The story of France’s rogue trader

On Tuesday, Jerome Kerviel, the former trader of French bank Societe Generale, was found guilty of forgery and breach of trust and sentenced to three years in prison.

He was also told to repay the bank the €4.9 billion (US$7 billion) he lost them – the largest trading loss in history. But he disputes the ruling and claims that the bank knew what he was doing all along and even encouraged it.

The rogue trader

Kerviel joined France’s second largest bank Societe Generale (SocGen) in 2000 where he worked in their ‘back office’ doing compliance and paper processing.

In 2005, he moved to SocGen’s ‘front office’ where he became a junior trader in European share futures – contracts between two parties to buy and sell shares on a certain day for a predetermined price.

His job was to buy a specific group of futures and sell a similar group with a different value. This meant the bank was constantly covering its risk but still making money on the difference in values.

However, Kerviel believed that he knew what was going to happen in the futures markets and decided to start gambling further with the bank’s money.

In late 2006, he started making real purchases in one group and creating fake sales in the other. This gave Kerviel’s managers the impression that the bank was ‘hedged’ (protected) against the risks when in fact it wasn’t.

To create the fake sales he used his knowledge from the ‘back office’ to falsify documents and use other employees’ computer access codes.

Other “extremely sophisticated and varied techniques” were supposedly used by Kerviel, but SocGen still admitted it had flawed control systems and was later fined €4 million by French banking regulators for allowing the activity to go undetected.

The initial fake trades were relatively small in value. But in late 2007 they started to get larger and more frequent.

About this time, stock market officials notified SocGen of irregular trades coming from Kerviel, prompting the bank to conduct an internal investigation.

The bank’s managers had actually been notified of Kerviel’s behaviour earlier by internal risk managers but every time they questioned him about it he either had a reasonable excuse or claimed it was a mistake.

Feeling more confident, Kerviel made his largest fictitious trades in January 2008 and it was then that SocGen uncovered his illegitimate €50 billion trading position.

They promptly proceeded to sell off the futures contracts over the next three days, however during that time share markets around the world fell sharply, and the bank made a loss of €4.9 billion.

Kerviel was taken into custody on January 26 for interrogation and in August 2009 he was formally charged with falsifying documents, unauthorised computer use and a breach of trust.

He wasn’t charged with fraud because he wasn’t stealing anything or trying to make money for himself. All the profits from his unauthorised trading – which he claimed amounted to $2 billion in 2007 – were made for the bank.

Some believe he was doing it just for recognition while others point to the €300,000 bonus he was due to collect as a result of his ‘improved’ trading performance in 2007.

The trial

Kerviel never denied that he was guilty of the alleged crimes. The key point in the trial was whether SocGen managers knew about the activity and let it happen.

Kerviel maintains they did know and implicitly encouraged it. After all, if the trades went well they stood to make a lot of money. He says other people were doing it and he was simply the scapegoat.

But SocGen published two internal reports claiming Kerviel worked alone and all they were guilty of was incompetence.

Kerviel became an instant star in France after the story broke and he released a book in May called “Memoirs of a Trader” outlining his version of events.

Industry experts seem split on SocGen’s involvement. Some find it difficult to believe that his behaviour went unnoticed given the sheer volume of legitimate trades that would have been required to make such large profits.

Nevertheless, the court ruled that Kerviel was the only one to blame and that he must pay back the €4.9 billion he lost the bank.

The repayment is a theoretical amount as there is no way Kerviel could afford it, but it reinforces the idea that the bank did no wrong.

Kerviel has already lodged an appeal which will allow him to stay out of prison until the appeal trial has finished.

But SocGen still hasn’t gotten off lightly. On top of the major blow to their reputation, they have lost $7 billion, their share price has plunged, middle managers were removed, and the CEO resigned, all thanks to a junior trader named Jerome Kerviel.

By The Casual Truth

Photo – Jerome Kerviel