BUSINESS 101 - TOPIC THIS WEEK: AN EXPLORATION IN WHITE COLLAR CRIME
On October 5th, French courts ruled that Jérôme Kerviel, a rogue trader at Société Générale, France’s second-largest bank, was guilty of breach of trust and forgery. The courts sentenced him to 5 years in jail, although they suspended the last two, and ordered him to repay the bank the full amount of the losses derived from the hisactions.
By Paul Li
On October 5th, French courts ruled that Jérôme Kerviel, a rogue trader at Société Générale, France’s second-largest bank, was guilty of breach of trust and forgery. The courts sentenced him to 5 years in jail, although they suspended the last two, and ordered him to repay the bank the full amount of the losses derived from the hisactions.
The scandal initially broke in January 2008, when, facing a market downturn, Société Générale discovered that Kerviel had engaged in a series of unauthorized trades totalling €49.9 billion, more than the bank was worth. The trades were concealed by the use of mirror trades that hid the total value of the positions. The bank closed the operations over a period of three days, yet as result of the market downtown, suffered losses estimated at close to €5 billion.
Kerviel has defended his actions, saying that his superiors knew of his actions, but simply turned a blind eye as long as he turned profits and turned him into a scapegoat to cover losses. Indeed, until the end of 2007, the trades had accumulated a total hidden profit of €1.4 billion. On January 24th, 2008, Société Générale filed a lawsuit against then 31-year old Kerviel for “creating fraudulent documents, using forged documents and making attacks on an automated system”, according to a spokesperson for the prosecution.
The courts have since ruled that there wasn’t enough evidence for fraud charges, but indicted Kerviel on the charges of breach of trust and forgery. Société Générale has called the restitution “symbolic”, and that the bank had no expectations that the sum would be paid. Kerviel’s lawyers have said he plans to appeal the sentence.
Weighing In: So what does this mean for you.
The court’s ruling on the case has one important implication: by holding him responsible to pay back the full €5 billion, it is tantamount to indicating that Kerviel was solely responsible for his actions. In his defence, Kerviel stated many times that he found it unlikely that none of his superiors knew of his actions, especially when he generated large profits. Managers have all plead ignorance, claiming to have been hoodwinked.
One question then, is simple: at what point do supervisors share in the blame for the actions of their subordinates? It is entirely and humanly possible to claim ignorance for one or two trades. Maybe a few. But trades that generated €1.4 billion in profit? Over a period of months if not years? Any supervisor who didn’t notice his subordinate has essentially bet the entire bank over a period of months is, in the eyes of your correspondent, not doing his job.
The other question, of course, is a matter of unrestrained capitalism. Charlie Sheen and Shia LaBeouf have shown us the insides of capitalism in their respective Wall Street movies. How much are the actions of the individual up to their own free wills, and how much are they a result of a system which glorifies winners, bails out losers, and demonizes apparent wrong-doers? Are the individuals fully to blame, as the French court ruling suggests, or should the bank itself shoulder part of the blame, as Kerviel claims?
