Société Générale (A):
The Rogue Trader
Jérôme Kerviel and his lawyer, Elisabeth Meyer
Photo © Agence France-Presse
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. Copyright © 2011 INSEAD
TO ORDER COPIES OF INSEAD CASES, SEE DETAILS ON THE BACK COVER. COPIES MAY NOT BE MADE WITHOUT PERMISSION. NO PART OF THIS PUBLICATION
MAY BE COPIED, STORED, TRANSMITTED, REPRODUCED OR DISTRIBUTED IN ANY FORM OR MEDIUM WHATSOEVER WITHOUT THE ...view middle of the document...
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.
6 7 8
Copyright © 2011 INSEAD
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. Société Générale, General Inspection Services, “Mission Green: Summary Report.” 20 May 2008, p. 29. Hereafter called Mission Green. Document de Référence 2008, p. 5. The name is French for “annual report.” All such documents cited here refer to Société Générale. All details concerning the discovery of Kerviel’s actions are drawn from Mission Green, pp. 31-34.
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.
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.
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...