(Updates with second defendant in 14th paragraph.)
Dec. 14 (Bloomberg) -- UBS AG’s wealth-management unit in London had no controls to prevent unauthorized trading in client accounts, according to a lawyer for a former trading desk head challenging a 1.25 million-pound ($1.93 million) fine.
UBS “was to some extent complicit” in Sachin Karpe’s unauthorized trades because “senior managers” were copied on e-mails about some client accounts, Karpe’s lawyer, Michael Blair, said at a court hearing in London this week. An external auditor’s review, commissioned by the bank, determined there were no controls to prevent internal unauthorized transfers or loans between clients of the bank unit, Blair said.
“He did not circumvent controls because there were none in place,” Blair said. “If there were no rules, he could not have been proved to be doing anything wrong.”
The case is one of three challenges by individual UBS bankers to Financial Services Authority enforcement actions stemming from the unauthorized trades. Zurich-based UBS in 2009 paid an 8 million pound-fine and agreed to reimburse customers $42.4 million.
Karpe, who is also accused of moving money between client accounts to hide losses from unauthorized foreign-exchange trades and helping a client use an offshore investment fund in violation of Indian law, is challenging the FSA fine at a court hearing that began Dec. 12.
Karpe, who was fired from his post overseeing Indian clients on the Asia-2 desk, accepts that he deserves a lifetime ban from working in Britain’s financial services industry, Blair said.
“That’s quite a considerable scalp for the FSA and it’s not being challenged,” Blair said. The fine isn’t an “appropriate penalty” because it would bankrupt Karpe, he said.
Karpe and his desk made as many as 50 unauthorized trades a day over a two-year period, according to the FSA. Over a one- year period from 2006 to 2007, he placed 1,404 foreign-exchange trades with values of $11.3 billion, 4.3 billion pounds, 1.9 billion euros ($2.5 billion), 109 billion Japanese yen ($1.4 billion), and 1.1 billion Swiss franc ($1.1 billion), the regulator said in court documents.
The trades were discovered after a UBS whistle-blower reported a $5,000 transfer from a customer account to Karpe’s personal bank account in 2007, the FSA said. The bank began a review that led to Karpe being fired in early 2008.
A UBS spokesman said the bank has “acknowledged that there were weaknesses in certain aspects of Wealth Management U.K.’s control environment.”
Karpe is also accused of using one of the bank’s accounts “to route internal transfers between client accounts to conceal the identity of the transferor and transferee accounts.”
There was “a defective system within the bank” that gave Karpe the ability to use the account “without much difficulty,” Blair said.
Laila Karan, a former client adviser on the desk who was fired for gross misconduct, is also a defendant in the case. The FSA is seeking to fine her 90,000 pounds and ban her from working in the industry for not notifying the bank about Karpe’s actions.
“Karan was never an insider on Mr. Karpe’s activity,” her lawyer, Hodge Malek, told the tribunal. “She accepts that the little she did know she should have escalated.”
Another defendant who worked on the desk, Jaspreet Ahuja, will settle with the FSA, said Jonathan Crow, the regulator’s lawyer.
The regulator is also attempting to fine John Pottage, the former chief executive officer of the wealth management unit, 100,000 pounds ($156,000) for failing to prevent the unauthorized trades. Pottage, who is now a senior executive at the bank’s headquarters in Zurich, went to trial last month to challenge the regulator.
The case is an instance of risk-management failures at the bank, several years before Kweku Adoboli, a former trader in UBS’s investment bank, was charged with causing $2.3 billion in losses through unauthorized trading. Adoboli, who was charged with fraud and false accounting tied to the loss, may enter a plea at a London criminal court next week.
--Editors: Anthony Aarons, Christopher Scinta
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