Jérôme Kerviel
Encyclopedia
Jérôme Kerviel is a French trader
who has a pending appeal of his conviction in the January 2008 Société Générale trading loss incident
for breach of trust
, forgery and unauthorized use of the bank's computers, resulting in losses valued at €
4.9 billion.
Société Générale characterizes Kerviel as a rogue trader
and claims Kerviel worked these trades alone and without its authorization. These assertions have been met with skepticism by some of Kerviel's former colleagues and acquaintances, as well as by some members of the news media. Kerviel had told investigators that his trading behavior was widespread at the company and that getting a profit makes the hierarchy turn a blind eye. Kerviel did not make a profit- he made massive losses. Kerviel published a book in May 2010, L'engrenage: Mémoires d’un Trader (Downward spiral: Memoirs of a Trader), in which he alleges that his superiors knew of his trading activities, and that the practice was very common.
, Brittany
. His mother, Marie-Josée, is a retired hairdresser and his father, Charles, who died in 2006, was a blacksmith. Kerviel has an older brother, Olivier. Kerviel is married, but he and his wife recently separated.
He graduated in 2000 from University Lumière Lyon 2
with a Master of Finance
specializing in organization and control of financial markets. The university's financial program, which was initiated in the 1990s with the support of France's larger banks, was intended to prepare students for middle and back-office positions in the trading departments of financial institutions. Prior to that he received a bachelor's degree
in Finance from the University of Nantes
.
During an interview, one of his former lecturers at Lyon, Gisèle Reynaud, stated that "He was a student just like the others, a young man, and he didn't distinguish himself from the others." In 2001, at the suggestion of Thierry Mavic, the Mayor of Pont l'Abbé, Kerviel stood for a seat on the local council
with the Union for a Popular Movement
party but was not elected.
of the bank Société Générale in the summer of 2000, working in its compliance department. In 2005 he was promoted to the bank's Delta One
products team in Paris where he was a junior trader. Société Générale's Delta One business includes program trading
, exchange-traded fund
s, swaps
, index futures
and quantitative trading. Christian Noyer
, governor of the Bank of France, has described Kerviel as a "computer genius"; however, sources within Société Générale described Kerviel as "not a star". Kerviel earned a bonus of €
60,000 on top of a €74,000 salary in 2006, considered modest in terms of the salaries paid to traders in the financial markets. He had hoped for a €600,000 bonus for 2007 and would have received at least half that amount.
discrepancies between equity derivative
s and cash equity prices, and "began creating the fictitious trades in late 2006 and early 2007, but that these transactions were relatively small. The fake trading increased in frequency, and in size".
Bank officials claim that throughout 2007, Kerviel had been trading profitably in anticipation of falling market prices; however, they have accused him of exceeding his authority to engage in unauthorized trades totaling as much as €49.9 billion, a figure far higher than the bank's total market capitalization. Bank officials claim that Kerviel tried to conceal the activity by creating losing trades intentionally so as to offset his early gains. According to the BBC
, Kerviel generated in hidden profits at the beginning of 2008. His employers say they uncovered unauthorized trading traced to Kerviel on 2008. The bank then closed out these positions over three days of trading beginning 2008, a period after which the market experienced a large drop in equity indices, and losses attributed are estimated at .
The bank claimed Kerviel "had taken massive fraudulent directional positions in 2007 and 2008 far beyond his limited authority" and that the trades involved European stock index futures. Though bank officials say Kerviel apparently worked alone, skeptics question how unauthorized trading of this magnitude could go unnoticed. Kerviel's unassuming background and position have heightened the skepticism that he worked alone. Some analysts suggest that unauthorised trading of this scale may have gone unnoticed initially due to the high volume in low-risk trades normally conducted by his department. The bank said that whenever the fake trades were questioned, Kerviel would describe it as a mistake then cancel the trade, after which he would replace that trade with another transaction using a different instrument to avoid detection. Kerviel's lawyers, Elisabeth Meyer and Christian Charrière-Bournazel, said that the bank's managers "brought the loss on themselves"; accused the bank's management of wanting to "raise a smokescreen to divert public attention from far more substantial losses in the last few months"; and said that Kerviel had made the bank a profit of US$2 billion as of 2007.
