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Société Générale (A): The Rogue Trader

01/2011-5613

This case was written by Mark Hunter, Adjunct Professor, and N. Craig Smith, INSEAD Chair in Ethics and Social Responsibility. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

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Jérôme Kerviel and his lawyer, Elisabeth Meyer Photo © Agence France-Presse

Copyright © 2011 INSEAD 1 01/2011-5613

A Routine Control Discovers the Unthinkable

The end of 2007 had been dreadful for the French Stock Exchange in general, and in particular for the Société Générale (SocGen). Rumours of the exposure of the Eurozone’s fifth-largest bank to the subprime credit crisis1 in the United States had driven down SocGen’s market capitalisation by 23% since the summer. CEO Daniel Bouton had repeatedly assured investors that “the situation is under control… our economic model is sound and our strategy is working,”2 but investors remained anxious. On “Black Tuesday”, 15 January 2008, fears that major US financial institutions were more exposed to defaulting mortgages than they had previously admitted set off a global slump in stock markets.

That same Black Tuesday, a review of trading operations by the Direction Financière (Accounting and Financial Affairs department, ACFI) was underway in SocGen’s Corporate and Investment Banking division (SGCIB).3 (See Exhibit 1 for an organization chart). A main purpose of the review was to ensure that the trades conducted by SGCIB’s Global Equity and Derivatives Solutions (GEDS) unit met regulatory requirements under the Basel Accords, concerning the amount of capital a bank must have on hand relative to its risk-adjusted assets in case of unexpected losses.4 (See Exhibit 2 for an organisation chart of GEDS.).

At SocGen, equity derivatives – financial instruments whose value is based wholly or partially on equities – were a major profit engine. Analysts believed that equity derivatives might account for up to 80% of all SocGen’s investment banking revenues, worth several billion euros annually.5 That took a lot of trading, and from time to time the “Cooke ratio” of

1 “Subprime” mortgage loans were initially made to individuals whose ability to pay might be doubtful.

These loans were then used as assets to back securities. Subprime loans made homeowners feel richer by simultaneously monetizing their homes, and helped to boost housing prices, which in turn made it possible for owners to obtain increasingly larger mortgages. However, interest payments were high, and when homeowners defaulted massively on mortgages, securities based on the loans also lost their value. By the fall of 2007 it was plain that even major financial institutions in the US were at risk of bankruptcy as a direct consequence. For a brief account of this period, including graphs, see “The Current Crisis Explained in One Thousand Words,” GlobalEurope Anticipation Bulletin No. 17, 16 September 2007, via http://www.leap2020.eu/The-current-crisis-explained-in-one-thousand-words_a934.html.

2 Gaëtan de Capèle, Anne de Guigné, et Yves de Kerdrel, « DB : La crise est sous contrôle ». Le Figaro, 14 October 2007.

3 In French, the division is called la Banque de Financement et d’Investissement. 4 There are two Basel Accords, both due to the Basel Committee on Banking Supervision, which includes

central bank and market regulator representatives of Belgium, Canada, France, Italy, Japan, the Netherlands, the United Kingdom, the United States, Germany, Sweden, Spain and Luxembourg. The committee issues recommendations which are typically enacted into law at the national level. The Basel II accord focused specifically on the amount of capital that banks must set aside to cover financial or operational risks, according to a simple principle: The more risk a bank assumes, the more capital it must hold.

5 In 2004, 2005 and 2006, SocGen’s annual reports show €4.7, €5.7 and €6.9 billion of revenues for Corporate and Investment Banking. Derivatives, which largely involve bets about how different combinations of assets will perform in the future, dominated the CIB section of SocGen’s annual report for 2007. CIB reported itself the world leader in warrants, which enable investors to buy stocks at a specified price, often to enhance the yield of bonds, CIB also claimed second place worldwide in exchange-traded funds. These funds offer investors the valuation features of a mutual fund, combined with tradability that allows investors to engage in arbitrage between the market value of fund shares and the value of the underlying assets. The latter were considered highly innovative products. Other major activities included


capital-to-assets fell too low. Often the problem was a difference in values between the time a trade was made and the time it was finalised. ACFI would identify and correct the discrepancy to reflect the final value.

A controller identified in reports only as “Agent 6”, working in the Accounting and Regulatory Reporting sub-division of ACFI, noticed a problem with the Cooke ratio for eight trades that originated from a trading desk called Delta One early in January 2008. The desk’s main product was “turbo warrants”, which are a form of “barrier” options. Such options become active or inactive when a price barrier is breached. The barrier can be above or below the spot price of the option. The effect is to provide the insurance value of an option (one sets a limit to the price and hence to one’s risks) while paying less of a premium, because what one buys is the barrier, and not an ordinary option to buy or sell at a given price.

From another, more basic perspective, Delta One’s trade in turbo warrants was a form of arbitrage. Arbitraging exists because markets are somewhat inefficient, so identical or highly similar securities can be priced differently on different exchanges. Thus by moving securities from one market to another, an alert trader can make essentially risk-free profits. The profits will generally be small, unless the volumes exchanged are massive. But on the Delta One desk, traders typically placed sums well under €1 million, and their combined risk, including hedges, could not exceed €125 million.6 GEDS aimed at having €115 billion of assets under management by 2010,7 so this was small beer.

Yet the sums that attracted the controller’s attention were, she said, “hyper significant” – a total of €1.5 billion.8 Even more worrisome, there were no apparent counterparties to the trades – the opposing buy or sell side of the deal – meaning that the bet might be unhedged. Delta One traders were not supposed to make such trades. For example, if a trader bet that a given security would rise, he or she must also bet that a similar security would fall; thus the risk for SocGen was normally limited to the small difference in price between the two securities. This time, however, the exposure might be total.

Agent 6 called a colleague in the GEDS sub-division that managed trading, sales and financial engineering for an explanation. Agent 6 was told that the trades had been cancelled a week ago, and was shown e-mails from the trader, Jérôme Kerviel, to prove it. But she could find no other evidence to confirm the cancellation. Pressed for further details, Kerviel, a very busy fellow in his early 30s, gave answers that Agent 6 could not understand. That was not unusual: ACFI personnel were often young and lacked market knowledge, especially compared to traders. That was one reason they typically deferred to traders when tension arose.

But Agent 6 did not give up, and sought help from her hierarchy. The matter dragged on past 20:30 that night, then all through the next day, as one controller and manager after another – two dozen in all – sought to clarify Kerviel’s business in a way that would satisfy regulations.

derivatives based on interest rates and currencies. CIB was also the number one stock and bond trader on the Euronext market, where its expertise in programme trading was widely recognised.

6 Société Générale, General Inspection Services, “Mission Green: Summary Report.” 20 May 2008, p. 29. Hereafter called Mission Green.

7 Document de Référence 2008, p. 5. The name is French for “annual report.” All such documents cited here refer to Société Générale.

