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LONDON/ZURICH (Reuters) -The two heads of the UBS UBSN.VX (UBS.N) division that caused a $2.3 billion loss stepped down on Wednesday as an internal investigation into the trading scandal showed risk systems had detected unauthorized activity but failed to respond.
Caretaker chief executive Sergio Ermotti, who took over 11 days ago after Oswald Gruebel quit over the losses, said it was "simply not acceptable" that unauthorized activity was not sufficiently investigated and controls not properly enforced.
"We have to be straight with ourselves. In no circumstances should something like this ever occur," Ermotti said in a memo seen by Reuters. "The fact that it did is evidence of a failure to exercise appropriate controls."
London-based trader Kweku Adoboli has been accused of the rogue trading, and his lawyer told a court last month he was "appalled at the scale of the consequences of his disastrous miscalculations."
Ermotti said the bank had accepted the resignation of the two co-heads of global equities, Francois Gouws and Yassine Bouhara, over the unauthorized trades and said disciplinary action against other members of staff was pending.
Mike Stewart, who only joined UBS from Bank of America Merrill Lynch (BAC.N) two days ago where he had been global co-head of equities, will become sole head of equities, UBS said.
In July, UBS said Stewart would become co-head of global equities with Gouws, while Bouhara -- who joined UBS in 2010 from Deutsche Bank (DBKGn.DE) -- had been due to take on the newly created role of running emerging markets.
In a memo to staff, investment bank head Carsten Kengeter said Stewart had already begun work in New York, while he had also asked Don Francese to take over immediately as interim chief operating officer for global equities.
"A number of front office staff have been suspended pending further disciplinary action. We will also be taking appropriate disciplinary measures against responsible individuals in our operations and control functions in the coming weeks," he said.
Kengeter -- who has also faced calls to quit since the scandal broke -- said the investment bank was already acting to improve its overall risk and control framework and would tighten up other processes and procedures.
"We will execute these actions with urgency and accuracy so UBS is able to move forward with confidence," he said.
Eight people in the equities business were facing disciplinary action, among them Adoboli's boss John Hughes, according to a source familiar with the matter.
The co-chief operating officers of the equities division, Sethu Palaniappan and Niraj Gudka, are also among them, the source said.
The rest are front office staff. Other "responsible functions," possibly outside equities, could also face disciplinary action, Ermotti said.
The 51-year-old Ermotti, who joined UBS in April after having been passed over for the top job at Italy's UniCredit (CRDI.MI), has made overhauling the investment bank a priority.
He is expected to announce details about the revamp at an investor day on November 17 and the unit is bracing for more job cuts in addition to the 3,500 for the whole bank announced in August.
Kengeter said UBS was working to align the strategy of the investment bank with the economic and regulatory environment.
"This means further investing in areas that make economic and strategic sense, exiting those that don't, and finding new ways to deliver much more effectively in others," he said.
Chief Financial Officer Tom Naratil said on Tuesday the internal investigation had revealed that the losses on Adoboli's alleged trades only really accelerated in August when big falls on global stock markets hurt bets on equity index futures.
The losses reached $2 billion around mid-August and remained close to that level until they were discovered and closed out, Naratil also said.
Writing by Catherine Bosley, editing by Bernard Orr