A Rogue Trader at Societe Generale Roils the World Financial System Most Important Facts Surrounding the Case Societe Generale alias SocGen is one of the oldest and recognized financial firms in France and worldwide. SocGen employs more than 130,000 workers and has 22. 5 million customers all over the world. The company is a leader in Corporate and investment banking, retail banking and financial services, and global investment management services.
In the beginning of the year 2008 company faced a crisis by losing around 5 billion euro’s because of a 31 year old trader Jerome Kervial who made unauthorized trade over the preceding year for around 73# billion which is above the market capitalization of 53# billion. Kervial worked in the risk management office of SocGen which helped him gaining knowledge about security procedures and back office systems and later was promoted as a lower-level trading desk known as Delta one.
His duty was to purchase one portfolio of European stock index futures and sell a similar combination of index futures of different value as a hedge in order to get a low risk profit outcome out of large transactions over time. Kervial outsmarted company’s security and information systems by investing in unauthorized port folios which could result in gaining or losing billions based on the market activity on that day.
He achieved it by making legal transactions on one way, but entered fake portfolios in the company’s data base which had no effect on cash positions, so that the real and fake trades would compensate one another leaving kervial’s investment limit within the acceptable risk creating no doubt for the supervisors when the balanced book is checked. Being familiar with the internal check schedules, kervial was able to delete the fake trades just minutes before the scheduled check and re-enter it soon after the check.
The temporary imbalance was not alerted by the system and using this trick he entered and cancelled new trades before the trade confirmation was sent to the banks which he accomplished by other employees access codes and user information. When superiors spotted kervial’s mistake he was really quick in fixing it to continue his fictitious activities. SocGen dismissed 75 warnings on kervial. The fraud was found when the DAX, FTSE and CAC-40 dropped. Later the fraud was found committed using simple techniques than sophisticated ones. Key Issues
One of the problems was that, the bank failed to follow up the warnings on kervial’s positions over the course of past several years. Instead of taking action on the warnings over kervial, SocGen dismissed the warnings claiming all traders would have similar amount of warnings over time, which finally resulted in a huge loss and crashed the reputation of the company. This show the organizational functions are weak. On the other hand, the security systems of SocGen were not efficient. Kervial used the login information’s of his colleague to conduct the fraud activities.
This shows that the IT infrastructure is not well programmed from stop committing a crime or fraud. Another problem was the scheduled checking system was carried out by the company which made kervial to commit the fraud. The system did not have proper tracking of records. The monitoring system is also not good enough to identify the fraud. The risk management control was not good to overcome the loss. The risk management team did not have backup plans, which resulted the company couldn’t face the financial crisis. Alternative Course of Action
Firstly, the bank has to make proper investigations over the warnings raised. The management system should be well structured in the means of communication and to take corrective actions against the mistakes done by the employees to overcome the fraud activities done, so that a heavy loss can be stopped from happening. If the trader goes beyond the trading limit he has to seek permission from two to three higher officials. Secondly, random and frequent checks should be implemented on the trading history of its traders. If this would have been carried out the loss would not have gone out of control.
The random checking information should not be revealed to the low level employees and to be maintained secretly. Third, the computer systems should have the track of entry and deleted data. The security should be high for personal logins, like finger print technology instead of user info. With this type of security unauthorized logins can be eliminated. Evaluating each course of action The first alternative course of action, that is maintaining a proper organizational structure, this would possibly have a good and effective output but it is a bit time consuming. A change in the operations would basically take some time to carry out.
The second alternative course of action will have a good output as employees will have this trade checks that will be carried out frequently and they would hesitate to do fraud activities. Frequent checks would take some production time of the employees. The third alternative course of action would help in finding the fraud after the crime is committed. This involves cost for programming and maintaining the server. This involves a risk of the server being crashed. Implementing this program is a bit time consuming as the server has to be programmed. Recommend the best course of action
In our opinion recommend the three courses of actions, they are as follows: 1) By maintaining proper organizational structure we could stop the fraud activities before the situation goes bad. 2) By carrying out frequent trade entries made by the traders. 3) To be more sophisticated against the online fraud and other crimes then it needs more hands-on when it comes to identity theft and fraud problems. So we should develop advanced sophisticated programs to track the records. Jerome Kervial confinement On January 2008 kervial handed himself to the police when societe generale found the loss of 5bn.
Jerome Kervial was charged against breach of trust, falsifying documents and breaching security but not for fraud. He served 5 weeks at Paris’s sante prison and he was left on conditioned bail to ensure the availability to investigators and prevent contamination of evidence and remain in France. Jerome kervial was dismissed from the company and now he is now working in a computer services company owned by a specialist who counseled his defense. REFERENCE: 1. Rougue Trader: Time Line of Events, Retrieved May 20, 2010, from http://news. bbc. co. uk/2/hi/business/7214019. stm 2. Ryan Blanch, (2009 feb 20).
Jerome Kerviel – Societe Generale case, Retrieved May 20, 2010, from http://www. hg. org/article. asp? id=6028, published by The Blanch Law Firm. 3. Soc Gen trader’s ‘scapegoat’ claim, Retrieved May 20, 2010, from http://www. connexionfrance. com/jerome-kerviel-societe-generale-trader-trial-colleagues-witnesses-testify-bank-11632-view-article. html. 4. Moult. J, (2009 January 29). ‘Rougue Trader’ in custody after double heartbreak ‘drove him to 3. 6bn pound fraud’ Retrieved May 20, 2010, from http://www. dailymail. co. uk/news/article-510089/Rogue-Trader-custody-double-heartbreak-drove-3-6bn-fraud. html