Jérôme Kerviel

Template:Current court case Jérôme Kerviel (born January 11 1977) is a French trader charged with abuse of confidence and illegal access to computers pertaining to equity index futures trading within Société Générale, resulting in losses valued at approximately €4.9 billion. Société Générale characterizes Kerviel as a rogue trader and claims Kerviel worked these trades alone, and without its authorization. Kerviel, in turn, told investigators that such practices are widespread and that getting a profit makes the hierarchy turn a blind eye. The current investigation is reported to be the largest individual fraud investigation in banking history.

Olivier Kerviel

Jeromes brother Olivier Kerviel a year earlier lost his job at BNP Paribas for being "in breach of controls and internal procedures". He worked as a Portfolio Manager at a subsidiary of BNP Paribas and left after "irregularities" were discovered. Olivier is said to have used his dealings with clients to advance his personal finances. The Daily Mail reported that "Olivier was trying to get rich off the back of clients by hijacking their surpluses."

Early life

Jérôme Kerviel grew up in Pont-l'Abbé, Brittany. His mother is a retired hairdresser and his father, who died in 2006, was a blacksmith. Kerviel is married, but he and his wife recently separated.

He graduated in 2000 from University Lumière Lyon 2 with a Masters in Finance specializing in organisation and control of financial markets. The university's financial program, which was initiated in the 1990s with the support of France's larger banks, was intended to prepare students for middle and back-office positions in the trading departments of financial institutions. Prior to that he received a bachelor's degree in finance from the University of Nantes.

During an interview, one of his former lecturers at Lyon, Gisèle Reynaud, stated that "He was a student just like the others, a young man, and he didn't distinguish himself from the others." In 2001, at the suggestion of Thierry Mavic, the Mayor of Pont l’Abbé, Kerviel ran for a seat on the local council under the UMP but was not elected.

Career

Kerviel joined the middle offices in the bank Société Générale in the summer of 2000, working in its compliance department. In 2005 he was promoted to the bank's Delta One products team in Paris where he was a junior trader. Société Générale’s Delta One business includes program trading, exchange-traded funds (ETFs), swaps, index and quantitative trading. Christian Noyer, governor of the Bank of France, has described Kerviel as a "computer genius"; however, sources within Société Générale described Kerviel as "not a star". Kerviel earned a combined salary and bonus of less than €100,000 per year, considered modest in terms of the salaries paid to traders in the financial markets.

Fraud accusations

The bank states that Kerviel was assigned to arbitrage discrepancies between equity derivatives and cash equity prices, and "began creating the fictitious trades in late 2006 and early 2007, but that these transactions were relatively small. The fake trading increased in frequency, and in size".

Bank officials claim that throughout 2007, Kerviel had been trading profitably in anticipation of falling market prices; however, they have accused him of exceeding his authority to engage in unauthorized trades totaling as much as €49.9 billion (US$73.3 billion), a figure far higher than the bank's total market capitalization. Bank officials claim that Kerviel tried to conceal the activity by creating losing trades intentionally so as to offset his early gains. His employers say they uncovered unauthorized trading traced to Kerviel on January 19, 2008. The bank then closed out these positions over three days of trading beginning January 21, 2008, a period in which the market was experiencing a large drop in equity indices, and losses attributed are estimated at €4.9 billion (US$7.16 billion).

The bank claimed Kerviel "had taken massive fraudulent directional positions in 2007 and 2008 far beyond his limited authority" and that the trades involved European stock index futures. Though bank officials say Kerviel apparently worked alone, skeptics question how unauthorized trading of this magnitude could go unnoticed. Kerviel's unassuming background and position have heightened the skepticism that he worked alone. Some analysts suggest that unauthorized trading of this scale may have gone unnoticed initially due to the high volume in low-risk trades normally conducted by his department. The bank said that whenever the fake trades were questioned, Kerviel would describe it as a mistake then cancel the trade followed by replacing that trade with another transaction using a different instrument to avoid detection. Kerviel's lawyers, Elisabeth Meyer and Christian Charrière-Bournazel, said that the bank’s managers "brought the loss on themselves"; accused the bank’s management of wanting to "raise a smokescreen to divert public attention from far more substantial losses in the last few months"; and said that Kerviel had made the bank a profit of $2 billion as of Dec. 31, 2007.

