Jérôme Kerviel is back in the news, giving his first interview with an English language newspaper (the FT), which is nicely timed with the release last week of his book, Trapped in a Spiral: Memoirs of a Trader. (I guess I’ll have to buy this one too, as I have all of the other rogue trader books in my library: see here, here, and here – and, yes, I even have the Rogue Trader movie).
Kerviel seems a bit jealous of Fabrice Tourre, the Goldman Sachs employee at the center of the SEC’s recent lawsuit and criminal investigation against the firm, saying “Goldman Sachs supports him, while Société Générale abandoned me.” Adds Kerviel:
I wrote the book to explain that my hierarchy knew what I was doing ... and to set the record straight. The bank has presented me as an isolated case but other traders did the same thing – it was common practice on the trading floor.
Joking aside, Kerviel raises an interesting point: when does a firm calculate that it is in its best interest to support and defend an employee’s actions, as opposed to distancing itself from her by claiming that her actions were unauthorized?
No doubt more information will emerge during Kerviel’s trial next month, but he is not wrong in his basic premise: organizations, such as Société Générale, that find themselves confronted with massive rogue trading losses often have willfully, or at least recklessly, disregarded the warning signs of rising operational risk levels in pursuit of higher trading profits. Easy parallels can be drawn between Kerviel and other relevant rogue trading cases, including Nick Leeson at Barings Bank, John Rusnak at Allied Irish Banks, Joseph Jett at Kidder Peabody & Co., and a small cohort of rogue traders at National Australia Bank.
As is common in rogue trading cases, there has so far been no evidence of direct knowledge by superiors at Société Générale of Kerviel’s overnight directional trades, which Kerviel hid through a variety of relatively straightforward cover-up schemes. However, supervisors and bank management ignored numerous warning signs regarding the size and scope of these trades, leading to a reasonable inference that at least some supervisory personnel likely turned a blind eye to Kerviel’s trading irregularities. Moreover, emails confirm that Kerviel’s immediate superior was aware of, and acquiesced in, some early intra-day unauthorized positions on equities and equity index futures.
Although much was made in the press of Kerviel’s “sophisticated” cover-up scheme enabled by his intimate knowledge of the back-office system, in reality the bulk of Kerviel’s cover up consisted of the standard fare employed by most rogue traders: fake trades or other system entries designed to hide unauthorized trading activity, backed up by lies (which were never questioned by his supervisors or managers) and forged documents. (Kerviel used three concealment mechanisms, which I document at length here, demonstrating that each is remarkably similar to techniques employed in prior well-known rogue trading incidents).
I’ll leave off there for now, but I’m sure that some newsworthy events will emerge from the trial.
Image source: FT
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