Meditations on Adoboli’s Conviction

Regulatory 03 Dec 2012

It was in some ways an odd split verdict, the one that emerged in stages on November 20. Adoboli, the fellow who lost £1.4 billion of UBS’ money working out of the Swiss bank’s  London office, was convicted of one count of fraud by a unanimous vote of a 10-person jury. Then, after receiving instructions from the trial judge that allowed them to overrule a single hold-out, they convicted Adoboli further by a 9-to-1 vote of another count of fraud.

But … they acquitted him of four counts of false accounting.

I’m hardly an expert on the pertinent laws, but ”false accounting” sounds like the sort of charge prosecutors include in a bill of indictment as a fallback, in the event they can’t prove the more serious charges. Jurors sometimes reach a compromise, finding someone guilty of the less onerous charges though acquitting him of fraud. Here the compromise, if that is what it was, went exactly the other way.

Some History

Fourteen months before, on September 14 2011, Adoboli had emailed an accountant in the back office, William Steward, a mea culpa. The first point to which he confesses in that email is precisely this: “the ETF trades that you see on the ledger are not trades that have been done with counterparty as I have previously described.”

The trades on the ledger aren’t the reality. That, to a layman, sounds a lot like what the phrase “false accounting” means.

One of the prosecuting attorneys said, as the trial opened, that when Steward received that email he “must have felt that he had been hit by a steam roller.”

Hmmm. That’s a familiar analogy. Where have I heard that before? Oh, I know! That’s a common description of certain forms that the pursuit of alpha takes. Its hunters are often said to be “picking up quarters in front of a steam roller” (or, in an alternative phrasing, in front of a bulldozer.)

Let us, in this context, expand on the analogy a bit. UBS was in the business of trying to pick up as many coins as it could. It employed people like Adoboli as, so to speak, its arms and fingers. It also employed people like Steward as eyes and legs – their job was to get the bank out of the way of the steam roller in time. In this case, Adoboli became the steam roller.

Not the Swiss Franc

There was some early speculation, when the size of Adoboli’s losses first came to light, that the actual steam roller was the devaluation of the Swiss Franc, a decision made only days before his admission. The Swiss National Bank had said on September 6 that it would not tolerate an exchange rate of fewer than 1.20 francs to the euro, and it has since successfully defended that level. Reuters at the time called this “some of the strongest language from a central bank in the modern era.”

But the hypothesis that this was behind Adoboli’s fall from grace proved false. There is no such neat a turning-point in this story. He had been piling up losses well before that devaluation, and other bank officials had gradually (too gradually of course) caught on, in ways that built the pressure leading to his confession. And, as his email to Steward also indicates, he hid them well, repeatedly extending the settlement dates of those ETFs that supposedly showed that his equity positions were properly hedged.

There is another policy-oriented context into which one might fit this story, without at all excusing Adoboli’s criminal behavior. Adoboli testified that over the summer of 2011 the management of UBS wanted him to switch his directional trading from bearish to bullish. Indeed, (on his story) chief executive Carsten Kengeter himself visited the ETF desk on July 12 – two months before Adoboli’s admissions to Steward – and had expressed the view that European equities would rally and that UBS wanted to be bullish. Adoboli said that he switched his own position from bearish to bullish in response to such pressure.

It was those subsequent bullish trades that led to the losses resulting in the only unanimous jury verdict of guilt in the trial.

This account is, so far as it goes, all too easy to believe. There are many in Europe (and this of course is not unique to that continent) who reflexively believe that the cure for the harm caused by a busted bubble is always … the generation of another bubble. Getting Europe’s equities to rise is, in their eyes, akin to the trick of flight that Peter Pan taught Wendy. Think happy thoughts.

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