Managers for Société Générale have described some of the means Kerviel employed to avoid the bank's internal controls and escape detection. Its Executive Chairman Daniel Bouton describes the pattern as like "a mutating virus" in which hundreds of thousands of trades were hidden behind offsetting faked hedge
trades. Officials say Kerviel was careful to close the trades in just two or three days, just before the trades' timed controls would trigger notice from the bank's internal control system, and Kerviel would then shift those older positions to newly initiated trades. City experts have expressed skepticism of the bank's account, saying that a pattern of closing out trades within the three day cycle alleged could not be accomplished given the immense sums involved.
Kerviel is not thought to have profited personally from the suspicious trades. Prosecutors say Kerviel has been cooperative with the investigation, and has told them his actions were also practiced by other traders in the company. Kerviel admits to exceeding his credit limits, but claims he was working to increase bank profits. He told authorities that the bank was happy with his previous year's performance, and was expecting to be paid a €300,000 bonus on a declared profit (approximately 0.5%) which illustrates the definition of "fair pay" in the French investment banks. Family members speaking out say the bank is using Kerviel as a scapegoat
to excuse its recent heavy losses.
Also on 24 January 2008, Société Générale filed a lawsuit against "a 31-year-old person" for creating fraudulent documents, using forged documents and making attacks on an automated system, according to Clarisse Grillon, a spokeswoman for the Nanterre
prosecutor. Le Figaro
reported that in addition to the Société Générale lawsuit, a group of shareholders filed a lawsuit for fraud
, breach of trust and forgery.
On the eve and afternoon of 25 January 2008, police raided the Paris headquarters of Société Générale and Kerviel's apartment in the western suburb of Neuilly-sur-Seine
to seize his computer files. On 26 January 2008, the Paris prosecutors' office stated that Kerviel "is not on the run. He will be questioned at the appropriate time, as soon as the police have analysed documents provided by Société Générale." He was taken into police custody later that day.
Kerviel's initial 24-hour detention was extended to 48 hours while French law enforcement questioned him about possible accomplices. The investigation later widened to encompass his personal cell phone records, and to explore possible links to other individuals working at rival banks and private investment firms who may be involved. The police were investigating whether he worked alone, and whether any investors outside of Société Générale may have been tipped off in advance. Police were interested whether others were involved either in the trades themselves or received notice of the bank's impending sell-off before the details of the scandal were publicly disclosed.
Kerviel was formally charged on 2008 with abuse of confidence and illegal access to computers. He was released from custody a short time after. The charges filed carry a maximum three-year prison term. On 2008 investigating judges Renaud van Ruymbeke and Françoise Desset had rejected prosecutor Jean-Claude Marin's bid to charge Kerviel with the more serious crime of "attempted fraud" and refuse bail.
His trial began on 8 June 2010. On 2010, he was found guilty and sentenced to five years of prison, with two years suspended, full restitution of the $6.7 billion which was lost, and a permanent ban from working in financial services. Caroline Guillaumin, a spokeswoman for Société Générale, stated that the restitution was "symbolic", and that the bank had no expectation that the sum would be paid. Olivier Metzner, Kerviel's lawyer, described the sentence as "extraordinary" and said that Kerviel would appeal. Kerviel's sentence was suspended until his appeal is completed.
Trader (finance)
A trader is someone in finance who buys and sells financial instruments such as stocks, bonds, commodities and derivatives. A broker who simply fills buy or sell orders is not a trader, as they are merely executing instructions given to them. According to the Wall Street Journal in 2004, a managing...
who has a pending appeal of his conviction in the January 2008 Société Générale trading loss incident
January 2008 Société Générale trading loss incident
In January 2008, the bank Société Générale lost approximately €4.9 billion closing out positions over three days of trading beginning January 21, 2008, a period in which the market was experiencing a large drop in equity indices. The bank states these positions were fraudulent transactions created...
for breach of trust
Breach of Trust
Breach of Trust is a Canadian alternative rock band originally from La Ronge, Saskatchewan. The band currently consists of vocalist Marty Ballentyne, guitarist Donovan Bruyere, bass guitarist Colin Cheechoo and drummer William Aubut...
