The Société Générale Fiasco - Lessons in Risk Management

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"The ghost trader had in-depth knowledge of the control procedures resulting from his former employment in the middle office. He managed to conceal these positions through a scheme of elaborate fictitious transactions." ¹

- Daniel Bouton, Chairman and Chief Executive Officer, Société Générale, in January 2008.

"This latest rogue trader scandal is yet more evidence that while rules-based regulation and controls work for kids in the playground, it won't stop adults doing the wrong thing. The banking industry used to have a reputation for honesty, trust and prudence. This latest scandal, on top of the massive losses in credit markets, and the ongoing incidence of mis-selling to retail customers, indicates that there is a systemic deficit in ethical values within the banking industry."²

- Roger Steare, Professor of Organizational Ethics at Cass Business School in London.

"Rogue trading is probably a daily occurrence within the financial markets. What shocked me was the size. I never for one moment believed it would get to this degree of magnitude, this degree of loss."³

- Nick Leeson, Trader held responsible for the fall of Barings Bank, in January 2008.

Introduction

On January 24, 2008, Société Générale, the second largest bank in France, announced that it had lost € 4.9 billion due to unauthorized trades. The bank held Jérôme Kerviel (Kerviel), a trader from the Delta One Desk team, of the Global Equities Derivatives Solutions (GEDS) department, in Société Générale responsible for creating a fraudulent trading position that subsequently led to losses (Refer to Exhibit I for different departments in Société Générale, their activities, and the details of Delta One). The origins of the fraud date back to 2005 when Kerviel was transferred to the Delta One Trading desk after working with the bank's back and middle offices for five years.

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1] Gordon Rayner , "Société Générale Trader Hacked into Computers," www.telegraph.co.uk, January 26, 2008.

2] Fiona Walsh, David Gow, "Société Générale Uncovers £3.7 Billion Fraud by Rogue Trader," www.guardian.co.uk, January 24, 2008.

3] "Rogue Trader to Cost SocGen $7bn," http://news.bbc.co.uk, January 24, 2008.

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