Case study: Jerome Kerviel $6 Billion Societe Generale Fraud case 2008
The Facts about the Jerome Kerviel $6 Billion Societe Generale Fraud case 2008
The Issues in Jerome Kerviel’s $6 billion fraud case
Jerome Kerviel is a famous French rogue trader who is responsible for huge losses in the Societe Generale bank where he worked. These losses which are estimated at 4.9 billion Euros were made between 2005 and 2007 are said to have resulted from unauthorized trading deals in the forex trading markets by the rogue trader. The Societe Generale bank has also been blamed for poor internal checks and balances which would have helped to discover and curb the shoddy trading deals much earlier. Jerome Kerviel’s fraud case is one of the largest in the banking trade history.
The Background of the case
Societe Generale is the second largest bank in France and was created in 1864 during Napoleon III’s reign. As at December 31st 2007, the bank was estimated to have amassed 46.2 billion Euros from offering financial services within the Euro Zone.
Having graduated with a Masters degree in finance from Université Lumière, Lyon, Jerome Kerviel got employment at the Societe Generale in 2000 and was immediately posted to the compliance department. He worked for five years in this department before being promoted to become a trader in futures markets at the Bank’s Delta One department.
Under this position, Jerome Kerviel was required to conduct arbitrage trading without taking any huge risks that would cost the Bank. However, in his confession he stated that he had began his betting streak in 2005 and managed to conceal this by creating fictitious hedges and hacking into other employees’ accounts and deleting some of the entries in the Societe Generale’s system.
How Jerome Kerviel’s fraud was discovered
Jerome Kerviel continued to hide his losses and in fact by using two portfolios managed to fool the system. He was adept at computers and had come up with means of evading suspicion while working at the compliance department.
In fact, the internal control unit, Mission Green did not countercheck at least 75 fraudulent alerts or warnings on Jerome Kerviel’s position as a trader. However, this rogue trader was discovered when the Societe Generale Bank discovered in mid January that an email of a trading deal with one of the big banks in France was fictitious. Upon investigations, Mr. Kerviel failed to give sufficient explanations for this and a call to the supposed bank confirmed that no such huge deal had been completed. This prompted the Societe Generale to scrutinize the trader’s portfolio more closely and this is when they uncovered the huge cover-up and massive losses. By then, the Asian market had collapsed and the European markets fell drastically. The relevant authorities were informed and Mr. Kerviel was brought in for questioning and apprehended.
The Rulings and effects of the case
The French authorities found Mr. Jerome Kerviel guilty of forgery, fictitious transactions, computer hacking and falsifying documents. Despite the huge losses the rogue trader had incurred the court only sentenced him to three years in prison because the Societe Generale and the prosecutor failed to establish that Mr. Kerviel’s intentions in trading were for personal gains. Jerome Kerviel was also required to pay $6 billion dollars to his former employer for the losses incurred.
The French Regulator also fined the Societe Generale for poor internal controls and failure to notice the Kerviel financial mishap on time. As a result, Societe Generale was fined 4 million Euros, the largest fine to ever be issued to a financial institution in the Euro zone.
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