UBS trader unchallenged over "cosmetic" changes to books, court told

Former UBS trader Kweku Adoboli arrives at Southwark Crown Court in central London October 22, 2012. Adoboli is on trial accused of fraud and false accounting that cost the Swiss bank $2.3 billion.

LONDON (Reuters) - Accused UBS fraudster Kweku Adoboli was not challenged when he told a colleague that he had made a "cosmetic adjustment" to the accounts, a London court heard on Monday.

Appearing as a witness at Adoboli's trial, former back office contractor Johannes Zuidmeer also said he had allowed the trader to hold back from entering a $1 billion loss into the accounts, accepting his explanation that it was due to booking errors.

Adoboli, 32, denies two counts of fraud and two of false accounting. He was arrested on September 15, 2011, and blamed for losses of $2.3 billion.

The prosecution say Adoboli took huge trading positions that far exceeded risk limits and concealed them by booking fictitious hedging trades, routinely lying to the Swiss bank about what he was doing.

Adoboli's defence team have sought to show throughout the trial that he openly discussed his methods with colleagues and that rule-breaking was condoned as long as profits rolled in.

Zuidmeer, who in 2011 was on the team that reviewed profit and loss accounts for Adoboli's Exchange Traded Funds (ETFs) desk, denied that he had understood or approved of the true nature of Adoboli's trading.

Paul Garlick, one of Adoboli's lawyers, challenged Zuidmeer by reading out excerpts from an electronic chat between him and Adoboli dated April 26, 2011.

In the chat, Adoboli said he had made what he called a "cosmetic adjustment" to the accounts because he had expected a revaluation of a particular trade due to the effect of foreign exchange rate fluctuations.

Adoboli went on to say that, if in fact there was no such revaluation, the adjustment should be reversed.

"IT LOOKS SERIOUS"

Under cross-examination by Garlick, Zuidmeer acknowledged that he had let pass the reference to "cosmetic adjustments" without question or challenge. However, he denied that this showed he had known that Adoboli made fictitious entries into the books.

"Obviously with the benefit of hindsight it looks serious," he said.

Garlick also raised a separate incident on August 11, 2011, when Zuidmeer allowed Adoboli to "adjust", or hold back, the booking of $1 billion in losses from the accounts.

Zuidmeer acknowledged that the amount involved was enormous and that he did not further investigate or challenge the trader's request.

He said Adoboli had explained that the trading desk and the operations team had made conflicting bookings due to an earlier misunderstanding about some trades, and that the adjustment was necessary to give them time to reconcile their records.

Zuidmeer said he accepted this explanation and added that financial markets were extremely volatile at the time, which helped to explain why the sum was so large.

He also said that at the time, the control accounts were "in a mess", which could have been another reason for the accounting problems.

"In hindsight, there's a lot of things we would have liked to do differently," he told the court.

The trial continues.

(Editing by Kevin Liffey)