Exactly How Do You Hide $73 Billion In Fraudulent Trades?

from the bet-big,-lose-big dept

Mon, Jan 28th 2008 6:21am — Mike Masnick

At the end of last week, the latest banking scandal started hitting the wires as news broke of a low level trader for the French bank Societe Generale was somehow able to lose the bank $7.2 billion by sneaking around various control and security systems to make a series of complex bets, well beyond what he should have been allowed to do. Many people are comparing it to the case of Nick Leeson, who brought down Barings bank over a decade ago -- though, with Leeson, it only took a little over a $1 billion. And, over the weekend, the details got worse. That $7.2 billion loss came on bets up to $73 billion. It certainly raises plenty of questions about the controls that are in place. No matter how sneaky you are, you would think that $73 billion would be pretty hard to trade without anyone noticing. Apparently not. The trader in this case, Jerome Kerviel, supposedly had a detailed understanding of the security systems thanks to an earlier job at the bank, that involved monitoring the trading systems and then used other people's accounts and falsified documents to hide his tracks. Even so, you would think that someone would have taken notice of $73 billion moving around. Societe Generale claims that, unlike Barings, it can easily survive this fraud and will even turn a profit. Of course, at the same time, it also announced it needs to raise $8 billion -- and given the size of the loss, that certainly makes it sound like the bank needs to replace that money pretty quickly.

Thank you for reading this Techdirt post. With so many things competing for everyone’s attention these days, we really appreciate you giving us your time. We work hard every day to put quality content out there for our community.

Techdirt is one of the few remaining truly independent media outlets. We do not have a giant corporation behind us, and we rely heavily on our community to support us, in an age when advertisers are increasingly uninterested in sponsoring small, independent sites — especially a site like ours that is unwilling to pull punches in its reporting and analysis.

While other websites have resorted to paywalls, registration requirements, and increasingly annoying/intrusive advertising, we have always kept Techdirt open and available to anyone. But in order to continue doing so, we need your support. We offer a variety of ways for our readers to support us, from direct donations to special subscriptions and cool merchandise — and every little bit helps. Thank you.

–The Techdirt Team

Filed Under: billions, fraud, jerome kerviel, security controls, trading

21 Comments

If you liked this post, you may also be interested in...

Reader Comments

Subscribe: RSS

View by: Time | Thread

ChurchHatesTucker, 28 Jan 2008 @ 6:38am

Slowly
His trading took place over the course of a year. It was when he tried to get rid of his profits (which he was too successful at) that he was detected. See the article here:
http://www.independent.co.uk/news/europe/rogue-trader-the-man-who-saved-the-world-or-not-7746 58.html
[ link to this | view in thread ]
Barbara, 28 Jan 2008 @ 7:09am

Don't you find it odd...
Don't you find it odd that a person would perpetrate such a fraud and not have any personal gain for themselves. Why did he do it if he personally wasn't going to gain - just for giggles? I think there is a lot more going on here that they are not sharing.
[ link to this | view in thread ]
Anonymous Coward, 28 Jan 2008 @ 7:19am

Wall Street Journal has a good article on how this happened. Actually, the positions he took recently is what did him in. 2007 was pretty much a neutral year for his trades, his positions in 08 sank the ship.
[ link to this | view in thread ]
Anonymous Coward, 28 Jan 2008 @ 7:35am

what is missing from this article is that the employee being blamed is a 30 year old mid lvl employee who has been in bank for less than 1 year.

which makes me wonder:
Is he really the cause or just a scape goat, if he really is the only one involved that bank has some serious security issues.
[ link to this | view in thread ]
Vincent Clement, 28 Jan 2008 @ 7:40am

A few years back, MasterCard was able to detect fraudulent activity on my card and called me to confirm if I did or did not purchase the material. We are talking about $600. Yet a bank cannot detect a $7.2 billion loss?
[ link to this | view in thread ]
dorpass, 28 Jan 2008 @ 7:41am

Re: Slowly
That article is quite interesting. Besides the different numbers, it has Ed Yardeni saying that ".. the recession is almost over." Quite fascinating seeing how we STILL did not have 2 continuous quarters of decreasing GDP. Sounds like someone is trying to write up a sensationalist article.
[ link to this | view in thread ]
Drew, 28 Jan 2008 @ 7:41am

Professional Gain
He might not have had a lot to gain personally, but he sure had a lot to gain professionally.

