May 27, 2024

DealBook: JPMorgan Sues Boss of Trader Behind Loss of Billions

Offices of JPMorgan Chase in London. The trade losses were associated with London workers.Carl Court/Agence France-Presse — Getty ImagesThe offices of JPMorgan Chase in London. The trade losses were associated with London workers.

The fallout continues from a multibillion-dollar trading loss at JPMorgan Chase.

JPMorgan, the nation’s largest bank, is suing Javier Martin-Artajo, a former executive in its chief investment office, a once little-known unit at the center of the bungled trades. Mr. Martin-Artajo directly supervised Bruno Iksil, the so-called London Whale, according to a lawsuit made public on Wednesday.

Mr. Iksil gained that moniker after reports emerged in April that he had built up an outsize position in an obscure corner of the credit markets. That position proved devastating for the bank, resulting in a $6.2 billion loss.

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The lawsuit, filed in a London court, did not disclose the details of JPMorgan’s claims against Mr. Martin-Artajo, according to a person who read the complaint.

Both men have left the bank. A spokeswoman for JPMorgan declined to comment on the lawsuit. Mr. Martin-Artajo’s lawyer could not be reached immediately.

Since announcing the problem in May, JPMorgan has worked to reassure skittish investors. The bank has broadly reshuffled its management ranks and united some of its business operations.

Timeline: JPMorgan Trading Loss

As part of that effort, the bank conducted an internal investigation, combing through thousands of e-mails and phone records to determine what went wrong at the chief investment office.

The investigation, led by Michael J. Cavanagh, the bank’s former chief financial officer, found that some traders might have improperly valued their positions as losses mounted.

Some phone recordings suggest that Mr. Martin-Artajo encouraged Mr. Iksil to value troubled positions favorably, according to people with knowledge of the investigation.

Mr. Martin-Artajo, Mr. Iksil and two others who worked in the chief investment office are under investigation by criminal and civil authorities, these people said. The authorities are examining whether the group mismarked positions to cover up losses. After revising the valuations, JPMorgan had to restate its first-quarter earnings.

But authorities face a high legal bar. Traders are given significant leeway to price financial instruments like the complex credit derivatives at the center of the bet. None of the people have been accused of criminal wrongdoing.

JPMorgan, too, faces scrutiny. The Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Federal Reserve are all looking into the botched trades.

The aftershocks have been felt throughout the bank. The multibillion-dollar loss tarnished the reputation of Jamie Dimon, the bank’s chief executive, considered one of Wall Street’s best risk navigators. In June, Mr. Dimon appeared before Congress to try to explain the misstep.

The debacle also claimed the job of one of Mr. Dimon’s most seasoned and trusted lieutenants, Ina R. Drew, who resigned as head of the chief investment office shortly after the losses were announced and offered to give back her pay. The bank has clawed back millions of dollars of compensation from Mr. Martin-Artajo, Mr. Iksil and others.

Mr. Dimon has moved to remake his management team. Douglas L. Braunstein, the bank’s chief financial officer since 2010, will resign by the end of the year, current and former executives said. Mr. Braunstein initially played down concerns about the chief investment office that emerged in April. Barry Zubrow, a former chief risk officer who now runs the bank’s regulatory affairs, said last month that he, too, would resign.

The huge loss stemmed from a complex wager on credit derivatives made by Mr. Iksil out of the London unit of the chief investment office, which was formed five years ago. The office was transformed from a relatively sleepy operation into a profit center as the complexity and risk of its positions swelled.

The group’s risk controls did not keep up with its increasingly large bets, according to several current and former executives familiar with the unit. Part of the problem, these executives said, was that the London branch operated without sufficient oversight. When some executives in New York called for greater risk controls, they said, they were ignored or shouted down.

During JPMorgan’s latest earnings call, Mr. Dimon emphasized that the bank had contained the loss from the troubled trade. It closed out the position and moved the remainder of the credit derivative trade to the investment bank.

Ben Protess and Mark Scott contributed reporting.

Article source: http://dealbook.nytimes.com/2012/10/31/jpmorgan-sues-boss-of-london-whale/?partner=rss&emc=rss

DealBook: UBS Faces Questions on Oversight After a Trader Lost $2 Billion

Kweku Adoboli leaving a London court after being charged with fraud. Some of the charges against him date to 2008.Adrian Dennis/Agence France-Presse — Getty ImagesKweku Adoboli leaving a London court after being charged with fraud. Some of the charges against him date to 2008.

Until this week, Kweku M. Adoboli was riding high, a young trader for a big bank, with a stylish apartment in a fashionable London neighborhood and a steady girlfriend.

On Wednesday, the world of Mr. Adoboli — whose name in a language spoken in his native Ghana means “born on a Wednesday” — began to come tumbling down around him. After being questioned by compliance officers about some of his trades, he became evasive, later sending a “confessional” e-mail to bank officials, saying that he did not have the information they wanted.

Mr. Adoboli, 31, has now been charged with one count of fraud and two counts of false accounting in connection with a $2 billion trading loss at his former employer, the Swiss banking giant UBS. In a brief appearance in a London courtroom on Friday afternoon, he dressed in a blue sweater and white shirt and appeared nervous, dabbing sweat from his cheeks and eyebrows, yet briefly offered a smile for reporters. He did not enter a plea, and his lawyer declined to comment.

