One of the photos in the gallery of memorable “rogue traders” of recent years is that of a man who has just walked out of prison a free man, after serving roughly half of his seven-year sentence. I personally extend my congratulations to him as he rejoins the world outside: and I thank him for this excuse to travel Memory Lane looking for lessons.
As of mid-June, Kweku Adoboli, the son of a Ghanaian diplomat, and the man who lost $2.3bn at UBS through unauthorized trading, no longer resides at Maidstone prison in Kent, England.
Adoboli was the infamous UBS “Delta One” trader. In the days after his losses came to light in September 2011, it was unsurprisingly the amount of the red ink that drew public attention, not the strategic decisions through which the losses occurred. But those are worth some attention in their own right in our own day, as the long stand-off between Syriza and the Triad [sorry, the Troika] finally seems to be coming to a head at the expense of Greek bank depositors.
Verdict and Sentence
Aficionados of rouge-trader scandals may remember the odd split verdict that led to Adoboli’s sentence. A 10-person jury in London voted unanimously to convict him of one count of fraud. Then after receiving instructions from the trial judge that allowed 9 members of the panel to overrule a single hold-out, they voted 9-1 to convict him of a second count, also of fraud. But they acquitted him of four counts of false accounting.
Mr. Justice Keith addressed Adoboli thus in his sentencing remarks: “You were arrogant enough to think that the bank’s rules for traders did not apply to you. And you denied that you were a rogue trader, claiming that at all times you were acting in the bank’s interests, while conveniently ignoring that the real characteristic of the rogue trader is that he ignores the rules designed to manage risk.”
The curious can read the full sentencing remarks here.
The Justice also addressed the question of why the jury acquitted Adoboli of certain of the charges against him. He said that jurors may not have been certain that the defendant booked the fictitious trades predominately to make a gain for himself. But that didn’t matter all that much to the sentence on the fraud counts.
“Your acquittal [on false accounting] does not necessarily mean that the jury must have thought that your booking of the fictitious trades might have been honest, and in any event the fictitious hedging trades you booked remain part of the picture of what your fraudulent trading involved.”
But again … what trades were those pursuant to what strategy?
Self-Serving, But …
According to Adoboli’s testimony at his trial, he began to lose money in a big way when he came under a “maelstrom of pressure” to reverse his positions from bearish to bullish. This switch led to “an increasing number of breaks, more frantic trading activity, [a] less controlled decision making process” and the final blow-up.
Yes, his testimony has to be considered self-serving. Still: suppose it to contain even a reasonable sized germ of truth. It suggests that this was not the case of a trader expected to be somewhere near market neutral, who disobeyed those directives and went directional. It was the case of a trader who was directional in one direction, and who was urged by superiors at the bank to trade directionally in the other.
I mention this not to exonerate Adoboli, but because it contributes to a clear eyed look forward. In the present climate, with the Republic of Greece closing down its banking industry and with much of Eurozone elite opinion committed to a view of that zone that excludes even the possibility of orderly departures: might there not be a recurrence? Even now, some trader wisely positioned to profit for himself and his institution from the failure of Greek banks may be facing pressures to turn that around, to put on a bullish happy face and trade as if the worst is over.
Which could turn out to be a very idea if, as seems likely, the worst isn’t.