Swiss banking giant UBS said Thursday that one of its traders lost an estimated $2 billion through unauthorized transactions, which could result in a loss for its entire third quarter.
Police in London's financial district said they have arrested a 31-year-old man in connection with the massive loss. He was arrested at 3:30 a.m. on suspicion of abusing his position to commit fraud.
The unidentified trader reportedly worked in UBS's London equities division.
Shares of UBS sank on the Zurich exchange Thursday, at one point plummeting more than 8 percent.
"UBS's current estimate of the loss on the trades is in the range of $2 billion," the bank said in a terse statement shortly before markets opened. "It is possible that this could lead UBS to report a loss for the third quarter of 2011."
In an internal email, the bank described the unauthorized trading as "distressing" and said it would "spare no effort" in its investigation.
"Although the news is regrettable, the fundamental strengths of the company won't be affected by this," the note said. "We ask that you continue concentrating on your customers. In these uncertain times they are counting on your support."
UBS said no client positions were affected by the loss. The unauthorized trades could cost UBS almost as much as the 2 billion Swiss francs ($2.28 billion) the bank said last month it hoped to save by cutting 3,500 jobs over two years.
Peter Thorne, a London-based equities analyst at Helvea, said the loss was a blow to UBS's reputation but was financially manageable for Switzerland's biggest bank.
The incident comes as UBS is struggling to restore its reputation after heavy subprime losses during the financial crisis that resulted in a government bailout, and an embarrassing U.S. tax evasion case that blew a hole in Switzerland's storied tradition of banking secrecy.
UBS isn't the first to be hit by a massive loss allegedly caused by a single rogue trader.
Societe Generale, France's second-largest bank, stunned investors in 2008 when it revealed that one of its staff had lost the bank euro4.9 billion ($6.7 billion) through a complex scheme of unauthorized trades.
The trader, Jerome Kerviel, was convicted in October 2010 on charges of forgery, breach of trust and unauthorized computer use for covering up bets worth nearly euro50 billion between late 2007 and early 2008. He was also banned for life from working in the financial industry and ordered to pay back the vast amount he had caused his employer to lose.
Nick Leeson, a British trader working in Singapore for Barings Bank, made unauthorized futures trades that lost more than $1 billion and led to the venerable bank's collapse in 1995. The infamous case prompted banks worldwide to tighten their internal checks.
Leeson was released from a Singapore jail in 1998 for good behavior after serving 3 1/2 years of a 6 1/2-year sentence. He claimed he did not make a cent from his disastrous trades but Barings' liquidators sought the return of 100 million pounds on any of his earnings relating to Barings.
With reporting from Larry Miller in London. Material from The Associated Press was used in this story.