Managers for Société Générale have described some of the means it alleges Kerviel employed to avoid the bank's internal controls and escape detection. Its Executive Chairman Daniel Bouton describes the pattern as like "a mutating virus" in which hundreds of thousands of trades were hidden behind offsetting faked hedge trades. Officials say Kerviel was careful to close the trades in just two or three days, just before the trades' timed controls would trigger notice from the bank's internal control system, and Kerviel would then shift those older positions to newly initiated trades. City experts have expressed skepticism of the bank's account, saying that a pattern of closing out trades within the three day cycle alleged could not be accomplished given the immense sums involved. Kerviel has simply been suspended, but is in the process of being fired by the bank.

Kerviel is not thought to have profited personally from the suspicious trades. Prosecutors say Kerviel has been cooperative with the investigation, and has told them his actions were also practiced by other traders in the company. Kerviel admits to exceeding his credit limits, but claims he was working to increase bank profits. He told authorities that the bank was happy with his previous year's performance, and was expecting to be paid a €300,000 bonus. Family members speaking out say the bank is using Kerviel as a scapegoat to excuse its recent heavy losses.

Legal repercussions

In answers to the rumors alleging Jérôme Kerviel had fled Paris following the discovery of the unauthorized trading, on January 24, 2008 Kerviel's lawyer denied that he attempted to disappear and said he remained in Paris to face the accusations.

Also on January 24, 2008, Société Générale filed a lawsuit against "a 31-year-old person" for creating fraudulent documents, using forged documents and making attacks on an automated system, according to Clarisse Grillon, a spokeswoman for the Nanterre prosecutor. Le Figaro reported that in addition to the Société Générale lawsuit, a group of shareholders filed a lawsuit for fraud, breach of trust and forgery.

On the eve and afternoon of January 25, 2008, police raided the Paris headquarters of Société Générale and Kerviel's apartment in the western suburb of Neuilly-sur-Seine to seize his computer files. On January 26, 2008, the Paris prosecutors' office stated that Kerviel "is not on the run. He will be questioned at the appropriate time, as soon as the police have analysed documents provided by Société Générale." He was taken into police custody later that day.

Kerviel's initial 24 hour detention was extended to 48 while French law enforcement questioned him about possible accomplices. The investigation later widened to encompass his personal cell phone records, and to explore possible links to other individuals working at rival banks and private investment firms who may be involved. The police are investigating whether he worked alone, and whether any investors outside of Société Générale may have been tipped in advance. Police are interested whether others were involved in either the trades themselves, or received notice of the bank's impending sell-off before the details of the scandal were publicly disclosed.

Kerviel was formally charged on January 28, 2008 with abuse of confidence and illegal access to computers. He was released from custody a short time after. The charges filed carry a maximum three year prison term. On January 29, 2008 investigating judges Renaud van Ryumbecke and Francoise Desset had rejected prosecutor Jean-Claude Marin's bid to charge Kerviel with the more serious crime of "attempted fraud" and refuse bail.

Potential economic effects

On January 21, 2008, European stock markets suffered heavy losses of about 6%. The sharp fall, which was followed by an emergency cut in the federal funds rate by the United States Federal Reserve on the following Tuesday (US markets were closed on the Monday for Martin Luther King Jr Day), came as Société Générale tried to close out positions built up by Kerviel. This has led to speculation that stock market turbulence caused the Federal Reserve Board to cut the rate, although a Federal Reserve spokesperson denied the central bank knew of Société Générale's situation when it made its decision.

It is estimated that over the period the total trading in futures and the cash market for the Euro Stoxx 50 was €544 billion. This would make the unwinding of Kerviel’s position account for five per cent or less of overall activity. Société Générale's investment banking chief, Jean-Pierre Mustier, acknowledged that the three days of forced selling played a role in the market's overall decline, but characterized that impact as "minimal".

See also

• Yasuo Hamanaka caused a loss of about US$ 2.6 billion in unauthorized copper trading on the London Metal Exchange
• Nick Leeson caused a loss of US$ 1.4 billion for Barings Bank, leading to its collapse
• List of trading losses