, forgery and unauthorized use of the bank's computers, resulting in losses valued at €
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
4.9 billion.
Société Générale characterizes Kerviel as a rogue trader
Rogue trader
A rogue trader is an authorised employee making unauthorised trades on behalf of their employer. It is most often applicable to financial trading, and as such is a term used to describe persons - professional traders - making unapproved financial transactions....
and claims Kerviel worked these trades alone and without its authorization. These assertions have been met with skepticism by some of Kerviel's former colleagues and acquaintances, as well as by some members of the news media. Kerviel had told investigators that his trading behavior was widespread at the company and that getting a profit makes the hierarchy turn a blind eye. Kerviel did not make a profit- he made massive losses. Kerviel published a book in May 2010, L'engrenage: Mémoires d’un Trader (Downward spiral: Memoirs of a Trader), in which he alleges that his superiors knew of his trading activities, and that the practice was very common.
Early life
Jérôme Kerviel grew up in Pont-l'AbbéPont-l'Abbé
Pont-l'Abbé is a commune in the Finistère department of Brittany in north-western France.The self-styled capital of Pays Bigouden , Pont-l'Abbé was founded in the 14th century by a monk of Loctudy who built the first bridge across the river estuary, hence the name...
, Brittany
Brittany
Brittany is a cultural and administrative region in the north-west of France. Previously a kingdom and then a duchy, Brittany was united to the Kingdom of France in 1532 as a province. Brittany has also been referred to as Less, Lesser or Little Britain...
. His mother, Marie-Josée, is a retired hairdresser and his father, Charles, who died in 2006, was a blacksmith. Kerviel has an older brother, Olivier. Kerviel is married, but he and his wife recently separated.
He graduated in 2000 from University Lumière Lyon 2
Lumière University Lyon 2
Lumière University Lyon 2 is one of the three universities that comprise the current University of Lyon, having splintered from an older university of the same name, and is primarily based on two campuses in Lyon itself...
with a Master of Finance
Master of Finance
A Master of Finance is a Master's degree designed to prepare graduates for careers in financial analysis, investment management and corporate finance. An alternate degree title is Master in Finance or Master of Science in Finance...
specializing in organization and control of financial markets. The university's financial program, which was initiated in the 1990s with the support of France's larger banks, was intended to prepare students for middle and back-office positions in the trading departments of financial institutions. Prior to that he received a bachelor's degree
Bachelor's degree
A bachelor's degree is usually an academic degree awarded for an undergraduate course or major that generally lasts for three or four years, but can range anywhere from two to six years depending on the region of the world...
in Finance from the University of Nantes
University of Nantes
The University of Nantes is a well-known French university, located in the city of Nantes. Currently, it is attended by approximately 34,000 students. 10% of them are international students coming from 110 countries.-History:...
.
During an interview, one of his former lecturers at Lyon, Gisèle Reynaud, stated that "He was a student just like the others, a young man, and he didn't distinguish himself from the others." In 2001, at the suggestion of Thierry Mavic, the Mayor of Pont l'Abbé, Kerviel stood for a seat on the local council
Municipal council
A municipal council is the local government of a municipality. Specifically the term can refer to the institutions of various countries that can be translated by this term...
with the Union for a Popular Movement
Union for a Popular Movement
The Union for a Popular Movement is a centre-right political party in France, and one of the two major contemporary political parties in the country along with the center-left Socialist Party...
party but was not elected.
Société Générale
Kerviel joined the middle officeMiddle office
The middle office comprises departments of a financial services company that manage position-keeping . These divisions make sure these transaction representations properly capture profit flows given the technological resources...
of the bank Société Générale in the summer of 2000, working in its compliance department. In 2005 he was promoted to the bank's Delta One
Delta One
Delta One products are a class of financial derivative that have no optionality and as such have a delta of one - that is to say that for a given percentage move in the price of the underlying asset there will be a near identical move in the price of the derivative...
products team in Paris where he was a junior trader. Société Générale's Delta One business includes program trading
Program trading
Program trading is a generic term used to describe a type of trading in securities, usually consisting of baskets of fifteen stocks or more that are executed by a computer program simultaneously based on predetermined conditions...
