Examining the Charges Against a UBS Trader
BY PETER J. HENNING
European Pressphoto AgencyKweku M. Adoboli, accused of being a rogue UBS trader, leaves a London court on Friday after being charged with fraud and false accounting.The $2.3 billion trading loss at UBS shows once again how a single employee who knows how to game internal accounting and reporting systems can wreak havoc at a financial firm. A trader at the Swiss bank, Kweku M. Adoboli, has been accused of making unauthorized trades and charged with fraud and false accounting. The charges outline a type of white-collar crime that does not involve theft so much as what looks like an effort to cover up bad decisions that ultimately spiraled out of control.
The false accounting charges assert that Mr. Adoboli’s conduct dated back to 2008, although most of his trades appear to have occurred over the past few months. The trades were not an aberration or one-time events, but appear to be part of a pattern intended to keep alive a fraud that probably began with trying to paper over some bad trades.
As with rogue traders like Jérôme Kerviel of Société Générale and Nicholas Leeson of Barings, the fraud at UBS appears to have started small and then took on a life of its own until being discovered.
Mr. Adoboli worked for the so-called Delta One desk at UBS, responsible for assisting clients dealing in derivatives based on exchange-traded funds. This was the same area in which Mr. Kerviel executed trades that led to nearly $7 billion in losses for Société Générale.
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Transactions of this type are considered to be fairly low risk for financial firms, but that can lead to less oversight of the traders involved because of the misperception that minimal risk equates to less potential for harmful conduct. Mr. Adoboli’s arrest demonstrates that risk can come from any part of a firm when accounting systems can be manipulated to cover up the real impact of financial transactions.
The fraud charge accuses Mr. Adoboli of violating Section 4 of Britain’s Fraud Act of 2006, which makes it a crime for a person who “dishonestly abuses” a position “in which he is expected to safeguard, or not to act against, the financial interests of another person” that results in a personal gain or causes a loss. Like Mr. Kerviel and Mr. Leesom, Mr. Adoboli has not been accused of embezzling money from UBS or directing transactions for his own account.
While UBS suffered significant losses, those who made money were traders who happened to be on the other side of the transactions, so there does not appear to be any basis for the bank to recover losses from them. The transactions were otherwise legitimate, so UBS cannot claim that the trades were fraudulent even if Mr. Adoboli was not authorized to conduct them.
So the accusation is not that Mr. Adoboli is a thief, but that he abused his authority through dishonest acts, a type of fraud that is similar to the “right of honest services” statute in the United States. The British law requires a link between the dishonesty of the defendant and some personal gain or that it caused a loss, while the American provision, 18 U.S.C. § 1346, only describes the violation as a type of “scheme or artifice to defraud.”
The Supreme Court significantly narrowed the scope of the honest services statue inSkilling v. United States, the case against Jeffrey K. Skilling, Enron’s former chief executive, by requiring prosecutors to show that the dishonest conduct involved receipt of a bribe or kickback. Under that analysis, Mr. Adoboli could not be charged with an honest services fraud violation if his conduct had occurred in the United States because there is no evidence that he received an illicit payment from anyone else. Indeed, his trading depended on avoiding detection, not that he was acting for the benefit of another person.
The Justice Department has complained about the Supreme Court’s restrictive interpretation of the honest services statue that does not allow it to pursue cases involving improper conflicts of interest. The British statute might be a worthwhile approach for Congress to consider if it wants to amend the honest services statue to mitigate the Skilling decision because linking dishonesty to financial gain or loss is a useful way to reach frauds that do not involve bribery or kickbacks but still cause significant harm.
So if Mr. Adoboli had been in the United States, he would have been charged under the federal bank fraud statue, not the honest services statue.
Another difference between the British and American fraud provisions is the potential sentence that Mr. Adoboli could receive if he were convicted. A violation of the Fraud Act is punishable by up to 10 years imprisonment, while the federal bank fraud statute carries a maximum penalty of 30 years in prison.
The federal sentencing guidelines, which provide a recommended sentence for a violation, would likely call for a significant prison term if Mr. Adoboli appeared before an American judge. Based on the amount of the loss, the guidelines would call for a sentence of at least 10 years, and perhaps as much as 20 years, depending on whether the defendant pleaded guilty and other factors.
Mr. Kerviel received a three-year sentence for his conduct at Société Générale, and Mr. Adoboli may be looking at something in that range if he is found guilty. The British courts have not been nearly as severe in imposing punishments for financial crimes as their American counterparts, where sentences of 10 years or more for white-collar defendants have become almost commonplace.
It will be interesting to see if any others are implicated in the trading, or whether Mr. Adoboli will go down as yet another example of the rogue trader causing billions of dollars of losses with apparent ease.
Peter J. Henning, who writes White Collar Watch for DealBook, is a professor at Wayne State University Law School.
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