Imagine everything had worked out perfectly, and he made his company BILLIONS of dollars. As a hot-shot banker, you gotta believe that he thought that might propel him up the corporate ladder... And what a reputation he'd have.
[ link to this | view in thread ]
Duodave, 28 Jan 2008 @ 7:49am

I have trouble getting excited over this
Why do I get the feeling this goes on more often than the banks care to let us know? I take issue with the inferrence that these were "bets" - when I saw that in your description I thought this guy was visiting Monte Carlo with $7.2 billion.
[ link to this | view in thread ]
Dave Barnes, 28 Jan 2008 @ 7:50am

Speling errors
It is not: Jerome Kerviel and Societe Generale.
It is: Jérôme Kerviel and Société Générale
[ link to this | view in thread ]
4-80-sicks, 28 Jan 2008 @ 8:03am

Re: Speling errors
It is: Jérôme Kerviel and Société Générale
American keyboards don't have those keys, and such characters must be typed by pressing Alt-0224, Alt-0232, etc. We don't usually bother.
[ link to this | view in thread ]
Spuds, 28 Jan 2008 @ 8:05am

Re: Speling errors
ғüĉķ ŸǒǗ
[ link to this | view in thread ]
Joe Smith, 28 Jan 2008 @ 8:14am

Re: I have trouble getting excited over this
I take issue with the inferrence that these were "bets" - when I saw that in your description I thought this guy was visiting Monte Carlo with $7.2 billion.

He was trading derivatives and "bets" is not a bad or unfair characterization.

When you go to Monte Carlo the rules of the game are known and you can calculate your odds. Its seems pretty clear that in the current meltdown there were lots of Wall Street types who did not did not understand the rules and could not calculate the odds. It brings to mind the old advice: if you sit down at a poker table and can't spot the mark - you're the mark.
[ link to this | view in thread ]
Anthony, 28 Jan 2008 @ 8:22am

Re:
The credit card company was able to detect the illegitimate charge because certain flags were triggered by the bank's computer. A rather simplistic example, after a card is stolen a thief might attempt to get gas for just a few dollars to make sure the card has not been canceled right before he buys his girlfriend a $3000 necklace at the jewelry store.

By working in the backroom trading facility before he started trading Jérôme knew those rules and was able to get around them.
[ link to this | view in thread ]
SimonSays, 28 Jan 2008 @ 8:23am

A must watch
Money = Debt. The system is broken. This is a reminder to everyone to watch this: http://video.google.com/videoplay?docid=-9050474362583451279
[ link to this | view in thread ]
Jack Sombra, 28 Jan 2008 @ 8:26am

"Imagine everything had worked out perfectly, and he made his company BILLIONS of dollars. As a hot-shot banker, you gotta believe that he thought that might propel him up the corporate ladder... And what a reputation he'd have."
If you read the article he actually he did make a billion or so, but because he could not explain it to the bank he had try to lose it, problem was he over did it and went from about a billion plus in the black to a billion plus in the red
[ link to this | view in thread ]
dorpass, 28 Jan 2008 @ 8:55am

Re: I have trouble getting excited over this
"Bets" is quite a common term in the stock market, there is no reason to be up in arms about it. This has nothing to do with this one bank coming up with the term for their purposes. If you want a conspiracy theory, try again, Duodave.
[ link to this | view in thread ]
Anonymous Coward, 28 Jan 2008 @ 10:10am

My understanding is the $7.2 loss was because the bank closed out all of his undocumented positions immediately upon discovery of the fraud. I wonder what would have happened if he hadn't been discovered?
[ link to this | view in thread ]
Anonymous Coward, 28 Jan 2008 @ 10:19am

The guy never tried to lose money. He placed bets on the industry averages, that was his department. When he placed a bet on the upside, he was supposed to place a offsetting bet on the downside. Through numbers, the bank would make a small profit. He made the bets, but was not hedging the bet with the appropriate offsetting bet (he just made those up by forging documents) and recently the bank was liable for up to $40 or so billion.
[ link to this | view in thread ]
Lance Hassan, 28 Jan 2008 @ 11:04am

Also...
In the war to point the finger it has also come out the Eurex the Exchange through which the trades were taking place, notified the bank that something did not look right, Back in November. Dealing with bad news like a lot of banks do these days, they ignored the warning.
[ link to this | view in thread ]
Cixelsid, 30 Jan 2008 @ 9:00am

Re: Re: Speling errors
"ғüĉķ ŸǒǗ"

Damn, that must have taken you a while. Your depth of devotion touches my soul.
[ link to this | view in thread ]
James, 19 Mar 2008 @ 5:41pm

SocGen Resume
I guess 8 years of Judo classes can help. Here's the rouge trader's resume:

http://razume.com/resume/view/916
[ link to this | view in thread ]