to Pockets’.14

Many U.K. payday lenders charge interest rates of at least 1000% on an annual basis, typically charging 25% per month.15 Some consider them predatory and there has been recent backlash against spokespeople for these companies, including Montel Williams.16 As we reported in a prior article, the reputation of many cash advance and payday lenders has gotten so bad that Google will no longer display their advertisements.

Amazingly, the fraud went on for years, undetected by his supervisor, John Christopher Hughes, although the Financial Conduct Authority later stated that Hughes should have known and been a whistleblower on Adoboli’s actions. In fact, during the ensuing trial, Adoboli did indicate that his bosses were aware of the losses. But his attempt to throw his superiors under the bus in exchange for a lesser sentence didn’t work.

Adoboli’s Fall: The Fraud Confession

Adoboli finally realized the gig was up when he sent an email to his boss saying “I take full responsibility for my actions and the sh%$storm that is about to ensue.”17 He had foreshadowed that something was amiss when he updated his Facebook page’s profile confessing, ‘I Need a Miracle’.18

As a result of his actions, Adoboli was convicted on two counts of fraud in November 2012.19 Consequently, he was sentenced to seven years in a U.K. prison, although he ended up serving less than half the time.20 Adoboli began serving his sentence during the trial, and spent nine months in jail. Upon conviction, he was transferred an island prison where he spent and ended with a stint in a lower security, immigration detention center.21

Similarities to the Original Rogue Trader

There are some interesting similarities between Adoboli and Nick Leeson, whose rogue trading took down Britain’s Barings Bank in the 1980s. Like Leeson, Adoboli cut his teeth working in the back office of a European bank, and then was promoted to trader. Leeson started working at a Barclay’s office in Indonesia and proved his mettle straightening out a back office mess. He was then promoted to trader in Singapore where he doubled as the operations department.

Similarly, Adoboli knew the ins and outs of the operations department and used the knowledge to cover his losing trades, including the creation of a ‘shadow account” to hide his trades. This is reminiscent of the infamous 88888 error account of Leeson.

Both Leeson and Adoboli’s trading losses were originally quite manageable, Adoboli, suffering the relatively ‘small’ loss of $400,000. Leeson was the same way, still contending that the first loss he covered up was a small £20,000 loss for a colleague.22

The final similarity is the way the frauds were eventually uncovered. Adoboli informed his supervisors of the fraud through email. In Leeson’s case, the technology of the time was the fax machine, which is how he revealed and apologized for his transgressions. It’s unclear how long either fraud would have lasted.

Time will tell whether the similarities between Leeson and Adoboli end there. Leeson, barred from the industry, has carved out a niche in the lucrative after-dinner speech circuit, sometimes bringing in thousands of dollars per speech. Adoboli is similarly banned from working in finance in London so his options are limited.

A Final Word

It has been a trying period for all the European banks since the financial crisis of 2008. Unlike American banks, none of their European counterparts have rebounded to the prior highs they enjoyed in 2006-2007. And it should be noted that UBS stock is still down approximately 12% from where it ended 2012. This is partly due to the rogue trades but also a plethora of other macro-economic conditions like the European debt crisis of 2012 and Brexit.

Just when we think that these types of frauds can’t possibly occur in the aftermath of other rogue traders such as Nick Leeson and Jerome Kerviel, they continue. JP Morgan’s Bruno Iksil, a.k.a. the London Whale shocked the financial world after Adoboli’s, posting a $6.2 billion loss.23 As long as this continues, compliance departments, staffed with internal auditors, will continue to hire and remain fully staffed in the hopes of thwarting any future rogue traders.

 

1,5https://www.theguardian.com/business/2014/may/01/financial-conduct-authority-bans-ubs-rogue-trader-kweku-adoboli
2,4,18http://www.independent.ie/world-news/europe/market-maker-arrested-after-13bn-alleged-fraud-26772372.html
3https://en.wikipedia.org/wiki/Kweku_Adoboli
6,7,9,10,17http://www.telegraph.co.uk/finance/financial-crime/9691699/Kweku-Adoboli-was-the-author-of-his-own-downfall.html
11,12,13,14http://www.telegraph.co.uk/finance/financial-crime/9690943/Wealthy-rogue-trader-took-out-payday-loans.html
15https://en.wikipedia.org/wiki/Payday_loans_in_the_United_Kingdom
16http://time.com/money/3726637/montel-williams-payday-loans-twitter/
19,20,21http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11697031/UBS-rogue-trader-Kweku-Adoboli-released-from-prison.html
22https://en.wikipedia.org/wiki/Nick_Leeson
23http://www.bloomberg.com/news/articles/2015-05-21/jpmorgan-directors-don-t-have-to-face-london-whale-loss-claims

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Masters of Fraud: Kweku Adoboli
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Masters of Fraud: Kweku Adoboli
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Kweku Adoboli may not be a household name, but he orchestrated one of the worst frauds in the history of the financial industry.
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