Unauthorized Trading at UBS

UBS, the big Swiss banking firm, announced today that it had lost $2 billion as a result of unauthorized trading by one of its traders. (Yes, that’s $2 billion.) UBS did not name the alleged wrongdoer, but news reports indicate that British police have arrested Kweku Adoboli, a UBS trader in London. Follow the links for stories from CNN, the Wall Street Journal, and the New York Times.You might also enjoy the BBC's Q & A on how unauthorized trading occurs and what can be done about it.

This is the fourth billion-dollar unauthorized trading loss that I’m aware of. Barings Bank lost over a billion dollars in 1995; Sumitomo Corporation lost $2.6 billion in 1996; and Societe Generale lost over $6 billion in 2008.

No compliance system, no matter how well designed, is perfect. Some fraud and unauthorized trading is going to leak through the controls. And, if derivatives are involved, it’s easy to lose a lot of money quickly. But $2 billion? It is going to be interesting to see exactly what sort of reporting and oversight measures UBS had in place and how those controls were skirted. I’m sure UBS’s directors and officers are anxiously consulting their attorneys this morning to see if they have any potential liability for allowing this to happen.

UBS is a Swiss company, so U.S. corporate law doesn’t apply. If UBS were a Delaware corporation, its directors would have an obligation to assure themselves that “information and reporting systems exist . . . that are reasonably designed to provide to senior management and to the board itself timely, accurate information sufficient to allow management and the board . . . to reach informed judgments concerning both the corporation’s compliance with law and its business performance.” In Re Caremark Int’l, Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996). However, the board is not liable just because the company’s compliance system fails to catch wrongdoing. As long as the directors decide in good faith that the company’s compliance system is adequate, they are protected by the business judgment rule. Caremark says that “only a sustained or systematic failure of the board to exercise oversight—such as an utter failure to attempt to assure a reasonable information and reporting system exists” is grounds for liability.

-Steve Bradford