8 All details concerning the discovery of Kerviel’s actions are drawn from Mission Green, pp. 31-34.


Finally, on Friday 18 January, Kerviel explained the source of the problem: the wrong counterparty for his trades was listed in the computer. He provided the name of a trader from another firm as the right counterparty.

It seemed like good news on a dark day. SocGen had just lost another 8.2 % of its market cap, after Christian Noyer, Governor of the Bank of France, announced that SocGen and another major bank must lower the valuation of their assets in the US. Kerviel left for a weekend in the Normandy resort of Deauville.

The next morning, a SocGen manager discovered that Kerviel’s “counterparty” knew nothing of the trades. Kerviel was recalled to Paris and questioned by top managers, including Jean-Pierre Mustier, the head of CIB and himself a former trader. Further review showed that Kerviel had been conducting unauthorised trades for months, and had made a profit for SocGen of €1.4 billion on them by the end of 2007.

Mustier recalled telling Kerviel, in order to keep him talking, “If you really earned [so much], you’re really good. What you did is annoying, but it’s not major.” Kerviel replied: “As long as you need me, I won’t do anything stupid.”9 Another source remembered the scene differently: Mustier said, “You have broken the rules. You understand that we can’t keep you. But don’t worry, my wife works for a hedge fund. She will easily find you a job.”10

The collegial mood vanished with a fresh discovery: since 2 January, Kerviel had built up an unhedged long position on index futures. He had bet €49 billion, equivalent to 181% of the SocGen group’s total capital of €27 billion.11 A “long” bet means the bettor hopes the markets will rise. They were falling. No bank has the right to make such bets. No bank could survive such a bet if the markets continued to fall.

SocGen in Crisis

On Sunday, 20 January, SocGen CEO Daniel Bouton offered his resignation to the board but it was rejected. The issue, said Bouton, “had nothing to do with a catastrophe due to our strategy [or] a false appreciation of our risks… The board therefore considered [that] I had to set the bank straight.”12 SocGen’s unions agreed, believing the bank’s survival was at stake: “We perfectly understood that [h]is resignation would allow a liquidator to be named at the head of the bank.”13

The following morning, Bouton pleaded with Michel Prada, president of the Financial Markets Authority (AMF), the French regulator, for time to quietly unwind Kerviel’s

9 Géard Davet , “19 janvier 2008, le jour où tout bascule”, Le Monde, 15 February 2009. 10 The incident was originally reported by William Emmanuel in his book “Trader: l´Affaire Kerviel ou la

folie du système financier”. Paris: Ed. du Toucan, 2008. The author, a correspondent at Reuter’s Paris bureau, published this book within three months after the scandal began.

11 Source: Document de reference 2008, p. 19. 12 Anon. “La SocGen surmontera rapidement le choc – Bouton”. Reuters, 25 January 2008. 13 Michel Marchet, National Delegate at SocGen for the CGT union, quoted in Anon., "L'immixtion des

politiques n'est pas saine". Challenges.fr, January 29 2008, via http://www.challenges.fr/actualites/business/20080129.CHA6724/limmixtion_des_politiques_nest_pas_sai

ne.html.


positions and raise new capital. Though SocGen was legally obliged to immediately inform the markets of events that could affect its stock price, Prada believed “it would be very dangerous to announce this fraud without also showing an appropriate response”. Prada implied that not only SocGen but also the French banking system was threatened. Invoking an exception to the law, he granted Bouton three days to act before the stock exchanges were informed. It was a “heavy secret” to carry, Prada said later.14

In one way it was no secret at all. Over the next three days, SocGen accounted for between 5.7% and 8.1% of the total volume in futures indexes on the EUROSTOXX and DAX exchanges as Kerviel’s stakes were dumped.15 Because “every sale of a title on a market has… a lowering effect on its price”,16 SocGen would be selling at a loss. It did not help that the DAX index had already fallen by nearly 10% in the weeks before SocGen dumped Kerviel’s positions. As the International Herald Tribune commented, “The timing could hardly have been worse.”17 After subtracting €1.4 billion in profits that Kerviel’s unauthorised trades had made for the bank in 2007, SocGen’s losses were €4.9 billion.18 To cover the losses, J.P. Morgan and Morgan Stanley agreed to provide €5.5 billion in new capital.

By 23 January, SocGen was in control of the situation. The Minister of the Economy, Christine Lagarde, and President Nicolas Sarkozy were informed at 08:00.19 Christian Noyer informed his counterparts at the European Central Bank and the US Federal Reserve Bank. Finally, Bouton revealed the affair in a public letter and a newspaper interview on January 24: “The management of Société Générale has discovered an internal fraud of major size [that was based on] extremely sophisticated and varied techniques.” He said the holes in SocGen’s controls had been identified and fixed, and that “I have put an end to the functions of the managers, including executives, responsible for the supervision and control of these operations.” The loss of €4.9 billion would “not stop the bank from earning a net profit for 2007”. New capital would guarantee that SocGen “will regain the profitable growth which has characterised it for many years”. Bouton also revealed that further subprime losses amounted to €2 billion.20

14 Société Générale : la Fed et la BCE prévenues avant l'annonce des pertes http://www.challenges.fr/actualites/business/20080130.CHA6804/societe_generale_noyer_met_en_cause_l

es_controles.html 15 Christine Lagarde, “Rapport au Premier ministre concernant les enseignements à tirer des événements

récemment intervenus à la Société Générale”. Ministry of Finances, 8 February 2008, p. 4. Hereafter called “Rapport Lagarde”.

16 Ibid. 17 Nicola Clark and David Jolly, “Société Générale loses $7 billion in trading fraud”. International Herald

Tribune, 24 January 2008. 18 France’s official Commission bancaire (banking commission) noted in July 2008 that in SocGen’s

statements, “the establishment speaks of a loss of €4.9 billion, which corresponds to the aggregation of the loss of 2008 with the profits realised in 2007 (€1.4 billion euros) on the fraudulent positions on futures of Jérôme Kerviel". This report is not indexed on the site of the commission at www.banque-france.fr. It is quoted from Nicolas Cordi, “Qui a perdu 4,9 milliards d'euros à la Société Générale?”. See www.libération.fr, Nov. 19 2008, at http://cordonsbourse.blogs.liberation.fr/cori/2008/11/dernire-auditio.html.

19 Rapport Lagarde, p. 3. 20 Daniel Bouton, open letter to the public, 24 January 2008, quoted from Agence News Press.


Those losses were hardly insignificant, yet far lower than the subprime damage inflicted through the beginning of February 2008 on Citigroup (US$18 billion), UBS ($13.5 billion), Morgan Stanley ($9.4 billion), Merrill Lynch ($8 billion), HSBC ($3.4 billion), Deustche Bank ($3.2 billion) and Bear Stearns ($3.2 billion).21 In a matter of weeks, Bear Stearns would collapse under the weight of its losses and be taken over by JP Morgan Chase at a fire sale price.22

Bouton indicated that now the worst was behind SocGen. He added that for six months he would take no salary or bonus. It was a gesture of solidarity with his shareholders and employees. But debate over who bore what responsibility was only beginning – on the internet as well as at the highest levels of government and civil society. Was Kerviel truly the criminal genius depicted by SocGen’s leaders, or was he being punished for his bosses’ sins? The most glaring question was also the hardest to answer: How could an institution whose leadership was generally regarded as the best in France come to this?