, exchange-traded fund
Exchange-traded fund
An exchange-traded fund is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as the S&P 500 or MSCI EAFE...
s, swaps
Swap (finance)
In finance, a swap is a derivative in which counterparties exchange certain benefits of one party's financial instrument for those of the other party's financial instrument. The benefits in question depend on the type of financial instruments involved...
, index futures
Stock market index future
In finance, a stock market index future is a cash-settled futures contract on the value of a particular stock market index.-Market:The turnover for the global market in exchange-traded equity index futures is notionally valued, for 2008, by the Bank for International Settlements at USD 130...
and quantitative trading. Christian Noyer
Christian Noyer
Christian Noyer is a French higher civil servant, current governor of the Bank of France , and former vice-president of the Executive Board of the European Central Bank . In March 2010 Noyer became Chairman of the Bank for International Settlements.-References: *...
, governor of the Bank of France, has described Kerviel as a "computer genius"; however, sources within Société Générale described Kerviel as "not a star". Kerviel earned a bonus of €
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
60,000 on top of a €74,000 salary in 2006, considered modest in terms of the salaries paid to traders in the financial markets. He had hoped for a €600,000 bonus for 2007 and would have received at least half that amount.
Unauthorized trading
The bank states that Kerviel was assigned to arbitrageArbitrage
In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices...
discrepancies between equity derivative
Equity derivative
In finance, an equity derivative is a class of derivatives whose value is at least partly derived from one or more underlying equity securities. Options and futures are by far the most common equity derivatives, however there are many other types of equity derivatives that are actively...
s and cash equity prices, and "began creating the fictitious trades in late 2006 and early 2007, but that these transactions were relatively small. The fake trading increased in frequency, and in size".
Bank officials claim that throughout 2007, Kerviel had been trading profitably in anticipation of falling market prices; however, they have accused him of exceeding his authority to engage in unauthorized trades totaling as much as €49.9 billion, a figure far higher than the bank's total market capitalization. Bank officials claim that Kerviel tried to conceal the activity by creating losing trades intentionally so as to offset his early gains. According to the BBC
BBC
The British Broadcasting Corporation is a British public service broadcaster. Its headquarters is at Broadcasting House in the City of Westminster, London. It is the largest broadcaster in the world, with about 23,000 staff...
, Kerviel generated in hidden profits at the beginning of 2008. His employers say they uncovered unauthorized trading traced to Kerviel on 2008. The bank then closed out these positions over three days of trading beginning 2008, a period after which the market experienced a large drop in equity indices, and losses attributed are estimated at .
The bank claimed Kerviel "had taken massive fraudulent directional positions in 2007 and 2008 far beyond his limited authority" and that the trades involved European stock index futures. Though bank officials say Kerviel apparently worked alone, skeptics question how unauthorized trading of this magnitude could go unnoticed. Kerviel's unassuming background and position have heightened the skepticism that he worked alone. Some analysts suggest that unauthorised trading of this scale may have gone unnoticed initially due to the high volume in low-risk trades normally conducted by his department. The bank said that whenever the fake trades were questioned, Kerviel would describe it as a mistake then cancel the trade, after which he would replace that trade with another transaction using a different instrument to avoid detection. Kerviel's lawyers, Elisabeth Meyer and Christian Charrière-Bournazel, said that the bank's managers "brought the loss on themselves"; accused the bank's management of wanting to "raise a smokescreen to divert public attention from far more substantial losses in the last few months"; and said that Kerviel had made the bank a profit of US$2 billion as of 2007.
Managers for Société Générale have described some of the means Kerviel employed to avoid the bank's internal controls and escape detection. Its Executive Chairman Daniel Bouton describes the pattern as like "a mutating virus" in which hundreds of thousands of trades were hidden behind offsetting faked hedge
Hedge (finance)
A hedge is an investment position intended to offset potential losses that may be incurred by a companion investment.A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, many types of...
trades. Officials say Kerviel was careful to close the trades in just two or three days, just before the trades' timed controls would trigger notice from the bank's internal control system, and Kerviel would then shift those older positions to newly initiated trades. City experts have expressed skepticism of the bank's account, saying that a pattern of closing out trades within the three day cycle alleged could not be accomplished given the immense sums involved.
