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Control Complacency: Rogue Trading at Societe Generale

STEVE LINDO

Principal, SRL Advisory Services

This case study is divided into two parts. Part One seeks to bring alive the circumstances leading up to the June 2010 public trial involving Societe Generale, the French banking group, and Jerome Kerviel, the equities trader whose positions caused Societe Generale to lose €4.9 billion (U.S.$7.2 billion) in January 2008. Part One concludes with an exercise in which the reader is asked to form his or her own opinion on who was to blame for the losses, based on the information contained in Part One. Part Two reveals the actual outcome of the trial and offers additional study materials for the reader. A Classroom Guide, available separately to instructors wishing to facilitate interactive discussion of the case study in a classroom setting, identifies key risk management lessons from the case study and provides a session plan.

ONE: KERVIEL'S TRIAL – A MEDIA CIRCUS

On Tuesday, June 8, 2010, the criminal trial of 33-year-old Jerome Kerviel began in Paris's Palais de Justice. The charges against him were forgery, abuse of trust, and illegal use of computers, brought by the Paris public prosecutor. Since the date he was charged, January 28, 2008, Kerviel had been free on bail and preparing his defense.

Despite the long time lapse between the January 2008 events that had caused Societe Generale's losses and the commencement of the trial, media attention was at a fever pitch because of Kerviel's claims that he was a scapegoat for high-risk trading practices that were condoned by Societe Generale when they were profitable. Kerviel released an autobiographical book presenting his version of the events shortly before the trial.

Societe Generale, on the other hand, maintained from its earliest public communications the posture that Kerviel was a rogue trader who single-handedly developed methods to conduct unauthorized trading without being detected and used them to take massive trading positions that ultimately backfired when markets turned against him. Societe Generale also sought to mitigate the damage to its reputation, due to the apparent facility with which Kerviel conducted his

Exhibit 23.1 Sample of News Headlines at the Time of Kerviel's Trial

Headline

Source and Date

Rogue Trader Says Ex-Bosses Encouraged Him French Trader Stays Silent as Trials Begin amid Media Scrum

Reuters (June 8, 2010)

The Guardian (June 8, 2010)

$62 Billion of Suspect Trades Exposed Lack of Oversight

CBC (June 8,2010)

Kerviel Gets Day in Court, SocGen Too

Wall Street Journal (June 7, 2010)

Kerviel's Trial – The World of Finance Takes a Hard Look at Itself (translation)

L'Express (June 25, 2010)

Rogue Trader Denounces "Banking Orgy" in Book

Agence France Presse (May 4, 2010)

unauthorized trading, by publishing in May 2008, a detailed examination of the operational and managerial circumstances that had allowed Kernel's unauthorized trading to occur and the remedial actions it was taking to prevent recurrence. Societe Generale stated from the outset its intention to hold the individuals accountable whom it considered responsible for the unauthorized trading, and took the first step by filing a civil lawsuit against Kerviel on January 24, 2008.

By June 2010, global financial markets were slowly recovering from the 2008 crisis, but memories of Societe Generale's trading losses remained especially vivid because, at the time of their announcement in January 2008, the incident seemed to confirm investors' worst fears that banks in general were taking massive amounts of risk far beyond their traditional lines of business. Exhibit 23.1 shows selected news headlines published at the time of Kerviel's trial, which illustrate this loss of public confidence in banks' risk management discipline.

 
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