SocGen’s History: From Private to Public to… Private Again

The “Société Générale” – literally general business firm – “to promote the development of commerce and industry in France” was founded in 1864 under the leadership of industrialist Eugène Schneider. The bank survived the 1930s Depression largely by working on loans for the State and its colonies. After the war, it was nationalised. In the 1960s, the bank expanded both at home and abroad. Deregulation in France allowed SocGen to gain expertise in capital markets and investment vehicles. In 1986, the parties of the Centre-right took control of the National Assembly from the Socialists, and symbolised their vision of the economy by privatising SocGen. There were charges of partisanship when a “hard core” of shareholders was constituted by the government, ostensibly to protect the bank from predators. In 1988, a takeover attempt by financiers close to the Socialists was launched but failed. SocGen was clearly a strategic asset for the French elite.

Daniel Bouton: The French Elite at SocGen

SocGen operated on a global scale, yet it was widely believed that non-French managers hit a “glass ceiling” in their careers there. Daniel Bouton candidly admitted in 2003:

21 Anon., “Subprime Pain: Who Lost How Much?” Rediff News, 6 February 2008, via http://www.rediff.com/money/2008/feb/06sub.htm. 22 At the moment Bear Stearns collapsed, investment bank Lehman Brothers Holdings Inc. announced record

quarterly profits of $1.5 billion. CEO and Chairman, Dick Fuld, claimed that "We expect to see various opportunities from the market dislocation." (Quoted in Grace Wong, "Lehman sees more subprime woes.” CNNMoney.com, March 14 2007, via

http://money.cnn.com/2007/03/14/news/companies/lehman/index.htm.) Lehman would deny that it faced losses from subprimes until June, when it disclosed a $2.8 billion quarterly loss. By September, after rebuffing offers from outside investors, Lehman was bankrupt. The US government allowed it to fail. This is widely considered as the moment when the financial crisis became catastrophic and global.


“There is no ceiling but the point is that we have not yet succeeded in having enough elevators to bring the non-French people to the top executive positions.”23

Nationalisation had bequeathed SocGen an internal culture modelled on the French State, where leadership is the province of an elite meritocracy. The elite’s core consisted of graduates of a very few state-run grandes écoles (literally “great schools”).24 The greatest of all was the National Administration School (known by its French acronym, ENA, which admitted only 90 French students and 40 foreigners each year.25 From 1984 to 2007, French Prime Ministers had been ENA graduates in all but four years.

Bouton, who was born in Paris in 1950, graduated from ENA at the young age of 23 and became the State’s youngest Inspector of Finances. By 1988 he was Director of the Budget, the highest non-political job in the powerful Ministry of the Budget. He joined SocGen in 1991 and became executive vice president for investment banking and risk management in 1993, under the presidency of Marc Viénot, an executive with an unmatched reputation for integrity and prudence. When Bouton succeeded Viénot as CEO and chairman of SocGen in 1997, France was just emerging from a wave of corruption cases that culminated in the suicide of Prime Minister Pierre Bérégovoy in 1993, and the indictment (and later conviction) of former Elf CEO, Loïk Le Floch-Prigent, on embezzlement charges. Legislators responded by creating new categories of business crime. Bouton agreed that a liberal economic system “cannot tolerate fraud”, but said it was an “illusion” to imagine that “the multiplication and aggravation of penal sanctions can constitute an effective protection against the fundamental risks of strategic error or poor management.”26 The French elite had always taken pride in serving the state above private interests; now members like Bouton were seeking to protect the private sector from the tradition of centralised economic control.

SocGen’s Strategic Dilemma

Bouton’s first great strategic move, an attempt to amicably acquire the Paribas27 bank, led to a hostile takeover attack on both by the Banque Nationale de Paris (BNP). Bouton managed to keep SocGen intact, but Paribas was seized by BNP. The event made it cruelly evident that SocGen lacked scale. Euromoney magazine warned in 2003:

“SocGen is big enough to be important and to count among the core group of major European companies but not of the size to play with the big boys... [so] Bouton has only two options: eat or be eaten.”28

23 Jennifer Morris, “France's banking model.” Euromoney, April 2003, pp. 42-43. 24 In French, grandes écoles. Besides the Ecole Nationale d’Administration (ENA), the most famous and

influential is the Ecole Polytechnique of Paris, founded by Napoleon. 25 Source: ENA. See http://www.ena.fr/index.php?page=formation/initiale/statistiques 26 Daniel Bouton, Président du groupe de travail, “Pour un meilleur gouvernement des entreprises cotées.”

Medef, Sept. 23 2002, p. 2. 27 Originally the Compagnie Financière de Paris et des Pays-Bas (Finance Corporation of Paris and the

Netherlands), later renamed the Compagnie Financière de Paribas, and finally Paribas just before its takeover.

28 Jennifer Morris, “The Crisis of Identity at Société Générale”, Euromoney, April 2003, p. 36-41.


The path ahead was narrow. On the one hand, SocGen’s retail base in France was its fortress, as Bouton explained:

“We have a model in which the client is tied to the bank for a long time. Our banking relationships are on average 17 years old and we sell 7.3 products per client. In the US, it’s an average of three. So the business model is one of high-quality, deep, broad relationships between the customer and the bank. [That] makes the revenue base extremely resistant and makes it difficult for any player to enter the French market.”29

However, such relationships were slow and costly to construct and maintain. Moreover, its mainly French clients and shareholders tended to be conservative and risk-averse. So when asked if SocGen might increase revenues by growing its proprietary trading activities, using its own capital, Bouton dissented: “Proprietary trading is something that has to be managed in a very restricted way. We are not casinos and we do not wish to become casinos.”30

Jean-Pierre Mustier Transforms SGCIB

Answers to this dilemma came from Jean-Pierre Mustier, who became head of SGCIB in 2002, at the age of 42, after his predecessor died in a car crash. Mustier had attended the Ecole Polytechnique and the Ecole des Mines, both grandes écoles where engineering was the basic curriculum. But he cultivated an image as a new kind of French manager – a former paratrooper whose career had begun on the trading floor instead of working for the State. Where the French elite affected a cordial but distant manner, Mustier conveyed enthusiasm and intense interest. A colleague said, “He knows the name of every person who works for him, what they do, how long they’ve been doing it and how much they get paid.”31

Mustier had joined SocGen in 1987, when the bank created a world-leading options trading operation that centralised computer, mathematical and trading resources. He recalled that with his boss Antoine Paille, “We explored the optionality of just about anything and everything in an absolutely exhaustive, systematic way.” Thus Mustier became a world-renowned creator of the “high-margin intellectual property” of sophisticated financial instruments.32

In 2001, he persuaded Bouton to combine SocGen’s debt capital operations with the financing division, thus bringing loans, bonds and interest rate and currency hedging into the same shop as structured finance products. These were quite different cultures, but within a year of the change SocGen had moved firmly into the top 10 players for Euro-denominated bonds for the first time.

