Jérôme Kerviel, the Société Générale, stack one wins, face you lose

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 Angel-demon society general cheat kerviel

Who is Jérôme Kerviel?

 

Born January 11, 1977, Jérôme Kerviel graduated from the University of Lyon II, where he earned a Masters degree in market finance. Joined Societe Generale in August 2000, he first worked in the division Bank for investment and finance, where he acquired knowledge of the control procedures. In 2005, it passes on the side of the 'Front Office', where he is responsible for taking positions on contracts indices in the term. His annual remuneration, including the variable part, namely the bonus was less than € 100,000, what was in the lower bands of this type of business.

Jérôme Kerviel nevertheless became known in the news not by his studies or his career but as the author of the most massive fraud in the history of finance. Indeed as a former Société Générale trader, he has created a truly undetectable parallel system. He has built since his job a company concealed inside the halls of Société Générale market and managed each time to hide its positions by other positions. This talent for concealment allowed him to change his positions, move them as controls, because he knew the calendar.

Today, Jérôme Kerviel was found guilty of breach of trust, forgery and use of forgeries and fraudulent introduction into a data system. He must also repay to the Bank all of the amounts claimed, or €4.915.110.154.

It was found liable civilly, at height of 4.82 billion euros, Societe generale losses discovered in January 2008, resulting from the liquidation of its catch of positions on futures on equity indices amounting at that time to about 50 billion euros (more than the own funds of the Bank) and that it has hidden its leaders by manipulations frauduleuses1. He was sentenced for breach of trust, forgery and use of forged and fraudulent introduction of data in a computer system. This judgment of the Court of appeal of Paris confirmed for the imprisonment sentence, but the damages have been broken by the Court of cassation in March 20142.

Following the liquidation of its positions, Jérôme Kerviel is held responsible for all of the losses recorded by the Bank Group, which makes far higher damages which have been caused by the misconduct of an employee in France, all categories, and so for a salarie3 broker. Société Générale losses also cost 1 billion euros to the french State.

 

In an attempt to understand the reasons that have induced Jérôme Kerviel, real symbol of the excesses of global finance, to commit the offences attributed to him, it seems relevant to be interested how was seen this character as well by public opinion, by its professional environment in which it evolved at Société Générale as well as by relatives.

  • For public opinion, Jérôme Kerviel is both the artisan and the victim of the excesses of finance. For some, he is a man alone and isolated against a Bank, world leader in financial derivatives and straight out wonders paradise of the grandes écoles.
  • According to the CEO of Société Générale, Daniel Bouton, Jérôme Kerviel is a single man who had the intelligence to escape all control procedures, a man who built a company concealed within the group using the instruments of Société Générale.
  • HRD of Société Générale evokes a fragile being, without particular genius through family difficulties.
  • Her co-workers talk about them to a lonely man who had not taken a vacation for a long time, which followed constantly its positions stock and which enjoyed a relatively good reputation in domestic markets. For them it was only a normal, very worker type happened the first morning and that started last night. It was simply someone who worked a lot but that was certainly not a genius.
  • His mother, as well as the rest of his family described him as a normal boy who, according to them, is not responsible for what he is accused. He is simply made wearing a hat that is far too broad for him.

The Société Générale case or the kerviel case?

Note that changing a name is not so innocuous that it seems and it has a
important consequences. So the case of the company
General has been transformed into "Kerviel case", which clear the company and changes
public opinion.

Media Guide also opinion with the choice of their word, in
preferring all the lexical field bound to the emotional: we talked little of BSE, the mad cow term is in all minds, with all associated with fear.

So should we not speak of the Société Générale case rather than case Kerviel?

That has happened?

 

The information provided by Société Générale, Jérôme Kerviel has derived its role as dealer, whose risk is limited, and took of directional positions i.e. made bets on the evolution of European stock market indices. The question that might be asked is "why these operations have not raised alert in different levels of checks provided by Société Générale?". The arguments made are the following:

  • On the one hand, efficiency and variety of the techniques of concealment used by Jérôme Kerviel allowed him to pass through nets;
  • On the other hand, the inspections necessary for the identification of the fraud was simply not provided.

 

This last finding is naturally much more inconvenient for the direction of the Société Générale. In effect this means that employees of back-offices do not have the necessary training in control and that the system of internal controls put in place at the time of the facts contained huge flaws.

