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.