Under Mustier, SGCIB and SocGen’s subsidiary Lyxor Asset Management functioned like “a hybrid of a hedge fund and asset management”, a competitor told Euromoney.33

29 Ibid. 30 Op. cit., “France’s Banking Model.” 31 Op. cit., “The Crisis of Identity at Société Générale.” 32 David Lanchner, “Pardon my French”. Institutional Investor-International Edition; April 2006, Vol. 31

Issue 3, p30-38. 33 Op. cit., “Pardon My French.”


Simultaneously, SocGen took “a more aggressive underwriting approach”, said Mustier.34 Its deals involved increasingly sophisticated calculations of value and risk, including the risk that bonds or derivative products might not sell. As Mustier said, the strategy required “complete confidence” in the ability of his traders to find buyers.35

That confidence was clearly justified. SGCIB became the bank’s biggest money maker. Revenues increased steadily, from €4.7 billion to €5.7 billion, and then to €6.9 billion in 2006. The division’s profits rose at a rate of 26% per annum, to reach €2.34 billion in 2006.36 SGCIB’s proprietary trading played a growing role, attaining €3.05 billion in revenues and €577 million in profits for 2006.37 In comparison, profits from SocGen’s traditional retail banking operations in France and abroad were €1.82 billion that year. (See Exhibit 3 for financial data on SocGen over the past five years).

SocGen’s Culture is Transformed

Power at SocGen had always resided in the accounting and control functions built to oversee the dispersed operations of retail banking.38 Several members of the executive committee were alumni of SocGen’s General Inspection service. In 2006, Bouton called it “the backbone of our rigour, organisation and values”.39 But increasingly the most talented young people in the bank were traders, not auditors. The best traders came from the Ecole Polytechnique, where France’s greatest scholar of equity derivatives, Nicole El Karoui, was on the faculty. As with Mustier, SocGen was often their first job. But unlike Bouton’s generation, they did not regard becoming inspectors of finance as a necessary career step. Some traders in SGCIB earned millions of euros in bonuses every year. Jérôme Kerviel saw that when a trader made a rich deal, “They call [him or her] a cash machine, a star.” 40

34 David Lanchner, “SG - picking fights it can win”. Euroweek 2 February 2007, pp.14-15. 35 Op. cit. “SG - picking fights it can win.” 36 Op. cit. Document de reference 2006. 37 Document de Reférence 2008, p. 41. 38 In 2007, four out of five of SocGen’s 135,000 employees worked in retail banking, and less than 9%

worked at SGCIB (Document de Reférence 2008, p. 107). Note that the roughly 12,000 employees of SGCIB included the biggest equity derivatives shop in the world – an indication of how small and exclusive this area of finance was. Another is that in the US, the latest (May 2008) data from the Bureau of Labor Statistics on “management occupations” showed a total of 44,760 “financial managers” for the national economy. Neither the BLS nor other national official sources lists traders as a separate job category. (See http://stats.bls.gov/oes/current/naics4_551100.htm). Nor does the BLS apparently use the same definition of financial managers as the industry. At the end of October 2008, American Express alone announced that it was laying off 7,000 managers worldwide. Up to that date, according to Corinne Ramey and Helen Kennedy in the New York Daily News (Oct. 31, 2008), US financial industry layoffs in the crisis included Bank of America (7,500), Bear Stearns (7,000), Citigroup (9,000), Lehman Brothers (1,400), Merrill Lynch (4,500) and Morgan Stanley (2,500). It is not known how many of these layoffs were derivatives traders.

39 Cited by Bertrand Rothé “Chronique d’un scandale financier; Mais que faisaient les fameux inspecteurs de la Société Générale?”. www.bakchich.info, 25 January 2008.

40 Jérôme Kerviel, le «cash machine» qui se croyait tout permis Une expertise psychologique révèle quel était l'état d'esprit de l'ancien trader de la Société générale,

lorsqu'il a perdu 5 milliards d'euros sur les marchés. LIBERATION.FR : jeudi 26 juin 2008


Compared to SGCIB’s accounting and control personnel, the traders were more highly educated, better paid, and better supported by the organisation. As PricewaterhouseCoopers (PwC) later noted, the focus of SGCIB’s internal control procedures was “to ensure that transactions were properly executed from an operational standpoint”. The possibility of fraudulent transactions was hardly envisioned. Moreover, said PwC, SGCIB’s procedures “did not appropriately reflect the requirement [to] analyse consistency of risks, results and positions”.41 Kerviel put those failings to good use.

Jérôme Kerviel: An Ordinary Guy at CIB

Jérôme Kerviel began his career at SocGen in the middle office, where profits and losses are calculated, errors are reconciled and trading risks are managed. His job from 2000-2002 was products modelling and process automation, helping to test scenarios for new derivatives and improve record-keeping. The work gave him a good idea of SocGen’s control systems. Then he spent two years as a trading assistant. The job consisted mainly of entering a trader’s deals into the system, but Kerviel described it in his CV as very proactive, with tasks such as “strategies backtestings” (applying a trading strategy to past data to estimate its effectiveness) and “short positions hedge” (using options to reduce the risk of loss on bets that a security’s value will fall). Kerviel did more than was asked of him, and he wanted it to be noticed. (See Exhibit 4 for Kerviel’s CV.)

The child of a hairdresser and a vocational school teacher, Kerviel was raised in Pont l’Abbé, a coastal town in Brittany (pop. 8,001), where fishermen, functionaries and tourism were the heart of the local economy. He showed discipline and ambition: he learned English and practiced judo for eight years, although bad knees kept him from earning higher than a green belt, the first degree up from the beginner’s white belt. He ran for the city council of Pont l’Abbé but was not elected.

As a Delta One trader beginning in 2004, he created software management tools, did studies to “develop the product range”,42 and eventually accounted for half the desk’s profits himself. His goal was to trade SocGen’s more exotic derivatives, but it didn’t happen. He lacked credentials. His education – undergraduate studies in finance at the provincial University of Nantes, and then a Masters in organisation and control of financial markets at the equally provincial University of Lyon – was hardly impressive to graduates of the grandes écoles. His Master’s programme had no pretensions to train cadres for the State, an essential mark of quality.43 Likewise, as one of Kerviel’s former professors at Lyon told the New York Times, ''People who want to be golden boys or clever in the market don’t come here.”44

http://www.liberation.fr/actualite/economie_terre/335082.FR.php 41 PricewaterhouseCoopers, “Société Générale: Summary of PwC diagnostic review and analysis of the action

plan.” Paris, 23May 2008, p. 6. 42 See Exhibit 4. 43 For a description of the Masters programme: http://www.univ-lyon3.fr/5004022IL/0/fiche___formation/&RH=INS-FORMdiscEcoGest. 44 Doreen Carvajal and Caroline Brothers, “French Trader Is Remembered As Mr. Average”. New York

Times, 26 January 2008.