These different internal failures at Societe Generale helped Jérôme Kerviel to achieve between 2005 and 2008 a multitude of unauthorized operations. Thus we can mention the positions taken by the person concerned between June and October 2006 on action Solarworld, quoted in Germany, and on which he was able to report a gain of €18K in 2005 and 1.8 M€ in 2006. In 2007, Kerviel bet first on the decline in the DAX and accumulated a position from futures which reached €28Mds to June 30, 2007. On average, Jérôme Kerviel bought 1700 contracts per day, or 150 000 contracts altogether. This position being first losing, 24-30 August was unwound. From September 11, 2007, Jérôme Kerviel bet again on the European indexes lower. He then held 80 000 on the DAX future contracts and 350 000 contracts on the EuroStoxx. These positions have proven winning again. Indeed, the positions was unbuckled from November 6, with a gain of 1, €5B. Finally, in 2008 Jerome Kerviel, has bet heavily and wrongly on a European stock market indices rise. The potential losses on its positions accounted for approximately EUR 1 billion when they were discovered, but they have quickly inflated within 3 days up to 4.9 billion euros. Société Générale decided to settle its positions while stock markets around the world plunged.

 

Summary of the trial

 

Jérôme Kerviel is charged with forgery and use of forgery, breach of trust and fraudulent intrusion into a system of automated processing of data.

He is liable as such maximum five years in prison and a fine of € 375 000. Société Générale is also requesting damages in the amount of the loss announced 4.9 billion euros.

The first days of the trial were rather unfavourable to the defence, until it does not either subsequently reverse it.

Many facts that have been recognized by the accused, it seems logical that Jérôme Kerviel is not released on the 3 alleged charges. Responses from the trader to the specific questions of the Prosecutor the day 7 go in this direction.

January 24, 2008: Société Générale's complaint and conduct of instruction

 

Jérôme Kerviel was incarcerated at the prison de la santé (Paris).

Société Générale filed a complaint the afternoon against Jérôme Kerviel broker for 'fake bank write, use of false and an attack to the automated data processing system' from the Tribunal of Nanterre, defence site, where worked its trader, dependent of this juridiction35. The Paris Prosecutor's Office, was also seized by an individual shareholder of a complaint against Société Générale for "scam, breach of trust, false and forgery, complicity and concealment" and has opened a preliminary information the same day and has entrusted it to the financiere35 brigade. On the other hand, an association of small shareholders, the acsess, Association of small holders of assets, said have also lodged a complaint with Paris prosecutors for 'dissemination of false or misleading information having acted on the course of stock exchange securities' 35. At the request of the Paris Prosecutor's office, the Court of Nanterre is functus the complaint so that there is only a single instruction36.

Convened, Jérôme Kerviel came spontaneously and was placed in custody the for purposes of interrogation in the premises of the financial brigade handed free under judicial supervision the 37. At the end of a custody of 48 hours, presented before the financial pole of the Paris Court with an application for review by the Paris Prosecutor's "attempted to scam" (art.) 313-1) 38, "false and forgery," "abuse of aggravated confidence", and "harming a computer data system. Pre-trial detention was requested to 'protect the suspect of the risk of pressure' to the proces39. Investigating judges responsible for the case, Renaud Van Ruymbeke and Françoise Desset, did not follow the Prosecutor's office and opened the statement regards Jérôme Kerviel, for a simple "breach of trust" (art.) 314-1) 40, for "forgery and use of forgeries" write private (art. (441 1) 41 and 'introduction in a computerised system of automatic processing of computer data' (art.) 323-1) 42, 43.

The same day, Jean-Claude Marin, Prosecutor of the Republic, which requires the immediate detention of Jérôme Kerviel up to the date of the trial, has decided to appeal to release at the end of the vue44 guard. The in an interview granted to France Info, Rachida Dati, Minister of justice, explained this determination to imprison him without waiting for the judgement by stating that "it is also necessary for reasons of public order to maintain under the hand of the justice Jérôme Kerviel" and "It is an offence of such magnitude" (EUR 5 billion) which has "shocked" the French. Furthermore, it indicates that the responsibility of Mr. Daniel Bouton may be committed, without mentioning criminal information against lui45.

