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Lieberman Software says UBS rogue trader saga could have been prevented

September 2011 by Lieberman Software

Reports that a trader with UBS has been arrested in connection with a potential two billion dollar `rogue trader’ fraud suggest that the banker has been controlling trading accounts to which he should not have had access, says Lieberman Software.

Philip Lieberman, president of the privileged account management and security specialist said “Clearly there was a problem with segregation of duties and the need for ‘dual-controls’ as well as attribution. This sounds a lot like they did not have any type of suspicious trading analysis software in place. The sad part is that all this technology exists, but UBS chose to “save money” on software and security to the detriment of its shareholder’s.”

He added, that the case sounds a lot like that of infamous bank trader Nick Leeson - from which the term `rogue trader’ was coined.

“In that 1990s case, Leeson made a large number of unauthorised and speculative trades that initially made profits for his employers, Barings Bank, but later went sour costing the bank so much money that it eventually went bust. What was notable about Leeson’s fraud was that he gained access to Barings’ error accounts - which were used to soak up trades that cost the bank money - apparently without full authorisation,” he said.

“Of course, it’s too early to say whether the UBS two billion dollar loss case has direct parallels with the downfall of the Barings Bank, but it’s interesting to note that, as the news broke, it sent the bank’s share price skittering in a downward spiral, as investors realised the ramifications – and probably remembered the Nick Lesson case,” he added.

The Nick Leeson fraud – which has since been turned into a movie – was notable, says Lieberman, as the Barings banker used an account that was numbered 88888 – 8 being a number considered to be very lucky in Chinese numerology.

Leeson claimed that this account was first used to hide an error made by one of his colleagues - rather than buy 20 contracts as the customer had ordered, she had sold them, costing Barings £20,000 in the process, he explained.

The Barings Rogue trader, says the Lieberman Software president, then misused his account to cover his subsequent bad trades, which gradually spiralled out of control as Leeson chased the bank’s losses.

The Nick Leeson case was caused, says Lieberman, by the fact that Barings had allowed the trader to remain as chief trader, whilst he was also responsible for settling his trades - jobs usually carried out by two different people. Whilst this made it much simpler for him to hide his losses from his bosses, it also meant he had access to multiple accounts, which banks today – hopefully - now realise should not be allowed.

“It will be interesting to work out the methodology that the alleged UBS rogue trader used when placing his trades. I suspect that he probably had access to accounts that he should not have, and this allowed him to trade the two billion dollar loss,” he said.

“The tangible losses are one thing, as UBS now looks likely to generate a loss during its third quarter. But the eight per cent drop on the bank’s share price when trading commenced after the news was released, is another thing. We are into reputational damage territory and that can be very expensive problem for a bank,” he added.

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