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UPDATE 2-UBS trader discussed "slush account" with Adoboli

(Adds details) By Estelle Shirbon

LONDON, Oct 8 (Reuters) - A UBS trader raised theissue of a "slush account" in an electronic chat with KwekuAdoboli months before he was arrested over allegations he lostthe Swiss bank $2.3 billion, a London court heard on Monday.

Appearing as a witness at Adoboli's trial, Darren Baileyrejected as "ridiculous" an accusation by the accused formertrader's lawyer that he ran a hidden trading book that hadserved as the template for Adoboli's illicit "umbrella" account.

Adoboli, 32, was arrested on Sept. 15, 2011, and has pleadednot guilty to two charges of fraud and two of false accounting.

The prosecution says he routinely exceeded his tradinglimits, booked fake trades into the accounts to mask his truepositions, and held back some of the profits from hisunauthorised deals in his umbrella.

The defence says Adoboli believed he was acting for the goodof the bank and was open about his methods with many of hiscolleagues.

In one group chat from March 17, 2011, read out in court,Adoboli and Bailey discussed that week's trading and Adobolisaid that it had been "emotional".

"Have you used the slush acct (account)?" Bailey asked inresponse.

Bailey, who still works for UBS and had denied during thefirst part of his evidence on Friday that he knew anything aboutthe umbrella, said he did not have an explanation for thecomment.

"I am genuinely shocked by this. I don't know what thecontext to that could have been. I am genuinely surprised," hesaid.

Adoboli's defence lawyer Paul Garlick said Bailey had been"caught out" and suggested that the comment showed he had beenaware of the umbrella.

"OUTLANDISH" ACCUSATIONS

In his evidence on Friday, Bailey had admitted that once, inJune 2011, he had accepted an offer from Adoboli to "warehouse"a trade overnight.

This meant that on that occasion, a trade executed by Baileywas booked into Adoboli's book rather than his own.

Repeatedly pressed on why it had been necessary to warehousethe trade, Bailey said he could not remember.

Garlick put it to Bailey that the episode showed that therewas a culture of rule-breaking among UBS traders. Bailey deniedthis, saying that the following day, his manager had reprimandedhim and banned him from trading futures for three months.

Concluding his cross-examination of Bailey on Monday,Garlick went further in his allegations against Bailey.

Presenting a spreadsheet sent by Bailey to Adoboli in April2011, after Adoboli had done a trade on Bailey's behalf, Garlicktold the witness that this was "your version of an umbrella".

He went on to say that Bailey's spreadsheet had been "thegenesis" of the umbrella later operated by Adoboli for thebenefit of his Exchange Traded Funds desk. Bailey worked on aseparate trading desk.

Bailey rejected Garlick's allegations as "ridiculous" and"outlandish".

Prosecutor Sasha Wass suggested through her questions toBailey that Adoboli had created the umbrella at least a year anda half before his exchanges with Bailey in April 2011.

She referred to a spreadsheet which Adoboli went into theoffice on the day after Christmas 2009 to send from his workcomputer to his personal email address.

The prosecution had previously argued that this spreadsheetwas the umbrella, and that Adoboli made the brief visit to theoffice because he needed time during the Christmas holiday towork on the illicit account.

The trial at Southwark Crown Court continues on Tuesday.

(Editing by Alison Williams and Pravin Char)

Keywords: UBS TRIAL