2008 Société Générale trading loss

Employment history of Jérôme Kerviel

Kerviel joined the middle offices in the bank Société Générale in the summer of 2000,{{Cite news |archive-url=https://web.archive.org/web/20080203164327/http://www.telegraph.co.uk/news/main.jhtml?xml=%2Fnews%2F2008%2F01%2F26%2Fnkerviel426.xml |url-status=dead |archive-date=2008-02-03 |access-date=2008-01-29

The incident

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 claimed Kerviel "had taken massive fraudulent directional positions in 2007 and 2008 far beyond his limited authority"{{Cite news |access-date=2008-01-25 |archive-date=2011-08-28 |archive-url=https://web.archive.org/web/20110828105548/http://www.nytimes.com/2008/01/25/business/worldbusiness/25bank.html |url-status=live |access-date=2008-01-26 |archive-date=2017-09-06 |archive-url=https://web.archive.org/web/20170906202818/http://www.nytimes.com/2008/01/26/business/worldbusiness/26trader.html?_r=1&hp&oref=slogin |url-status=live

Kerviel is not thought to have profited personally from the suspicious trades. Prosecutors say Kerviel has been cooperative with the investigation, and has told them his actions were also practiced by other traders in the company. Kerviel admits to exceeding his credit limits, but claims he was working to increase bank profits. He told authorities that the bank was happy with his previous year's performance, and was expecting to be paid a €300,000 bonus. Family members speaking out say the bank is using Kerviel as a scapegoat to excuse its recent heavy losses.

Methods used

The bank states that Kerviel was assigned to arbitrage discrepancies between equity derivatives and cash equity prices,{{Cite web |access-date=2008-01-25 |archive-date=2008-01-28 |archive-url=https://web.archive.org/web/20080128011119/http://www.ft.com/cms/s/1/13e0c5b0-cb28-11dc-97ff-000077b07658.html |url-status=live |access-date=2008-01-28 |archive-date=2008-01-29 |archive-url=https://web.archive.org/web/20080129163517/http://www.nytimes.com/2008/01/28/business/worldbusiness/28bank.html?em&ex=1201669200&en=9787a96b4e941d12&ei=5087%0A |url-status=live

Allegations of fraud and legal ramifications

In answers to the rumors alleging Jérôme 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, Société Générale 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. Le Figaro reported that in addition to the Société Générale 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 Société Générale and Kerviel's apartment in the western suburb of Neuilly-sur-Seine{{Cite news |access-date=2008-01-28 |archive-date=2008-07-18 |archive-url=https://web.archive.org/web/20080718182239/http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3254619.ece |url-status=dead |access-date=2008-01-26 |url-status=dead |archive-url=https://web.archive.org/web/20080128122207/http://afp.google.com/article/ALeqM5gD0QVnXt4tdnH6g5s89mUo0u5O1Q |archive-date=2008-01-28 |access-date = 2008-01-28 |access-date=2008-01-28 |archive-date=2011-06-12 |archive-url=https://web.archive.org/web/20110612034855/http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3256630.ece |url-status=dead

Kerviel's initial 24-hour detention was extended to 48 while French law enforcement questioned him about possible accomplices.

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.

Société Générale characterizes Kerviel as a rogue trader and claims Kerviel worked these trades alone, and without its authorization. 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, Société Générale 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.

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 spokeswoman for Société Générale, 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.

Potential economic effects

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 (US markets were closed on the Monday for Martin Luther King Jr Day), came as Société Générale tried to close out positions built up by 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 Société Générale'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. Société Générale'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".

Notes

References

• . Chapter 11: Société Générale, pp. 179–196.

References

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