Unfortunately, a busy travel schedule – including a lovely visit to Boulder -- over the last few days has kept me from blogging more about alleged UBS rogue trader Kweku Adoboli. Hopefully, I’ll have time to correct that this week.
New information emerged over the weekend that suggests numerous parallels to the 2008 Jérôme Kerviel rogue trading scandal at France’s Société Générale. This is not terribly surprising. As I detailed in connection with the Kerviel case (see the set of links below), most of these high-profile rogue-trading cases follow a fairly familiar pattern.
Despite initial speculation that the complexity of Adoboli’s trades inhibited detection by risk management personnel, this is rarely the case. As I discuss at length here, most of the high profile rogue trading cases initially blamed on the use of complex derivative or other products are actually more the product of basic risk management and compliance failure. In other words, rogue traders tend to Keep It Simple, Stupid – they enter fake trades or otherwise manipulate risk management systems, forge documents, lie when questioned about their unauthorized trading activity, and follow a number of other tried and true strategies to evade detection.
It looks as if the UBS case will be no different. UBS has now disclosed that the losses arose from trades in S&P 500, DAX, and EuroStoxx index futures, which Adoboli concealed through fictitious trades. This is very similar to the Kerviel scandal (which, in turn, bore many similarities to prior scandals.)
There are two other notable similarities between the Adoboli and Kerviel cases. First, both migrated from the back office, where they gained knowledge that later facilitated their illicit trading and cover up. Second, both were on the Delta1 desk, which has broader implications for financial reform issues, such as the Volcker rule.
I will be back later to discuss those implications in more detail. But, in short, rogues such as Adoboli and Kerviel aptly illustrate the thorny enforcement problems associated with attempts to distinguish prohibited proprietary trading activity from permitted client service and market making activity. These difficulties, according to GAO, impede even the study of proprietary trading at banking entities, which does not bode well, in my view, for Volcker rule implementation and enforcement.
Related Posts:
When $61bn Seemed Like Real Money
Denial: It Ain’t Just A River In Egypt
Kerviel’s Fake Trades: Genius Or Copy Cat?
Kerviel’s Fake Trades: The Anatomy of A Cover-Up
On Warning Signs II: Follow The Money
On Warning Signs: You Can’t Get There From Here
Kerviel Trial Opens to Fanfare
Société Générale: Back In The Saddle Again
Jérôme Kerviel to Société Générale: Stand By Your Man
Comments