After joining the Delta One desk in 2004, Kerviel earned €100,000 in salary and bonuses.45 It was four times the median salary of a teacher in France, like his father,46 but it was low for a trader, considering the workload. Kerviel lived in a small apartment in a wealthy suburb of Paris. As the London Times put it, despite his ambitions, he resembled “an average guy” with “mediocre abilities and limited experience”.47

How Kerviel Worked

In November 2004, the manager of Kerviel’s desk at Delta One had noticed that he was taking small but unauthorised long and short positions on index futures and stocks. Kerviel’s plays were “tolerated” by his manager, but there were discussions between the two.48 Kerviel was verbally reprimanded in July 2005 when his manager discovered an unhedged long bet of €10 million on Allianz stock. But the manager did not notice that Kerviel had entered a fictitious trade for the same amount into the front office system. That was Kerviel’s solution to a double problem: how to conceal his trades, and how to conceal the earnings they generated until he was ready to declare them.

Before long, that experiment became a system. Over the next three years, on at least 947 occasions, Kerviel sought to eliminate traces of the market risk that his unhedged trades created. Normally, the overall amount of risk would be detected by SocGen’s risk management IT systems, but Kerviel created fictitious transactions that balanced the risk monitored by the system. In other words, he made it look as if he were hedging his bets. Kerviel entered his fictitious trades into the system under titles that indicated the counterparty of the trade hadn’t been classified, or that parameters such as the dates of the trade hadn’t been determined.49 By doing so, he delayed settlement of these fictions. Next, Kerviel cancelled his fictitious trades before they were verified or monitored by the middle or back offices, and replaced them with new ones. Thus he stayed below SocGen’s risk detection radar.

This method depended on close timing, and so Kerviel rarely left his desk. In the summer of 2006, while most of Delta One was on vacation, Kerviel was in Paris, making unauthorised long and short bets that added up to €140 million, then unwinding them. Two different desk managers formally noted Kerviel’s “reluctance to take vacations” on four occasions in 2006-7. This was a possible sign that Kerviel was concerned about an audit in his absence, but the information had “no concrete effect” on his hierarchical superiors.50

Another of Kerviel’s favourite concealment techniques, which he used at least 115 times, was to enter pairs of fictitious reverse transactions – a purchase and a sale – for the same asset at different prices. This allowed him to show a virtual loss that “cancelled” the earnings from his real trades. Thus on 1 March 2007, he recorded the purchase of 2,266,500 shares of a certain 45 According to Mustier, cited in numerous press reports. 46 See http://www.worldsalaries.org/france.shtml. The median salary for French teachers is €1900/month,

with a 13th month for most. 47 Adam Sage, “He's not a Machiavellian genius. He's just an average kind of guy”. The Times, 26 January

2008. 48 Mission Green, p. 4. 49 Ibid., p. 1. 50 Ibid., p. 7.


equity at a price of €63 per share, and then recorded their sale at €53, to create a fictitious loss of €22.7 million.51 His methods were hardly foolproof, as his desk manager had proved by spotting the Allianz trade, but the scale of his trades, both fictitious and real, continued to grow.

Kerviel Becomes a Star

The only person who paid close attention to Kerviel, his desk manager, left SocGen at the beginning of January 2007. He was replaced by a man named Eric Cordelle, 34 years old, who knew nothing about his new assignment:

“I was named to the job after five years in Tokyo spent on financial engineering.… I think an experienced desk chief could probably have spotted Jérôme’s frauds[.] The role of a financial engineer is to invent structured products and put them to work. Traders [like Kerviel] do something else. They have a position, a risk, to manage daily by selling and buying shares. These are neither the same professions, nor the same mentalities, nor the same time scale.”52

Three weeks after Cordelle took over the desk, Kerviel built an unhedged short position in DAX shares of €850 million, his biggest ever. One month later, the position reached €2.6 billion, and it kept growing. By July 2007 it stood at €30 billion. Kerviel unwound part of it, then rebuilt it in the fall.

Kerviel later claimed that he ceased to hide his growing profits:

“In the first semester of 2007 I made 500 million in profits… Nearly every day I declared hallucinatory profits – a million, 500,000, 700,000 euros… well, at that point you’re a king…. Everyone is super happy, because you’re exploding the limits.”53

Kerviel did not profit personally, according to one of his hierarchical superiors:

"He made no money, nothing, not a cent... It’s difficult to get money out of a bank, as soon as you try, you will leave a trace. So he saw no financial benefit at all.”54

Nonetheless, alarms sounded in at least 11 different bureaus of the front, middle and back offices. On 39 different occasions, auditors questioned discrepancies in the commissions paid to brokers on his trades, or the settlement of his trades, or variations in his accounting, or other circumstances that involved “a direct link to the fraud, further investigation of which

51 Ibid., p. 1. 52 Mathieu Delahousse, “Les critiques du chef de Kerviel contre la SocGen.” Le Figaro, 3 June 2008. 53 Agence France Presse, “Jérôme Kerviel, le «cash machine» qui se croyait tout permis: Une expertise psychologique révèle quel était l'état d'esprit de l'ancien trader de la Société Générale,

lorsqu'il a perdu 5 milliards d'euros sur les marchés.” 26 June 2008, via http://www.liberation.fr/actualite/economie_terre/335082.FR.php 54 Anon., 'You must stop this manhunt!' Guardian Unlimited, 24 January 2008.


could have been liable to identify the fraud”, according to SocGen’s internal audit of the affair.55

But there was no investigation. No one saw the accelerating pattern of Kerviel’s scheme, because the same controller hardly ever dealt with Kerviel twice, and controllers in different bureaus did not share information about alerts. Most important, according to the SocGen internal investigation, “Operators did not systematically extend their controls beyond what was called for by procedures.”56 Instead, the bureau involved would typically

“attribute the cause of the anomalies to recurring problems in recording transactions in computer systems. They [would] just notify Kerviel and his immediate superiors of the exceeding of the limit and make sure it return[ed] to normal.”57

However, at 13 different times someone called Kerviel to get an explanation. Usually, whatever he said was accepted, but in the spring of 2007 two controllers complained to Cordelle that Kerviel’s explanations were “incoherent”. Cordelle took no action.58 Kerviel later said that “during four months, tons of alerts were sent to my bosses to warn of fictitious operations. The fact that no one came to talk to me legitimated my position a little.”59 (See Exhibit 5 for specific examples of these alerts.)

