John Pottage, the former chief executive officer of
UBS AG's wealth-management unit in the U.K., didn't heed warning signs that risk controls in the division were ineffective before an unauthorized trading loss was discovered, the U.K.'s finance regulator said.
Pottage, now a senior executive at the bank's headquarters in Zurich, should have started a review of controls after a client-money breach, a payment fraud, and other failings were discovered, the Financial Services Authority said in court papers. He also should have done an “adequate initial assessment” of the unit's controls after becoming CEO, a lawyer for the FSA said at a trial in London today.
Pottage's actions constituted a regulatory breach, FSA lawyer Andrew Hochhauser said in the first day of closing arguments in the case, where the ex-CEO is challenging a 100,000 pound ($156,000) fine. The case is the first time the regulator has sought to penalize an executive for oversight failures.
“What he did was not sufficient to comply” with FSA rules, Hochhauser said of Pottage.
Pottage didn't ensure the division had controls in place to prevent employees from making as many as 50 unauthorized trades a day with funds from at least 39 customer accounts, the FSA alleges.
UBS compensated customers $42 million, and was fined 8 million pounds by the FSA in 2009. The hearing over the fine against Pottage began in London in November.
Enforcement Actions
The case is one of three challenges by individual bankers from UBS's wealth management unit in London against FSA enforcement actions.
Sachin Karpe, the former head of the India desk at the unit, is fighting a 1.25 million-pound fine for unauthorized trading and helping a client use an offshore investment fund in violation of Indian law. Laila Karan, a former client adviser on the desk, is also challenging a 90,000 pound fine and a ban from working in the industry by the FSA for failing to notify the lender about Karpe's actions.
Another banker on the Asia-2 desk, Jaspreet Ahuja, agreed to pay a 150,000 pound fine last month for his advice with Karpe on the illegal offshore fund for an Indian client.
A spokesman for UBS said the bank “has acknowledged that there were weaknesses in certain aspects of Wealth Management U.K.'s control environment” and cooperated with the FSA in its actions against Karpe, Karan and Ahuja. The Swiss bank is supporting Pottage in challenging the fine against him.
Control Failings
The Pottage case sheds light on a series of control failures and red flags at the bank's wealth-management unit, several years before a separate instance of unauthorized trading in its investment bank caused a $2.3 billion loss.
Pottage said in court papers he worked to improve systems and controls in the unit when he started as CEO in September 2006 and doesn't deserve a fine. Pottage, who moved to Zurich amid the FSA probe, denies the charge that he should've acted sooner than he did to review weaknesses in the systems and controls, and “is supported in that denial by UBS,” his lawyers have said.
Pottage testified during the three-week hearing that he was “confused” by the regulator's attempt to fine him and that he thought it didn't understand his role at the bank. He said during a meeting with the regulator in 2009 that he was “concerned that the interviewer thought the CEO was a fully empowered individual.”
Pottage said he asked for the position of CEO because “it sounded like the best thing to have,” Hochhauser said today.
The chairman of the tribunal that's hearing the case told Hochhauser today that his cross-examination of Pottage during the trial was “impressive.”
--Bloomberg News--
