Why Conspire When Nobody's Looking?

Posted by: Carol Matlack on March 14

From the moment Société Générale admitted losing more than $7 billion on rogue trades by Jérôme Kerviel, it’s been hard to imagine that the 31-year-old trader could have carried out tens of billions in unauthorized transactions without anyone helping or even noticing what he was up to.

So far, investigations by the bank and law-enforcement authorities have turned up no evidence that Kerviel had accomplices – at least not in the sense that he conspired with anyone to carry out improper trades or cover them up. An employee of a SocGen brokerage unit who apparently executed some of his trades was taken into custody for questioning this week but was quickly released, as was another SocGen broker last month. Neither has been charged.

Yet it’s become clear that – as Kerviel has told investigators – his bosses chose to put their faith in the young trader and overlook repeated warning signals, in large part because he was making money for the bank.

The latest evidence comes in a March 13 Le Monde article, which details statements made to investigators by Kerviel and his immediate supervisor, Eric Cordelle. The newspaper obtained a summary of the statements that prosecutors presented to a Paris court.

According to the newspaper’s account, Cordelle, 36, was typical of the bright young men on SocGen’s management fast track. A graduate of the prestigious Ecole Polytechnique, he had spent 4 years in SocGen’s Tokyo office. Then, although he had never been a trader, in the spring of 2007 he was named boss of the bank’s Delta One trading desk in Paris. Kerviel had worked at Delta One since 2005 after moving up from a back-office job. Cordelle told investigators that his predecessor “at no time indicated any problem with Mr. Kerviel,” and told him that the young trader was well-considered by clients and colleagues.

Indeed, Kerviel was considered a top performer, as he reported making a gain of almost $85 million in 2007, or 55% of the total reported by the entire Delta One team of 8 traders. Cordelle said that didn’t surprise him, because “it often happens that a member of the team accounts for 50% of the total.” (In fact Kerviel has said he made a gain of more than $2 billion, but covered most of it up with fictitious offsetting trades.)

During 2007, the bank’s internal control units issued more than 60 alerts about his transactions. “I must have asked Jerome about it 50 times,” Cordelle told investigators, “and each time his responses convinced me.” The bank’s back-office monitors also were satisfied by the explanations, which Kerviel has said were often backed up by phony e-mails that he created.

By autumn, the Frankfurt-based Eurex derivatives exchange had started asking SocGen about Kerviel’s questionable trades, including one in October worth more than $1.5 billion – whereas the entire Delta One desk was not supposed to trade more than about $190 million in a day. Cordelle admitted he didn’t notice that inquiry, saying, “I receive 200 or 300 e-mails a day.” He said that if he had read it, “I would have hit the ceiling.”

However, he did learn about other Eurex inquiries, which he discussed with Kerviel. According to the report obtained by Le Monde, Kerviel again persuaded Cordelle that there was no problem, saying, “They sure are dumb over at Eurex.”

Kerviel has admitted using his knowledge of back-office procedures to create and delete fictitious trades to offset his gambles. Yet even if superiors didn’t know the size of his bets, they clearly knew that he and other traders regularly exceeded Delta One’s $190 million daily trading limit.Cordelle told investigators that in early January this year he “sent an e-mail to the entire team, drawing their attention that they were exceeding the limit too often. Jérôme, like the other members of the team, responded that there was no need to request an increase of the limit,” he said.

On March 12, lawyers in New York City filed a federal lawsuit on behalf of SocGen’s U.S. shareholders, saying the bank “misled investors regarding SocGen’s lack of adequate internal controls. Litigation by non-U.S. shareholders is sure to follow.

In the end, investigators may find there was no criminal conspiracy – only an ambitious young trader with a misguided scheme to become a superstar. But the legacy of lax oversight will continue to haunt this once high-flying bank for years.