In November 2007, someone outside SocGen wondered what Kerviel was up to. The EUREX exchange e-mailed Cordelle twice to question Kerviel’s purchase of €1.2 billion worth of DAX futures contracts in two hours. Cordelle later said he “received 200 to 300 e-mails each day”, and had not seen the details of EUREX’s warning.60 Kerviel provided an explanation and his boss proposed a conference call to discuss the matter, but EUREX never replied.61 The matter ended there.

At the end of 2007, Kerviel liquidated his positions and reported earnings on his trades of €43 million to his managers. This was a small percentage of the €1.4 billion profits generated by his unauthorised trades, but it was still more than six times his €7 million earnings in 2006.62

The earnings would ordinarily be used to calculate his year-end bonus (which Kerviel never received). The portion of his declared earnings that resulted from proprietary trading – the trades that a bank undertakes with its own capital – was €25 million, which could appear exemplary at a moment when “proprietary trading losses dragged down the performance of the Corporate & Investment Banking division.”63 Moreover, Kerviel generated nearly 27% of the total earnings of Delta One. That made him the 15th-best among the 143 traders working on the 10 desks of the Arbitrages unit of the Global Equity and Derivatives Solutions division

55 Mission Green, p. 56. 56 Ibid. 57 Mission Green, p. 65. 58 Mission Green, pp. 58, 7. 59 Op. cit., “Jérôme Kerviel, le «cash machine» qui se croyait tout permis” 60 Heather Smith, “Rogue trader's boss applies to join SocGen suit”. Bloomberg, April 21 2008. 61 Mission Green, p. 8. 62 Mission Green, p. 46. 63 Rahul Shah, “Société Générale.” Bear, Stearns International Limited – European Equity Research, 8

November 2007.


of SGCIB.64 No one asked how a trader working under Delta One’s strict limits could do so well.

When the New Year began, he resumed trading on a bigger scale than ever, reaching €49 billion in long trades by January 18. And then he was caught.

Kerviel: a Villain or a Victim?

Kerviel complied fully with SocGen’s efforts to unwind his positions from 21-23 January. No charges were filed against him until the afternoon of Thursday, 24 January. Yet that day, simultaneous with Bouton’s disclosure of the affair, headlines in the press announced that Kerviel had “fled the country without being interviewed by police”.65 Kerviel’s newly-hired lawyer, Elisabeth Meyer, denied the rumours, which she believed had been planted to destroy her client’s image:

“For someone to be in flight, you have to be looking for them but you can’t find them. He wasn’t being looked for. He was in my office, sitting at a table full of files. If he was fleeing, it was a very strange way to do it.”66

Meyer sought to present Kerviel as cooperative, professional and unashamed. After police searched his apartment and questioned him for two days, he was officially put “under inquiry” – a pre-indictment step in French law – for abuse of confidence, creating and using counterfeit documents, and receiving stolen goods, on 28 January. The charges were relatively minor. Kerviel was not imprisoned without bail, as French law allowed. But Meyer claimed that any criminal charges against Kerviel would be inappropriate. She claimed that similar cases in the past had been resolved by civil lawsuits. (In fact, cases on this scale typically resulted in jail terms; see Exhibit 6.)

Meyer believed that SocGen wished to appear as “the perfect victim” of a master criminal. Her strategy was to avoid attacking the bank and its leaders, while showing that Kerviel was an ordinary guy. The strategy was immediately effective. News media called SocGen’s version of events “a little too much” to believe. Experts commented that either the bank’s internal controls were lax, or it was hiding embarrassing facts.67 The opposition daily paper, Libération, observed:

“A guilty party is designated, but no one is responsible, especially among the executives. With this new blow to the head in the middle of the subprime crisis, it’s still hard not to ask some delicate questions. Who is responsible for the madness of risk-taking that overtook the markets, if it isn’t the banks and their bosses?”68

64 Mission Green, pp. 47, 14. 65 Op. cit., 'You must stop this manhunt!' 66 Interviewed in Paris, June 9 2008. 67 Anon., “Fraude" à la Société Générale: économistes et analystes boursiers doutent”. Agence France Presse,

24 January 2008. 68 Fabrice Rousselot, “Société Générale.” Libération, January 25 2008.


In the online world of blogs and forums, opinion ran sharply against SocGen. The daily France Soir commented: “Kerviel now embodies the scapegoat of a pitiless system.”69 A webzine called “Save Kerviel” denounced his “unprecedented media lynching”.70 A message to a “true crime” forum argued:

“I would not be surprised if these ‘rogue’ traders have accidentally made money in the past, but it was covered up when profits were discovered. In that case, far from going to jail, the rogue trader might even get a bonus.”71

Meyer agreed:

“If Jérôme’s operations were still profitable, would they have filed charges? My position is that he did his work [and] no one stopped him. The normal means at SocGen’s disposition allowed the bank and his superiors to know his activities precisely. Someone said, ‘He was on a highway where the speed limit is 90, and he drove at 200.’ Sure, but he passed by the gendarmes dozens of times, and they didn’t stop him.”

Pressure from Peers and Politicians

A widening circle of actors in the public and private sectors now took action. The Bank of France and Financial Markets Authority began investigations. At the European Central Bank, President Jean-Claude Trichet called on all banks to reinforce their internal controls. SocGen’s major French rival, BNP Paribas, publicly considered – then rejected – the possibility of a takeover bid for SocGen. EU Internal Markets Commissioner Charles McCreevy disgustedly told the Society of Business Economists: “It is inexcusable that the entire market value of a financial institution can be placed at risk by such abject carelessness on the part of a leading European bank.”72 SocGen was isolated.

France’s politicians gained in power from the crisis. Prime Minister François Fillon, besieged by reporters at Davos, promised to ensure “greater transparency” in financial markets.”73 Minister of the Economy Christine Lagarde quickly issued a report which warned that in cases involving “the stability of the financial system,” the Government must play a greater role.74 She noted that the Bank of France had made risk management recommendations to SocGen that had not been followed,75 and that market actors needed more “independent” scrutiny; otherwise, the Government must step in.76 She also called for heavier legal sanctions

69 Alice Mahlberg et Sébastien Cometti, “SocGen - Dans la peau de Jérôme Kerviel”. France Soir, 22 March

2008, via http://www.francesoir.fr/enquete/2008/03/22/socgen-dans-la-peau-de-Jérôme-kerviel.html. 70 http://sauvezkerviel.canalblog.com/ 71 The message is from raylopez99 on the alt.true-crime forum, January 26 2008. 72 Ashley Seager, “Eurozone Northern Rock-style bank failure 'would cause chaos'”. Guardian.co.uk, 7

February 2008. 73 Anon. “Colère et incompréhension des politiques”. Le Monde, 26 January 2008. 74 Rapport Lagarde, p. 6. 75 The Bank’s auditors had recommended in March 2007 that SocGen pay more attention to counterparty risks,

to no avail. Rapport Lagarde, p. 8. 76 Rapport Lagarde, p. 10.


against banks that did not meet their regulatory obligations. The National Assembly, where deputies called Bouton “an incompetent”, wrote those measures into law.77

The political firestorm grew. On 26 February, French President Nicolas Sarkozy cuttingly declared,

“I don’t understand this affair…When the president of a company has a disaster of this size and doesn’t recognise the consequences, it isn’t normal. I don’t have anything against Daniel Bouton. But you can’t say, ‘I’m going to be paid €7 million a year,’ and when there’s a problem you say, ‘It’s not my fault.’ No, I don’t accept that.”

