Société
Générale bank’s N82bn loss
•Investigative panel endorses management’s
findings
By CUDJOE KPOR
Thursday, March 13, 2008
Investigations into Société Générale
Bank’s loss of N82.2 billion (4.82bn euro) because of
the illegal and unauthorized activities of its former trader,
Jerome Kerviel, 31, have not revealed anything startling.
A few unanswered questions, however, remained.
For instance, one significant omission in the report of the
panel of non-executive directors is its inability to establish
how much the immediate supervisors of the rogue trader knew,
but turned blind eyes to them, while he was making profit
for the bank.
An unidentified bank source told New York Times recently that
it was “inconceivable” that Kerviel’s immediate
supervisors were not alerted after his illegal trades set
off alarm bells at Eurex, the derivatives exchange based in
Frankfurt, Germany.
It listed the immediate supervisors as Martial Rouyère,
dead of Delta One, the bank’s trading floor and his
deputy, Éric Cordelle. According to the bank’s
lawyers familiar with the case.
“The only thing that was said to me is to manage a way
to straighten it out,” New York Times cited Kerviel
as saying. Headed: “The other warnings that they get
after don’t make them react more.”
Moreover, French daily, Le Monde, quoted police investigators’
transcript of interviews with Kerviel, the rogue trader, that
as long as he was making money for the bank, his supervisors
turned blind eyes. “I regularly received risk messages
alerting me that I had greatly exceeded my nominal cover.
A few minutes later (during which he would create a fictitious
transaction to mask the risk), a counter-message would be
sent. The frequency of these alerts did not worry them, because
I was generating cash, the signals didn't worry them."
Otherwise, the panel admitted in its preliminary report to
the bank’s board last week that the failure or non-existence
of adequate internal control systems in the bank made it virtually
impossible to detect Kerviel’s activities for two years.
Thus, its investigations broadly confirmed the management’s
assertions that Kerviel acted alone. In other words, he exploited
his familiarity with the bank’s control systems gained
from working previously in its risk control department to
indulge in his unauthorized activities that cost the bank
the enormous loss.
Mr Daniel Bouton, the bank’s chairman, had said Kerviel
used in-depth knowledge of the bank’s risk-control software
systems to conceal his activities.
Bouton had told a French newspaper, Le Figaro, that the nature
of the trader’s fictitious operations were constantly
evolving.
“And when the control systems detected an anomaly, he
managed to convince control officers that it was nothing more
than a minor error.”
The 27-page preliminary report, complete with tables and graphs,
which tracked Kerviel’s trading activities since inception,
was posted at its website (www.socgen.com). In it, the investigators
conceded that the bank’s employees followed the available
controls, in accordance with the established procedures. However,
the procedures were inadequate to identify the fraud before
it was eventually detected on January 18, this year.
“On the other hand, controls, which would have allowed
the fraud to be detected (sooner), were missing,” it
said.
It gave three reasons for the fraud going undetected for two
years: “The failure to identify the fraud until that
date can be attributed, first, to the efficiency and variety
of the concealment techniques employed by the fraudster. Secondly,
to the fact that operating staff did not systematically carry
out more detailed checks and finally, to the absence of certain
controls that were provided for and which might have identified
the fraud,” he said.
It is unclear yet why the report referred constantly to Kerviel
as a fraudster when a Paris court refused to admit fraud as
one of the charges against the trader. As at now, the panel
refrained from drawing a final conclusion. For, the parallel
investigations being conducted by the police involved interviewing
the same supervisors of the rogue trader.
The investigation committee of non-executive directors was
led by Mr Jean-Martin Folz, former chief executive officer
of Peugeot-Citroen. PriceWaterhouseCoopers, the global auditing
giant, reviewed the work of the approximately 40-member team
of investigators from the bank’s General Inspection
Department working under the non-executive directors. The
final report would be made available to shareholders at the
annual general meeting scheduled for next May 27.
It concluded that so far, “we have not detected any
indication of embezzlement of funds.” Also, “we
have not identified any sign of internal or external collusion.”
Thus, Kerviel’s motivation appeared to be to earn more
money for the bank in order to be rewarded with higher annual
bonus. He earned N1.02 million (60,000 euro) as bonus in 2006.
He got N5.1 million (300,000 euro) or half of what he asked
for as claims in 2007.
The report was submitted to Société Générale’s
board by three non-executive directors, including Jean Azéma
and Antoine Jeancourt-Galignani, alongside the panel chairman.
The special investigation panel, which was formed last month,
is probing how Kerviel contrived to hide his unauthorized
trading activities and identify the lapses that made it possible
for the trader to expose the bank to N853bn (50bn euros) worth
of bets — more than its market value which stood at
about N682bn (40bn euro) last month.
The committee said Kerviel started taking the unauthorized
risky positions soon after he was posted to the derivatives
trading desk, called Delta One in Paris in 2005. Till 2006,
he traded them in small amounts. But from March 2007, apparently
after he had gained confidence in his technique, he placed
bets in large amounts. By January 18, this year, when it was
uncovered, he had ratcheted up to 50bn euro which led to N82.2bn
(4.82bn euro) loss when the fraudulent positions were unwound
between January 21 and 23, this year.
It listed the corrective measures taken by the management
to prevent recurrence as:
A strengthened IT security through strong identification solutions
(biometry), acceleration of current structural plans for the
management of access security and targeted security audits;
reinforce controls and alert procedures to ensure the appropriate
circulation of relevant information between the different
units and at the appropriate management level; and strengthen
the organizational structure and governance of the operational
risk prevention system to develop its cross-functional nature
and better take account of the fraud risk from a human resources
perspective as well. |
