Societal General Case Study

1). What was the fraud that occurred at Societe Generale (SG)?

The fraudulent act that occurred at Societe Generale, one of the largest banks in Europe, was perpetrated by one of its employees in charge of hedging the bank's trades in European stock index futures, named Jerome Kerviel. He executed a series of elaborate and fictitious unauthorized securities transactions that cost the bank over 6.4 billion Euros and approximately twenty percent of the bank’s equity capital. According to Magee, Chief Technology Officer and Zaki, Market Analyst (2008), the fraudulent activity caused by a rogue trader led to a loss of USD 7 Billion for Societe Generale, excluding reputational loss and diminished investor confidence.

Kerviel was a computer genius and aided by his in-depth knowledge of the internal control procedures resulting from his former employment in the back-office, managed to conceal his fraudulent activities through a scheme of elaborate fictitious and unauthorized transactions. It was even reported that Jerome Kerviel would provide counterfeit emails showing authorization from superiors stating that the transactions and/or trading was valid. Again, he would create fictitious accounts to make it look as though his un-hedged positions had been covered, and falsified documents to affirm his fraudulent transactions. In some cases, Kerviel would manage to change his activities sufficiently to reduce the number of contacts where he would deal with the same back-office control agent, another cunning example of his efficient and diverse concealment techniques.

2). What do you think were the reasons for the fraud?

I think the main reason for the fraud was that Jerome Kerviel’s compensation which was tied to his overall performance for which he received a moderate, discretionary bonus. His motivation, therefore, was to create a name for himself as a fantastic trader with the ability to predict market movements, while in actual fact; he was simply...