One of the false accounting charges against Mr. Adoboli dates to October 2008 — at the height of the financial crisis and less than two years after he became a trader for UBS. The charge that Mr. Adoboli’s rogue trading had been going on for years raises embarrassing questions about the bank’s controls and oversight. After writing down more than $50 billion on bad subprime mortgage investments, the chief executive of UBS, Oswald J. Grübel, had pledged to improve the bank’s risk management when he took over in 2009.

The Financial Services Authority, Britain’s equivalent of the Securities and Exchange Commission, and Swiss market regulators said on Friday that they would begin an independent investigation into the bank’s “control failures.”

With the charges going back to 2008, “it would seem there was a systematic pattern of trading,” said Lindsay Thomas, managing director at Sustainable Risks, a risk management consulting firm, and a former director at the F.S.A.

Before he landed a job on the bank’s trading desk, Mr. Adoboli had worked in its back-office support. UBS executives suspect that his knowledge of the bank’s computer systems and protocols enabled him to override the internal controls that would have caught his trading, a person close to the bank said.

Representatives for UBS declined to comment.

This weekend, UBS managers are continuing to comb through dozens of trades made by Mr. Adoboli. The transactions under the microscope, according to a person briefed on the situation, typically began as client trades, packaged for either a hedge fund or for another arm of the bank.

Oswald Grübel, chief executive of UBS, and Kaspar Villiger, the bank's chairman, in April. A management shake-up is expected.Alessandro Della Bella/European Pressphoto AgencyOswald Grübel, chief executive of UBS, and Kaspar Villiger, the bank’s chairman, in April. A management shake-up is expected.

A management shake-up at the bank — possibly reaching the highest ranks — is expected as a result of the trading scandal. Already this week Mr. Adoboli’s manager, John Hughes, left the bank after his trader’s supposed misdeeds were uncovered. The bank is also investigating other employees, primarily those who were supervising Mr. Adoboli.

UBS, which is based in Zurich, also has a mechanism to claw back compensation and one person familiar with this situation but who was not authorized to speak on the record said it was “almost certain” the bank would seek to recover compensation from Mr. Adoboli and other UBS staff members. Any unauthorized gains could have contributed to his year-end bonuses.

Mr. Adoboli was the director of exchange-traded funds, an increasingly profitable corner of Wall Street. He would package E.T.F.-related trades for clients. Typically firms like UBS, in an attempt to minimize risk, hedge these types of transactions.

But Mr. Adoboli often did not hedge his trades, according to a person briefed on his trading who was not authorized to speak publicly. So rather than reducing the risk, it exposed UBS to big swings depending on the way the trade went, this person said. For a time, the ledger went in Mr. Adoboli’s favor.

In recent days, however, a number of his trades, many of which were in the red, were set to roll over, raising questions from the back office of UBS.

The son of a former United Nation’s official, Mr. Adoboli spent his childhood globetrotting — from Ghana to Israel before ultimately landing at a Quaker boarding school in West Yorkshire, England.

After studying computer science and graduating from the University of Nottingham in 2003, he accepted a job offer from UBS. He became a trader in 2006 and his star continued to rise during the financial crisis, which shook financial institutions around the world, including UBS.

The bank, however, sustained huge losses and moved to tighten its compliance systems. In late 2008, the firm tapped Philip Lofts, a UBS veteran, to oversee risk. This year, the firm hired Maureen Miskovic, former head of risk control at the State Street Corporation, as its new chief risk officer, replacing Mr. Lofts, who now runs UBS in the Americas.

Still, despite the extra rigor, Mr. Adoboli’s trading scheme apparently flourished. From 2008 to as late as this week, he supposedly executed countless trades that were not hedged, according to the person familiar with his trading but was not authorized to speak on the record.

His personal life was also flourishing. Mr. Adoboli, until about four months ago, lived in a stylish building adjacent to London’s famous Brick Lane, a bustling thoroughfare known for its nightlife and curry houses. Neighbors there remembered his occasional lively parties.

The flat, which public records suggest rents for up to $1,000 a week, is not far from the UBS Finsbury Avenue office in central London, the glass structure where Mr. Adoboli is suspected of having placed his illicit trades.

On Wednesday, early in the afternoon, Mr. Adoboli sat at his desk and typed an e-mail to several members of the firm’s compliance department. Two people with knowledge of the e-mail described it as “confessional.” He wrote that he did not have the data they had asked for and gave details of what he had done, these people say. The e-mail was quickly forwarded to the firm’s legal office, which dispatched a small team to Mr. Adoboli’s apartment. They peppered him with questions for hours, hoping to learn more. At the bank, employees began to pore through Mr. Adoboli’s trades. It quickly became clear the losses in Mr. Adoboli’s account were huge.

Top UBS executives were alerted to the situation and they contacted regulators in Britain and Switzerland. UBS lawyers left Mr. Adoboli’s apartment late Wednesday night. UBS also alerted the London police, who arrested Mr. Adoboli at about 3:30 a.m. on Thursday.

Neil MacFarquhar, Azam Ahmed and Julia Werdigier contributed reporting.

Article source: http://dealbook.nytimes.com/2011/09/16/ubs-faces-questions-on-oversight-after-traders-huge-loss/?partner=rss&emc=rss