Last updated: January 30, 2012 7:04 pm

Adoboli trial risks getting under UBS’s skin

At UBS’s London headquarters, senior executives privately admit the last thing they wanted was for Kweku Adoboli, a low-level trader accused of losing $2.3bn last year on a series of unauthorised bets, to go to trial.

Already in the midst of a restructuring in which the Swiss group will retrench from the top tier of investment banking, UBS faces a potentially embarrassing examination of its internal workings following Mr Adoboli’s decision to plead not guilty to fraud and false accounting charges.

A trial has been set for September in what will be one of London’s biggest white-collar crime cases in recent years. UBS declined to comment in view of the criminal proceedings.

Since the financial crisis, when the group almost collapsed after writing off more than $50bn in toxic securities, efforts to rebuild have been hobbled by regulatory inquiries.

At its flagship wealth management arm, a battle with US regulators over alleged tax evasion by some of its wealthiest US clients spurred SFr165bn in withdrawals between 2008 and 2010. Two London tribunals have more recently probed allegations that some private bankers ignored internal guidelines, in a case that centres on whether certain former staff helped the businesses of Anil Ambani, the Indian billionaire, to set up an illegal offshore fund.

However, the revelation in September that Mr Adoboli of the so-called Delta One desk had allegedly gambled away more than $2bn through unauthorised futures positions on various stock market indices was by far its biggest setback, senior executives admit.

Within 10 days, Oswald Grübel, the respected chief executive, had been forced to fall on his sword while the bank accelerated an overhaul of its investment banking division.

Already struggling to compete amid unpredictable markets and tougher regulatory requirements, UBS has since announced plans to shed SFr145bn of risk-weighted assets within the business over the next five years as it attempts to chart a more stable future.

The overhang of the trial, however, threatens to distract executives from that strategy and damage staff morale, analysts say. A trial, likely to last several weeks, could focus on UBS’s compliance procedures, as well as how Mr Adoboli was supervised, lawyers say.

Under Sergio Ermotti, the Italian-Swiss man who assumed the top job last year, UBS has parted company with a group of managers in its sales and trading business, including the two senior executives from the business in which the losses occurred. Maureen Miskovic, its former chief risk officer, left in January after less than a year in the job.

“Senior management behind Delta One has already left UBS, so there are unlikely to be disclosures that do more than embarrass top brass,” says one banking analyst.

UBS has completed an internal report of the incident; a probe by the Financial Services Authority and the Swiss Financial Market Supervisory Authority is expected to be ready for review this spring. That could generate some type of enforcement, given the scale of the losses involved.

“We have to be straight with ourselves,” Mr Ermotti said in October. “In no circumstances should something like this ever occur.”

Of biggest concern to many staff is the effect of the trading incident on their bonus. The bank was criticised last year for failing to reduce the sum set aside to pay its investment bankers in spite of the $2.3bn loss. Executives are working out how to account for the incident, with the bank due to report its year-end earnings next month.

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