Bloomberg News

UBS Moved Executive in FSA Risk-Management Case to Zurich

September 21, 2011

(Updates with UBS share price in sixth paragraph.)

Sept. 21 (Bloomberg) -- A UBS AG executive accused of risk- management failures and facing a potential fine by the U.K. finance regulator was moved as early as 2008 from London to Zurich by Switzerland’s biggest bank.

John Pottage, the former chief executive officer of UBS’s wealth-management division in London, will challenge the Financial Services Authority at a court hearing in November over its attempt to fine him for not ensuring the unit had controls to prevent unauthorized trades that began in 2006, according to three people familiar with the case. He now works in risk management, two people with knowledge of his role said.

The FSA fined UBS 8 million pounds ($12.5 million) in 2009, at the time the third-largest penalty imposed by the regulator, for failing to prevent employees in the international wealth- management business from making as many as 50 unauthorized trades a day with funds from at least 39 customer accounts. The case is an example of UBS failing to police errant trading in London years before the bank said this week it lost $2.3 billion from unauthorized trades.

“Now that the machine has got going, every single bad thing is going to come out,” said Fred Ponzo, a capital markets adviser at Greyspark Partners in London.

Pottage was authorized by the FSA until Dec. 15, 2008, according to the watchdog’s website. He had authorization for roles including chief executive, significant management, director, apportionment and oversight, investment adviser and insurance mediator.

‘Reasonable Steps’

Pottage declined to comment when reached at a UBS number in Zurich. Yves Kaufmann, a UBS spokesman in Zurich, also declined to comment. UBS shares rose 0.8 percent to 10.29 Swiss francs in trading today.

Pottage was obligated to “take reasonable steps to ensure the right systems and controls were in place and to take dutiful care over the running of the business,” Richard Everett, a former FSA senior legal adviser who now works at law firm Lawrence Graham LLP, said in a telephone interview. “It’s a question of what constitutes reasonable steps here.”

UBS trader Kweku Adoboli was charged with fraud and false accounting last week after the bank discovered unauthorized trades that it said caused $2.3 billion in losses. The loss in the case came from trading in Standard & Poor’s 500, DAX and EuroStoxx index futures over the past three months, according to the bank. The risk of the trades was masked by fictitious positions, UBS said.

FSA, Finma

The FSA and the Swiss Financial Market Supervisory Authority opened a joint investigation into control failures at UBS that allowed the trades to go undetected.

Chris Hamilton, an FSA spokesman, declined to comment. Tobias Lux, a spokesman at the Swiss regulator, declined to comment on the case. Pottage’s lawyer, John Fordham, also declined to comment.

Adoboli worked at UBS’s investment bank on its Delta One desk, which handles trades for clients, typically helping them to speculate on or hedge the performance of a basket of securities. He will appear at a court hearing in London tomorrow. UBS has said that no client positions were affected.

The $2.3 billion loss is the largest since former Societe Generale SA derivatives trader Jerome Kerviel caused a 4.9 billion-euro ($6.7 billion) loss in 2008.

Kerviel Case

Kerviel amassed 50 billion euros in unauthorized positions, concealed with faked hedges. A Paris court ordered him last year to repay the full amount of the loss and sentenced him to three years in jail. He’s appealing that verdict.

Britain’s FSA has said it had discussed the Kerviel case with as many as 50 banks in London and that “many had already put in place reviews to ensure they identify any gaps in trading controls and close them as soon as possible,” according to a policy document from March 2008.

When UBS was fined in 2009, the regulator said the bank had already paid more than $42 million to compensate customers. The FSA found that four UBS employees on one desk made unauthorized foreign exchange and precious metals trades over a two-year period. All four left the bank. Pottage isn’t accused of having been involved in any trades or having known about them.

In the 2009 case, UBS failed to adequately supervise employees who dealt with customers, manage and control risks in its international wealth-management business, or to respond to warning signs, the regulator said. The breaches came to light when a whistleblower notified the bank’s compliance department about a proposed transfer of funds from a customer’s account to a desk head’s personal account, according to the FSA.

The agency said in its final report detailing the failures that UBS corrected the problem and hired a third-party firm that determined the bank made “very significant changes” and that their controls in wealth management were adequate.

UBS’s bonus policy “created a tension between employees’ personal interests and their risk and compliance obligations,” the FSA said in the report.

--With assistance from Ambereen Choudhury and Stephen Morris in London, and Giles Broom in Zurich. Editors: Christopher Scinta, Keith Campbell

To contact the reporters on this story: Ben Moshinsky in Brussels at bmoshinsky@bloomberg.net; Lindsay Fortado in London at lfortado@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net


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