According to statements made in the course of the preliminary inquiry and reported by Mr. Jean-Claude Marin, Jérôme Kerviel subtracted no amount of money, but has committed funds of the Bank the threshold to which he was entitled, by abusing certain procedures of control with false information, but without getting out of the scope of his duties. On the other hand, the profits or losses generated by these excesses, which have begun to intervene as early as 2005-2006, were made on behalf of the Bank that cashed them. The latter has several times taken into account for the calculation of its remuneration. It is to increase its share of professional remuneration, that Mr. Kerviel took more than risques46. The world publishes the a part of the minutes of the hearing made by the Paris Prosecutor's office during the preliminaire47 information.

For Me Élisabeth Meyer, the first lawyer in Kerviel48, there is no longer question of fraud and fraud alleged by Mr. Bouton. The question that remains to be determined is whether or to what extent the penal nature of the misconduct alleged against Mr. Kerviel applies to procedures and internal to a company in the framework documents relationships between employees, and to what extent such practices were common and were tolerated, or even ratified encouraged several times by his superiors. In which case it would not be criminal misconduct, but professional misconduct punishable, depending on their severity, by a licenciement49 assessing.

As soon as the review of its employee known, Société Générale is a civil party the . Convened to ask for explanations on the reasons for this request, the investigating judge Renaud Van Ruymbeke has heard the Secretary-general of the Bank, "Mr. Schricke (who) has provided to the judge's explanation of the organizational structure of the Société Générale specifying including what was the position of Mr. Kerviel to the Bank ' 50.

A second search was conducted the at the home of his brother in Paris where he lived and where his personal computer was saisi51.

The It is placed in provisional detention at the prison de la santé in Paris, the judges according to the requirements of the public prosecutor who had argued for the «necessities of the statement because the acts of investigation continues». Committed by examining magistrate Renaud Van Ruymbeke and Françoise Desset is Jean-Pierre Bouchard, who realizes the psychological expertise of Jérôme Kerviel during his incarceration. Imprisoned in a "VIP cell" (without fellow prisoners), his requests for release fail until the . It is after 37 days of detention that the Court of appeal of Paris ordered the release of Jérôme Kerviel. It remains subject to "very strict judicial control" according to the Paris Prosecutor's office, as opposed to the release, but has not appealed this decision.

The judges have completed their instruction52. End of August 2009, Jérôme Kerviel is returned in correctionnelle53.

August 31, 2009: order for reference

August 31, 2009, judges Renaud Van Ruymbeke and Françoise Desset establish their order for reference of 76 pages, pressed on the investigations of the financial Brigade and attempting to answer the following seven questions (I): what was devolved by the Bank Mr Kerviel activity? (II): how Jérôme Kerviel managed to get out of this framework? (III): why the Bank has t – not react in the light of these signals? (IV): why the internal controls of the Bank have failed? (V): in what circumstances the matter is resolved? (VI): the question of criminal qualifications (VII): the personality of Mr. Kerviel54.

June 8, 2010: trial

His trial starts June 8 201055. Jérôme Kerviel is being sued for "fake, forgery, breach of trust, fraudulent entry of data in a computer system" and is liable to up to five years in prison and 375 000 euros amende56. On 24 June, the Prosecutor requires against him a sentence of five years imprisonment including a year with sursis57. Kerviel then changed legal and defensive line, and Mr. Olivier Metzner now strives to show that "the Bank knew" 48. The , found guilty by the 11th Criminal Chamber of the Court of major jurisdiction of Paris chaired by Dominique Pauthe of all the charges and was sentenced to five years in prison with two years suspended. In addition, he must pay the sum of 4 915 610 154 euros in damages to the company generale58, 59. The judgment fully clears Société Générale from liability. However, serious deficiencies in the internal control system have been confirmed at Bercy by several senior officials of the direction of the tresor60 and the bancaire61 commission.

June 4, 2012: trial on appeal

An appeal trial takes place from 4 to 28 June 2012. Kerviel changed a third time and lawyer line of defense: Me David Koubbi accused the Bank of having everything organized and plotted against Kerviel62: illegal operations of Kerviel would be covered by a grey cell that would have all recovered secretly, causing no loss for the banque48.

By a judgment of the Court of appeal of Paris confirmed the judgment of first instance.

2013-2014: Labour Court

February 12, 2013, Kerviel enters the Labour Court to claim expertise on the losses which it is allocated by Société Générale, believing that these losses do not exist and that the Bank never lost 4.9 billion, but recovered them secretly all conspiring against lui62. It is dismissed on 3 July 201363.

