The Faculty Lounge: Ella . . . Ella

November 02, 2012

Ella . . . Ella

As I mentioned in my prior post, I spoke on Monday about “rogue trading” at a seminar hosted by the Autorregulador del Mercado del Valores de Colombia in Bogotá, Colombia. Though this is a topic I’ve discussed before at risk management meetings and seminars, this was the first time that I’ve had sufficient information regarding the Kweku Adoboli case to include him as a part of my presentation. As I’ve discussed before, Adoboli is the alleged UBS rogue trader currently standing trial in the UK on criminal charges stemming from unauthorized trading that first came to light in September 2011.

I should say at the outset that there are still a lot of open questions concerning the Adoboli case. UBS has conducted (and, I believe, completed) an internal investigation and KPMG has an ongoing external investigation. UK (FSA) and Swiss (Finma) authorities also have initiated enforcement actions, which are still in progress. So most of what we know about the case comes from press reports regarding the trial testimony and evidence, including testimony from UBS employees and internal auditors regarding the UBS and KPMG investigations.

What we do know is that Adoboli was a trader on UBS’s four person ETF desk. According to Adoboli, he began off-books trading in 2008 using an account nicknamed “umbrella,” which he used as a slush fund to hide profits until he needed them to cover a loss on some later, rainier, day. As I’ll discuss in another post, such smoothing of profits and losses is a common element in other recent rogue trading cases, including Jerome Kerviel at Société Générale.

The umbrella account is the one element of the case that has finally convinced me of the possibility of an Adoboli made-for-television movie (note to networks: I’m willing to consult on the cheap in exchange for hobnobbing with movie stars . . . or just for free lodging). I think that we’re due for another rogue trading movie. Though Nick Leeson got a real (not TV) movie out of his ordeal -- starring Ewan McGregor, no less -- it was a real dud, which hasn’t prevented me from showing it in class about a dozen times.

But the umbrella account has, perhaps surprisingly and most definitely entertainingly, turned out to be an important element of Adoboli’s defense. Adoboli’s lawyer, Charles Sherrard argues that all three ETF desk traders, including Adoboli’s supervisor, John Hughes, knew about the umbrella account. Sherrard has introduced numerous email and chat communications referencing Adoboli’s “umbrella,” “Rhianna,” and “ella ella,” in an attempt to establish that Adoboli, far from being a rogue agent, was part of a collaborative scheme in which other bank employees (again, including his direct supervisor) acquiesced.

Even the UBS internal investigation concluded that “there is strong evidence of collusion at local desk level,” and that the “local supervisor was aware of Mr Adoboli’s propensity to smooth the profit and loss and take unacceptably high levels of net delta [risk]”. The traders who have testified (including Hughes) have mostly admitted their knowledge of the umbrella account, but claim to have misunderstood its purpose.