Did Calamity Jerome Commit a Crime?
According to a report in today’s UK Guardian, the infamous rogue trader from Societe Generale will stand trial next year to face criminal charges associated with his bad bets. Jerome Kerviel almost brought down one of the largest financial institutions in the world by conducting a series of trades that led to losses of over $7 billion. He argues that his actions were not criminal because the bank knew about and encouraged his trading activity until the losses began to mount. Here is what the Guardian reports about the ongoing investigations.
The independent investigations and the bank’s own internal inquiries into the scandal have found that its managers and control systems failed to operate properly and ignored warnings. A report by PricewaterhouseCoopers blamed the “culture” at the trading desk, describing it as “overheated”. France’s central bank has fined SocGen €4m for “serious shortcomings” in its internal controls that led to the trading losses. Kerviel’s legal team is trying to go further and prove that the bank knew what was actually happening.
Employed at the bank since 2000, Kerviel worked his way up from a desk that monitors traders to a job on the futures desk, where he invested the bank’s money by making huge bets on the future direction of European stock exchange prices. He is accused of causing five times the financial damage inflicted by Nick Leeson, the rogue trader who sparked the collapse of Barings Bank in 1995 with losses of £800m.
At the very least, the bank lacked the controls necessary to prohibit unauthorized trading activity as well as limit authorized trading activity. As financial institutions and the trading operations they support become more complex, opportunities for fraud and abuse will continue to increase. Investments in controls and monitoring technology are crucial to prevent future calamities such as this.