He also seized the Tribunal for unfair dismissal. The procedure is awaiting trial (March 24, 2014) 64.

March 19, 2014: Court of cassation

The the Court of cassation confirmed the conviction of Jérôme Kerviel to prison but cancels damages of 4.9 billion euros65.

Anyway nobody can pay such a sum (except 10 people around the world may be)

July 28, 2014: Tribunal de Grande Instance of Evry

The penal enforcement judge accesses the development application of the sentence placement under electronic surveillance, the prosecution appealed from this judgment but is affirmed and Jérôme Kerviel benefits from this development from September 8, 2014.

January 17, 2016: questioning of the investigation into Société Générale losses

January 17, 2016, the press announced that in June 2015, in a telephone interview recorded at his blind, Chantal de Leiris, former vice-Attorney of the Paris Prosecutor's office which had followed the investigation on the losses of Societe generale attributed to Kerviel, said that the investigation had been manipulated by the General society, with the consent of some superiors of Chantal de Leiris66 67.

 

Societe Generale knew?

jungle - hide

It is one of the core issues in this case.

Master Metzner had proclaimed loud and clear that it would demonstrate that Societe Generale was aware, using new parts. The defence strategy is in effect to say that Societe Generale knew for a long time, since at least March April 2007, with the emails exchanged on a fictitious transaction with a person of the service of controls.

A real moral problem which consists of big to say either you cheat and you are rewarded and we condone or you do not you are transferred or makes you have you are fired also.

And especially a bank that lost billions without noticing… Vive seriously…

 

 

New parts in question:

  • table Excel showing accounting lines of orders passed by the traders on the basis of data from serve Eliot (day 1)
  • copy screen of the tool at the disposal of the managers to control the limits and risks, nominal column (day 3)

Cash, the fact that Société Générale says that supervisors of JK could only look at the cash only once per month (day 4 Benoit Taillieu), unless it is challenged by the Court or defence, undermines the thesis that the level of cash of€ 1.4 billion over several weeks could not be ignored by n + 1.

The issue of the EUR 55 million result declared end of 2007 by JK that could alert recurs, relatively either JK functions, either objectives or daily limit of 125 million euros.

Regarding the damages claimed the trader, the Bank only has to take on itself on its serious shortcomings:

  • control systems;
  • teams of controls;
  • hierarchy.

  • Alerts (internal, external) were numerous over time.

    Aggravating circumstances, the trader had taken at fault in 2005 and a fraud (even much lesser magnitude) involving fictitious transactions had been discovered in the first half of 2007.

    Transparency, finally, or almost. For the first time, Société Générale issued a nearly complete document on the different operations performed by Jérôme Kerviel. It is the report of the Inspectorate General of the Bank, which inspired the progress report of the special Committee of the Board of Directors of Société Générale, chaired by Jean-Martin Folz.

     

     

     

     

     

     

    The conclusions of the special Committee.

     

    Three observations:

    (1) it validates the first explanations provided by the Socgen. Kerviel has derived from his trade as a dealer, whose risk is very limited, and has taken "directional positions", i.e. made bets on the evolution of European stock market indices.

    (2) the ex-trader acted alone within the Bank and there is no evidence of complicity, subject that will bring up the investigation within Fimat, the Socgen brokerage subsidiary.

    (3) its operations were not detected earlier because, on the one hand, 'effectiveness' and "variety of the concealment techniques employed by the fraudster," what had already been said, and more importantly, on the other hand by the fact that "operators deepen not systematically their audits", then by "the absence of certain controls that were not provided for and which would have been likely to identify fraud". A much more annoying fact for the Directorate. This means that the back-office employees are not trained or encouraged to take any initiative in the work of control, and that the system itself was huge flawed.

    Then, the detail of the operations carried out by Kerviel according to the progress report of the Inspectorate General, extracted from work entitled "Mission Green":

    For 2005 and 2006: Kerviel made some unauthorized transactions. Thus, it takes between June and October 2006 a position on the Solarworld action, listed in Germany, between 100 and 150 M€. Over these two years, he won without declaring, 180 k€ in 2005 and 1.8 M€ in 2006.

