With Jerome Kerviel, Societe Generale bank lost approximately 4.9 billion Euros

Jerome Kerviel

In January 2008, the bank Societe Generale (French Bank) lost approximately €4.9 billion closing out positions over three days of trading beginning January 21, 2008, a period in which the market was experiencing a large drop in equity indices.  The bank states these positions were fraudulent transactions created by Jerome Kerviel, a trader with the company. The police stated they lacked evidence to charge him with fraud and charged him with breach of trust and illegally accessing computers. Kerviel states his actions were known to his superiors and that the losses were caused by panic selling by the bank.

Kerviel joined the middle offices in the bank Societe Generale in the summer of 2000,  working in its compliance department. In 2005 he was promoted to the bank’s Delta One products team in Paris where he was a junior trader. Societe Genrale’s Delta One business includes program trading, exchange-traded funds (ETFs), swaps, index and quantitative trading.

Bank officials claim that throughout 2007, Kerviel had been trading profitably in anticipation of falling market prices; however, they have accused him of exceeding his authority to engage in unauthorized trades totaling as much as €49.9 billion, a figure far higher than the bank’s total market capitalization. Bank officials claim that Kerviel tried to conceal the activity by creating losing trades intentionally so as to offset his early gains. According to the BBC, Kerviel generated €1.4 billion in hidden profits by the end of 2007.  His employers say they uncovered unauthorized trading traced to Kerviel on January 19, 2008. The bank then closed out these positions over three days of trading beginning January 21, 2008, a period in which the market was experiencing a large drop in equity indices, and losses attributed are estimated at €4.9 billion.

The bank states that Kerviel was assigned to arbitrage discrepancies between equity derivatives and cash equity prices,[9] and “began creating the fictitious trades in late 2006 and early 2007, but that these transactions were relatively small. The fake trading increased in frequency, and in size”.[10] The Executive Chairman of Société Générale, Daniel Bouton described the pattern as like “a mutating virus” in which hundreds of thousands of trades were hidden behind offsetting faked hedge trades. Officials say Kerviel was careful to close the trades in just two or three days, just before the trades’ timed controls would trigger notice from the bank’s internal control system, and Kerviel would then shift those older positions to newly initiated trades.[4] City experts have expressed skepticism of the bank’s account, saying that a pattern of closing out trades within the three-day cycle alleged could not be accomplished given the immense sums involved.

In answers to the rumors alleging Kerviel had fled Paris following the discovery of the unauthorized trading, on January 24, 2008 Kerviel’s lawyer denied that he attempted to disappear and said he remained in Paris to face the accusations.

Also on January 24, 2008, Societe Generale filed a lawsuit against “a 31-year-old person” for creating fraudulent documents, using forged documents and making attacks on an automated system, according to Clarisse Grillon, a spokeswoman for the Nanterre prosecutor. The french newspaper Le Figaro reported that in addition to the Societe Generale lawsuit, a group of shareholders filed a lawsuit for fraud, breach of trust and forgery.

On the eve and afternoon of January 25, 2008, police raided the Paris headquarters of Societe Generale and Kerviel’s apartment in the western suburb of Neuilly-sur-Seine (near Paris) to seize his computer files. On January 26, 2008, the Paris prosecutors’ office stated that Kerviel “is not on the run. He will be questioned at the appropriate time, as soon as the police have analyzed documents provided by Societe Generale.” He was taken into police custody later that day.

Kerviel’s initial 24-hour detention was extended to 48 while French law enforcement questioned him about possible accomplices. The investigation later widened to encompass his personal cell phone records, and to explore possible links to other individuals working at rival banks and private investment firms who may be involved. The police are investigating whether he worked alone, and whether any investors outside of Societe Generale may have been tipped in advance. Police are interested whether others were involved in either the trades themselves, or received notice of the bank’s impending sell-off before the details of the scandal were publicly disclosed.

Kerviel was formally charged on January 28, 2008 with abuse of confidence and illegal access to computers. He was released from custody a short time after. The charges filed carry a maximum three-year prison term. On January 29, 2008 investigating judges Renaud van Ryumbecke and Francoise Desset had rejected prosecutor Jean-Claude Marin’s bid to charge Kerviel with the more serious crime of “attempted fraud” and refuse bail.

Societe Generale characterizes Jerome Kerviel as a rogue trader and claims he worked these trades alone, and without its authorization. Jerome Kerviel, in turn, told investigators that such practices are widespread and that getting a profit makes the hierarchy turn a blind eye. The current investigation involves what is reported to be the largest fraud in banking history.

On 11 March 2008, Societe Generale announced that another of their employees had been taken into custody in connection with the investigation of the fraud, and their headquarters searched by police.

Jerome Kerviel ‘s trial began on 8 June 2010. On 5 October 2010, he was found guilty and sentenced to five years of prison, with two years suspended, full restitution of the $6.7b which was lost, and a permanent ban from working in financial services. Caroline Guillaumin, a spokes-woman for Societe Generale, stated that the restitution was “symbolic”, and that the bank had no expectation that the sum would be paid. Olivier Metzner, Kerviel’s lawyer, described the sentence as “extraordinary” and said that Kerviel would appeal. Kerviel’s sentence was suspended until his appeal is completed.

On January 21, 2008, European stock markets suffered heavy losses of about 6%. The sharp fall, which was followed by an emergency cut in the federal funds rate by the United States Federal Reserve on the following Tuesday, the US markets were closed on the Monday for Martin Luther King Jr Day, came as Societe Generale tried to close out positions built up by Jerome Kerviel. This has led to speculation that stock market turbulence caused the Federal Reserve Board to cut the rate. A Federal Reserve spokesperson denied the central bank knew of Societe Generale’s situation when it made its decision.

It is estimated that over the period the total trading in futures and the cash market for the Euro Stoxx 50 was €544 billion. This would make the unwinding of Kerviel’s position account for five per cent or less of overall activity. Societe Generale’s investment banking chief, Jean Pierre Mustier, acknowledged that the three days of forced selling played a role in the market’s overall decline, but characterized that impact as “minimal”.

Jerome Kerviel grew up in Pont-l’Abbe, Brittany. His mother, Marie-Josée, is a retired hairdresser, and his father, Charles, who died in 2006, was a blacksmith. Kerviel has an older brother, Olivier. Kerviel is married, but he and his wife separated in 2008.

Jerome Kerviel graduated in 2000 from University Lumière Lyon 2 with a Master of Finance specializing in organization and control of financial markets. The university’s financial program, which was initiated in the 1990s with the support of France’s larger banks, was intended to prepare students for middle and back-office positions in the trading departments of financial institutions. Prior to that he received a bachelor’s degree in Finance from the University of Nantes.

During an interview, one of his former lecturers at Lyon, Gisele Reynaud, stated that “He was a student just like the others, a young man, and he didn’t distinguish himself from the others.”In 2001, at the suggestion of Thierry Mavic, the Mayor of Pont l’Abbe, Kerviel stood for a seat on the local council with the Union for a Popular Movement party but was not elected.

Photo by myahya 

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