The Globe and Mail: Eric Reguly
Société Générale SA struggled yesterday to defend its stated assertion that Jérôme Kerviel, the young trader the French banking giant accuses of massive fraud, acted entirely undetected for almost a year as his trading positions climbed to tens of billions of euros.
French investigators said Eurex, the European futures and options exchange, questioned trades by Mr. Kerviel, 31, in November. The trader was put under formal investigation yesterday, four days after SocGen revealed it had lost €4.9-billion ($7.2-billion) as a result of his unauthorized trading spree.
“In November, 2007, Eurex said it was worried about a particular position that had been taken,” said Jean-Claude Marin of the Paris prosecutor’s office.
He said Mr. Kerviel had “justified his positions, saying they were not speculative because he had hedged against them. The bank was right to think that he was practising his normal duties as a trader, even if a certain number of positions appeared to exceed his authority.”
For its part, SocGen has said it was entirely unaware about Mr. Kerviel’s outsized trades until he was confronted by his immediate bosses 11 days ago. The bank said Mr. Kerviel had committed an “exceptional fraud” and had “falsified documents” and used other employees’ passwords to create fake hedges. Without hedges, the trading positions were uninsured, that is, they were fully exposed to potential losses.
Mr. Marin said Mr. Kerviel had admitted to acting alone but also claimed unauthorized trades were widespread at SocGen, the country’s second-biggest bank. The prosecutor added that Mr. Kerviel “felt that he benefited from a certain tolerance” from the bank.
Mr. Kerviel’s lawyers said their client will be investigated for breach of trust, breaching computer security and falsification, but not fraud. One of his two lawyers, Elisabeth Meyer, called the judges’ decision to exclude the fraud from investigation “a great victory.”
Mr. Kerviel joined the bank in 2000 and initially worked in SocGen’s back office, where he gained intimate knowledge of the bank’s control systems, and evidently learned how to elude them. He became a trader in 2005.
Ron Dembo, the founder and former chief executive officer of Canada’s Algorithmics Inc., a risk management advisory firm that counted SocGen among its clients, said the bank clearly underestimated the behavioural risks of its employees. “To take a guy who was in the back office, who knew how to circumvent things and how to get around limits, and turn him into a trader is what you would call risky,” he said in a phone interview.
Mr. Dembo, who is now CEO of Zerofootprint, a Toronto organization that helps companies reduce their carbon output, said the pity of the rogue trader affair is that SocGen had been a global leader in equity derivatives since the early 1990s and was making fortunes from them. “They created immensely complicated structures that were mathematically based,” he said.
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