    In 2007: Kerviel bet first on the decline in the Dax, German stock index, and is from the month of March a position from futures, which will reach 28 billion € to June 30. On average, he bought 1700 contracts per day, or 150 000 contracts altogether. This position is losing. From July 24 to August 30, the position is unwound. From September 11, Kerviel bet again on a decrease in the European indices, namely the Dax and the EuroStoxx. He then holds up to 80 000 future contracts on the Dax, and 350 000 contracts on the EuroStoxx. A winning bet. Its positions are unbuckled from November 6, generating a gain of 1.5 billion €.

    2008: Kerviel bet on rising stock market indices and is between 2 and 18 January a "long" position from futures, reaching 49 billion €. Its unwinding, between 21 and 23 January, a loss of 6.4 billion €.

     

    Other lessons from the report of the Inspection

     

    (1) details of Kerviel concealment operations. Or how cheat back-office via the internal computer system called Eliot.

    The idea is to return to the base a specific type of operations that did not alert of oversight services, then to cancel (the cancellation to not conduct regulation and delivery of securities).

    Namely, an operation with a "significant offset", i.e. a difference of 30 days between the date of the transaction and the value date. Meanwhile, the back-office does not check the. Operations on date of value offset being checked at the end of five days.

    Or so an operation with certain consideration: either a matching internal to the group, for example Clickoptions, a 100% subsidiary of Socgen, which does not require any confirmation because the operation is reviewed in the context of intragroup operations. Or an external consideration with a small institution, where it is not intended margin call.

    These manipulations were used for several types of financial instruments. The report cites four. The simplest are actions of several European companies: Allianz, Solarworld, Nokia, Porsche, Deutsche Bank, Business Object, Conergy. Kerviel would have bought (or sold) these shares off-Exchange, OTC.

    (2) Finally, the chain of events that leads to discover his manipulations. Note that Kerviel was caught for its position of 50 billion, but because of an operation whose objective was to hide its 2007 profit.

    Inspection has reconstituted, from the exchange of mails, the relationship between Kerviel and the different services of control on this particular point. There again, the terms are technical, but for little it goes in, it becomes very fun retrospectively by exploiting the division of labour in a big institution that the Socgen, it can easily move between the cracks time to do big nonsense.

    It all began on December 31, 2007. To avoid being revealed a profit in its annual result, Kerviel invented losing trades. He enters the system eight forward transactions with as counterpart Clickoption. Internal counterparty that passes unnoticed. On January 2, the details of eight transactions is sent to an employee of the back office (OPER in the jargon of the Bank) with the following comment: "we will put the broker until the counterparty CONF.". The next day, Kerviel modifies the 8 transactions on returning the name of the Baader Bank as counterparty.

    Finally, a meeting is organized on Thursday, January 17 at 4: 30 p.m. between Kerviel and members of CAIP. The trader includes while the problem comes from the fact of his choice of consideration. The Baader is not a usual consideration of Socgen Bank, there's no contract framework between the two institutions and the risks are very high. Suddenly, it changes version and said that the Deutsche Bank its real counterpart. The cooke ratio becomes reasonable: the overflow is more than EUR 390 million. All returned in order, except that asked Kerviel a confirmation of the order passed by the Deutsche Bank.

    It is done the next day, at 12:59. Kerviel sends a false justification (a mail tampered with a Deutsche Bank header). But in the meantime, his superiors at the Front began to worry. And a new meeting is held in the evening. One of the heads of Department then intends to call a contact at Deutsche Bank. It does on Saturday morning, and discovers that the operation is fictitious. Everything crumbles. Kerviel, party at weekend, has more than a few hours to live as an employee of the Socgen.

    Note, finally, inspection not found trace of Kerviel using passwords of the back office, a version provided so far by the Bank's management. "Task force" which carried out the survey the first days would be "misconstrued information collected thereon", according to the report.

     

    Conclusion

     

    In conclusion, Jérôme Kerviel has spilled much ink and generated a lot of questions about the checks carried out in the world of finance. The media coverage allowed every citizen to ask how one man could be responsible for a loss of nearly 5 billion euros.

    This same media is at the origin of catches of confidence of various stakeholders such as economists, politicians, bosses until some "lambda" interested individuals. All this so that the case is of immeasurable complexity, even for specialists.

    Jérôme Kerviel seems to be the scapegoat, victim of the consequences of the financial crisis. Trial appears as uneven as it is supposed to explain to judges who have never seen a room how actually works, to generalize, the 'trading '. Facing him, Société Générale, who knows perfectly its software, procedures and other safety measures and that repeats the theory of finance within his institution.

     

    Bibliography

    Bibliography

     

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