Kerviel is not thought to have profited personally from the suspicious trades. Prosecutors say Kerviel has been cooperative with the investigation, and has told them his actions were also practiced by other traders in the company. Kerviel admits to exceeding his credit limits, but claims he was working to increase bank profits. He told authorities that the bank was happy with his previous year's performance, and was expecting to be paid a €300,000 bonus on a declared profit (approximately 0.5%) which illustrates the definition of "fair pay" in the French investment banks. Family members speaking out say the bank is using Kerviel as a scapegoat
Scapegoat
Scapegoating is the practice of singling out any party for unmerited negative treatment or blame. Scapegoating may be conducted by individuals against individuals , individuals against groups , groups against individuals , and groups against groups Scapegoating is the practice of singling out any...
to excuse its recent heavy losses.
Legal repercussions
In answer to the rumors that Kerviel had fled Paris following the discovery of the unauthorised trading, on 2008 Kerviel's lawyer denied that he attempted to disappear and said he remained in Paris to face the accusations.Also on 24 January 2008, Société Générale filed a lawsuit against "a 31-year-old person" for creating fraudulent documents, using forged documents and making attacks on an automated system, according to Clarisse Grillon, a spokeswoman for the Nanterre
Nanterre
Nanterre is a commune in the western suburbs of Paris, France. It is located west of the center of Paris.Nanterre is the capital of the Hauts-de-Seine department as well as the seat of the Arrondissement of Nanterre....
prosecutor. Le Figaro
Le Figaro
Le Figaro is a French daily newspaper founded in 1826 and published in Paris. It is one of three French newspapers of record, with Le Monde and Libération, and is the oldest newspaper in France. It is also the second-largest national newspaper in France after Le Parisien and before Le Monde, but...
reported that in addition to the Société Générale lawsuit, a group of shareholders filed a lawsuit for fraud
Fraud
In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
, breach of trust and forgery.
On the eve and afternoon of 25 January 2008, police raided the Paris headquarters of Société Générale and Kerviel's apartment in the western suburb of Neuilly-sur-Seine
Neuilly-sur-Seine
Neuilly-sur-Seine is a commune in the western suburbs of Paris, France. It is located from the center of Paris.Although Neuilly is technically a suburb of Paris, it is immediately adjacent to the city and directly extends it. The area is composed of mostly wealthy, select residential...
to seize his computer files. On 26 January 2008, the Paris prosecutors' office stated that Kerviel "is not on the run. He will be questioned at the appropriate time, as soon as the police have analysed documents provided by Société Générale." He was taken into police custody later that day.
Kerviel's initial 24-hour detention was extended to 48 hours while French law enforcement questioned him about possible accomplices. The investigation later widened to encompass his personal cell phone records, and to explore possible links to other individuals working at rival banks and private investment firms who may be involved. The police were investigating whether he worked alone, and whether any investors outside of Société Générale may have been tipped off in advance. Police were interested whether others were involved either in the trades themselves or received notice of the bank's impending sell-off before the details of the scandal were publicly disclosed.
Kerviel was formally charged on 2008 with abuse of confidence and illegal access to computers. He was released from custody a short time after. The charges filed carry a maximum three-year prison term. On 2008 investigating judges Renaud van Ruymbeke and Françoise Desset had rejected prosecutor Jean-Claude Marin's bid to charge Kerviel with the more serious crime of "attempted fraud" and refuse bail.
His trial began on 8 June 2010. On 2010, he was found guilty and sentenced to five years of prison, with two years suspended, full restitution of the $6.7 billion which was lost, and a permanent ban from working in financial services. Caroline Guillaumin, a spokeswoman for Société Générale, stated that the restitution was "symbolic", and that the bank had no expectation that the sum would be paid. Olivier Metzner, Kerviel's lawyer, described the sentence as "extraordinary" and said that Kerviel would appeal. Kerviel's sentence was suspended until his appeal is completed.