Leaks from the government said that Bouton would soon be fired and SocGen merged with the State’s Postal Bank. Bouton declared that his board still supported him, and SocGen was not considering a merger. As a sign of his confidence in SocGen, he invested €1.5 million of his own funds in the capital increase.

Shakeup at SocGen

The affair transformed SocGen, and Bouton was not immune. In April 2008, he resigned as CEO, while remaining chairman. Until then, SocGen had been one of the few banks that combined the two roles. Part of Bouton’s board had always argued that “When an airplane crashes, the responsibility of the pilot is forcibly engaged.”78 That same month, rumours that Mustier would resign as the head of CIB were published; Mustier and SocGen denied them. In May, separate public reports by SocGen auditors and PricewaterhouseCoopers highlighted the control failures described above.

SocGen was losing its image as the most solid of French banks if the number of new personal current accounts opened in France was any indication. More than 170,000 new personal accounts had been registered in 2006, and over 160,000 in 2007.79 In the first half of 2008, SocGen reported only 44,700 new personal accounts in France, fewer than in 3Q 2007.80 In comparison, BNP Paribas reported 260,000 new accounts in 2007 and 100,000 new accounts through the first half of 2008.81

The annual General Shareholder Assembly on May 27 turned ugly. The first shareholder to speak raged: “They threw the employee in jail, when it’s the bosses who should’ve been thrown out!” Another accused Bouton of running a “casino”. When he replied that SocGen remained “one of the most profitable European banks”, the shareholder roared back, to thunderous applause:

77 Ninon Renaud, “Interview: Didier Migaud : ‘Adapter les moyens à l'ampleur prise par les activités de

marché’". La Tribune, 27 May 2008. 78 Guillaume Maujean, “La Société Générale confrontée aux critiques de ses actionnaires.” Les Echos, 27

May 2008. 79 See Document de référence 2007, p. 32, Document de référence 2008, p. 31. 80 See Third Update to the 2008 Registration Document (7 August 2008), p. 15, Third Update to the 2007

Registration Document (31 August 2007), p. 12. 81 See BNP Paribas Annual Report 2007, p. 45, and interim results press releases, 14 May and 6 August 2008,

via http://invest.bnpparibas.com/en/pid544/results.html.


"I wonder who you take us for. Who do you think will believe that someone can do such things [as Kerviel did] with impunity? Either it suited the hierarchy of Société Générale, or the controls are worthless. You speculated, period. You’re the one we’re wondering about, and Kerviel is just a clown, whom it would have been easy to stop if you wanted to or if you really had proper controls!”82

The revolt did not stop there: around one-fourth of shareholders voted against two management propositions to distribute stock options.83 Frédéric-Karel Canoy, the lawyer for the Association of Small Shareholders who had filed a lawsuit against SocGen for negligence, explained that for many of his clients the affair threatened poverty in their old age:

“In France, liberal professions don’t allow you to have a decent retirement, unlike teachers and salaried employees. You build a portfolio of shares to complete your retirement. Up to now, the shares of SocGen always rose.”84

On May 30, Mustier resigned from his post. Previously, as a result of the affair, two employees – Kerviel and his trading assistant – had been fired for “disciplinary reasons”, three for “professional insufficiency” (including Cordelle), and two others had resigned.85 Mustier remained with the bank in an undisclosed position. (See Exhibit 7 for a chronological summary.)

On 17 October, a class action shareholder lawsuit was filed against SocGen in the state of New York, charging that the bank had concealed losses due to both Kerviel and the subprime crisis. The bank said it was taking the lawsuit seriously but believed that it was without merit.86 At the end of the year, SocGen’s stock was trading at around €34 per share; it had traded at over €90 in January 2008. Its closest rival, BNP Paribas, was trading at around €30, down from the year’s high of €75. By this measure, SocGen was doing roughly as well in the markets as its competitors in the midst of an unprecedented global crisis.

Kerviel on the Defensive and the Offensive

Meanwhile, the immense stakes of the affair had forced prosecutors to be particularly scrupulous, at least where Kerviel was concerned. He was incarcerated without bail on 8 February 2008, under a French law that aims to stop suspects from conspiring with or pressuring witnesses. The media had announced that Kerviel had an “accomplice”. His communications consultant, Christian Reille, protested: “Sending him to prison is an injustice. You can’t tell public opinion that someone who answers questions and cooperates with the

82 Anon., “Les dirigeants de la Société Générale hués par leurs actionnaires”. Agence France Presse, May 27

2008. 83 The vote was reported on SocGen’s website. See: http://www.socgen.com/sg/socgen/pid/174/context/SC/lang/fr/object/rubriqueSC/id/919/rubid/919/nodocty

pe/0.htm 84 Interview, June 5, 2008. 85 Anon., “SocGen: sept salariés ont quitté la banque après l'affaire Kerviel (Bouton)”. Agence France Presse,

27 May 2008. 86 Massimo Prandi, “La Société Générale sous le coup d’une ‘class action’ aux Etats-Unis.’ LesEchos.fr, 11

December 2008 (via http://www.lesechos.fr/info/finance/4807895.htm).


justice system, who doesn’t flee, is in prison.”87 Only weeks later, when the new suspect’s innocence was established, could Elisabeth Meyer obtain Kerviel’s release. He remained free after his former trading assistant, identified in SocGen’s internal report as a possible accomplice, was indicted in turn. He even found a job as an IT consultant.

But the pressure on Kerviel was rising. Though Meyer had succeeded in getting certain charges thrown out, he was likely to face up to three years in prison. Other lawyers, eager for the publicity that a high-profile case would bring, pressed Kerviel to adopt an aggressive strategy, directly blaming the bank for the affair. Meyer refused, and on 2 July Kerviel informed her by email that she had been replaced by a new team of hard-nosed lawyers. “For me,” she said, “Jérôme’s decision is incomprehensible.”88

A new phase in the affair had opened and it promised to be even uglier for all concerned. How could Bouton and his team convince their shareholders, business partners and the world that what had occurred was not their fault, and could never happen again? How could they counter attacks from Kerviel, whose interest was clearly to show that the firm had more or less directly encouraged him until he began to lose? Every word and event would be watched by politicians, by the legal system, by shareholders and by lawyers on both sides of the Atlantic.

87 Interview, 10 June 2008. 88 François Labrouillère, “Jérôme Kerviel se cherche une nouvelle défense”. Paris Match, 23 July 2008, via

http://www.parismatch.com/dans-l-oeil-de-match/reportages/Jérôme-kerviel-se-cherche-une-nouvelle-defense/(gid)/41854 .


