Societe Generale in damage control

Societe Generale has announced an external audit to ensure proper controls are in place, after the company faced one of the biggest cases of fraud in investment banking history.Thirty-one-year-old trader Jerome Kerviel, who worked at the bank from 2000, is currently under formal investigation for insider trading that eventually lead to Societe Generale losing over 4.9 billion euros.

In a statement released by Societe Generale, Kerviel started his unauthorised high-risk trading in share futures in 2005, after taking a position as a trader in the arbitrage department.During this time he bought futures in three European indices; the Eurostoxx, the DAX and the FTSE.

According to Societe Generale, “in order to ensure that these fictitious operations were not immediately identified, the trader used his years of experience in processing market operations to successively circumvent all the controls which allow the bank to check the characteristics of the operations carried out by its traders, and consequently their real existence”.

Kerviel combined several fraudulent methods to avoid the controls in place. For example, he chose specific operations with no cash movements or margin calls, he misappropriated IT access codes, and falsified documents allowing him to justify the entry of fictitious operations.

By the time Kerviel’s fraudulent activities had been uncovered on January 20, it was found he held positions worth about 50 billion euro, well in excess of the bank's market value of 35.9 billion euro.Societe Generale moved to unwind his deals on January 21, and due to a sharp fall in the Asian markets during the night of January 20, resulted in a total loss of 4.9 billion euro.

Societe Generale said it has now implemented specific control procedures that will ensure that the techniques devised by the trader to avoid controls can no longer be applied.“Beyond these specific measure, additional controls will be launched. Significant human resources will be mobilised for this project, with the support of external specialists in fraud techniques.”According to prosecutors, Kerviel did not commit those acts for personal financial gain, but in order to be seen as an “exceptional trader and astute market player” by colleagues.