Single Rogue Trader Convicted in Société Générale Case

Jérôme Kerviel used to be a trader with French financial giant Société Générale. At one point, he had as much as 50 billion euro worth of uncovered bets. Today, a court in Paris sentenced him to five-years (two of which are suspended) in prison and ordered him to repay SocGen 4.9billion euros in damages (the amount it lost while ineptly unwinding his bets -- he was in the black at the time he was discovered). While the penalty seems a bit lenient, the real question is why weren't more people in the dock? Management was either complicit or negligent because no one person should be able to establish such huge positions.

The defense lambasted the judgment of the court. Mr. Kerviel admitted he had "committed faults, stupid things ... I went too far." But it wasn't entirely his fault he maintained, "Without the laisser-faire of my hierarchical superiors, this would not have happened." His lawyer, Olivier Metzner, opined, "He is revolted that those that created him put all responsibility on him. Prison is unacceptable for a man who didn't make a penny." Didn't make a penny? Mr. Kerviel didn't receive a paycheck? He traded financial instruments pro bono? Nonsense.

As for SocGen, its lawyers decided to plead stupid rather than evil to the charge of laisser-faire. Scheherazade Daneshkhu wrote in the Financial Times, "The bank denied the ex-trader's allegations that his superiors knew what he was doing but turned a blind eye while he was making money. It admitted lax controls while it focused on building up its investment banking business into a derivatives powerhouse." Those lax controls resulted in a record 4 million euro fine by France's banking commission for "serious weaknesses" in its control system.

That fact that Mr. Kerviel admitted lying to colleagues, falsifying documents and entering fake trades does not excuse his superiors. While it is true that the forged documents and phony trades likely assured them that things were fine, he should not have been in a position to create the underlying "evidence." Barings ran into the same problem with Nick Leeson in the 1990s; a rogue trader managed to defeat weak controls to protect his own losing positions. After the Leeson debacle, the Dutch bank ING purchased Barings Bank in 1995 for the nominal sum of £1 and assumed all of Barings' liabilities, forming the subsidiary ING Barings. SocGen could have gone the same way.

The failure of internal controls at SocGen was extreme and egregious, but nevertheless, it illustrates the inherent difficulty of having managers who are responsible for profits also bear the responsibility of risk management and controls. Even a separate enforcement department within a financial institution will have an interest is erring on the side of profits rather than safety. The argument for international standards with national or international enforcement grows ever more compelling.

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