Exhibit 1 Structure of SGCIB’s Global Equity and Derivatives Solutions (GEDS) Unit

Source: Mission Green report, p. 13


Exhibit 2 The Chain of Management over Jérôme Kerviel

Source: Mission Green report, p. 11


Exhibit 3 Selected Financial Data for SocGen, 2003-7

GROUP CONSOLIDATED FIGURES 2007 2006 2005 2004 2003Results (in millions of euros)

Net banking income 21,923 22,417 19,166 16,390 15,637

Operating income (excluding loss From Kerviel’s trading) 6,713 8,035 6,562 4,760 3,843

Operating income (including loss From Kerviel’s trading) 1,802

Net income before minority interests 1,604 5,785 4,916 3,623 2,755

Net income 947 5,221 4,402 3,281 2,492

French Retail Banking 1,375 1,344 1,059 942 878

International Retail Banking 686 471 386 258 214

Financial Services 600 52 1,453 376 285

Global Investment Management & Services 652 577 460 385 290

Corporate and Investment Banking (2,221) 2,340 1,841 1,453 1,052

Corporate Centre and other (145) (32) 203 (133) (227)

Activity (in billions of euros) Total assets and liabilities 1,072 957 835 601 539

Customer loans 305 264 227 208 178

Customer deposits 270 267 223 213 160

Assets under management 435 422 386 315 284

Equity (in billions of euros) Group shareholders’ equity 27 29 23 18 17

Total consolidated equity 31 33 27 21 21

Average headcount (thousands) 130 115 100 93 90

Source: Document de Référence 2008


Exhibit 4 Jérôme Kerviel’s CV89

OBJECTIVE Reach a position as a retail listed derivative products trader, managing a volatility and Delta One book

EDUCATION

MASTERS in Finance (Organisation and Control of financial markets) University of Lyon, September 2000 Bachelor Degree in Finance University of Nantes, 1996-1999

WORK EXPERIENCE

Société Générale S.A., Paris, France Trader and Market Maker for Delta One Products March 2004 - Today Trading: Market making of Listed Delta One products Including open end and closed end Turbos (Single Stocks, Index, Forex and Rate Futures), ETFs and secondary market for Certificates ETFs structuration - Management of the collateral with Lyxor Asset Management Development of managing tools (Excel VBA macro) New Underlyings Study to develop the product range Participation to the specification for the implementation of turbos to the Clickoptions platform

Société Générale S.A., Paris, France

Trader Assistant - Basket Trading and Delta One Products August 2002 - February 2004 Valuation and Risk Analysis explanation for Basket Trading (Single Arbitrage book) and Delta One Products Strategies Backtestings Short positions hedge Process automation and managing tools development

Société Générale S.A., Paris, France

Middle Office - Referential Team August 2000 - July 2002 Products modelling Process automation Excel macro Development for the exotic Desk Participation to the single referential project

ACTIVITIES

Judo - 8 years practice - Trainer for children; Sailing

SKILLS

English: working language Microsoft Office Package - Visual Basic Licensed for EUREX, XETRA, EURONEXT

89 Source: Alistair Osborne, “Jerome Kerviel’s CV: The Ambitious Judo Teacher”, Telegraph.co.uk, Jan. 27

2008, via: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/2783204/Jerome-Kerviel%27s-CV-The-ambitious-judo-teacher.html


Exhibit 5 Selected Alerts to Kerviel’s Activities and Results of the Alerts

Source: Mission Green Report, p. 56.


Exhibit 6 Infamous Traders of the Recent Past, Losses and Sanctions

Year Name Institution Loss Sanction

1995 Nick Leeson Barings Bank90 £827 million Jail 6.5 yrs.

1995 Toshihide Iguchi Resona Holdings £557 million Jail 4 yrs

1996 Peter Young91 Deutsche Morgan Grenfell $280 million £3 m. fine& penalty

1996 Yasuo Hamanaka Sumitomo Corp $2.6 billion Jail 8 yrs

1998 Scholes, Merton92 LTMC $4 billion None

2002 John Rusnak Allied Irish Banks £350 million Jail 7.5 yrs

2004 Luke Duffy Nat. Australia Bank AU$360 million Jail 16 mos.

2005 Chen Jiulin China Aviation Oil $550 million Jail 51 mos.

2006 Brian Hunter Amaranth Advisors $6.5 billion None

90 As a result of Leeson’s losses, Barings went out of business. 91 Young was investigated by the UK’s Serious Fraud Office, but was not charged. The fine was paid by his

employer. 92 Myron Scholes and Robert C. Merton, Nobel Prize winners in economics, were among the co-founders of

the hedge fund Long Term Capital Management along with leading Wall Street figures. After a Federal bailout, the firm was liquidated in 2000.


Exhibit 7 Summary Chronology of the Affair93

Jan. 18-20: A controller’s persistent queries lead to the discovery that Jérôme Kerviel’s unhedged long positions total €50 billion.

Jan. 21: SocGen obtains three days from France’s Financial Markets Authority to quietly liquidate Kerviel’s positions. Equity markets are already plunging.

Jan. 24: SocGen announces it has taken losses of €4.9 billion from the “fraudulent” activities of a trader, but the bank is not in danger. The French government launches an investigation. Kerviel is falsely rumoured to be missing. He is soon taken into custody, questioned and released.

Jan. 28: SocGen CEO Daniel Bouton denies that Kerviel is being persecuted to distract attention from SocGen’s subprime losses in the US.

Jan. 30: The SocGen board refuses Bouton’s resignation. The following day BNP Paribas confirms it is considering a takeover bid. The idea is later abandoned.

Feb. 5: Kerviel suggests he is being made into a “scapegoat” by SocGen. He is jailed three days later, despite cooperating with police and prosecutors.

Feb. 11: SocGen raises its capital by €5.5 billion. Bouton subscribes €1.5 million.

Feb. 21: SocGen reports a 4Q 2007 loss of €3.4 billion.

Feb. 26: French president Nicolas Sarkozy suggests that it is “abnormal” and unacceptable for Bouton to deny responsibility for the crisis.

March 6: Sarkozy says France will defend SocGen against a foreign takeover bid.

March 18: Kerviel is released from jail.

April 17: Daniel Bouton steps down as president of SocGen, remains chairman.

May 23: An internal SocGen investigation, the “Mission Green” report, discloses failures in supervision and control.

May 27: The annual shareholders’ meeting is a disaster for SocGen management.

May 30: Jean-Pierre Mustier, head of SocGen’s Corporate and Investment Banking division and heir apparent to Bouton, resigns. Kerviel worked in his division.

July 2: Kerviel fires his lawyer and hires a new team who promise an aggressive response to SocGen’s charges.

Oct. 17: A class action lawsuit against SocGen is filed in New York.

93 Adapted and enriched from anon., “CHRONOLOGY-Timeline of events in SocGen rogue trader case”,

Reuters News, 18 March 2008.

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