Jerome Kerviel’s Rogue Trade Story
Jerome Kerviel, a French rogue trader, was convicted of fraudulent trading at Société Générale. He created fake trades to balance his one-sided bets, concealing his gains by intentionally generating losses. Kerviel's actions resulted in €4.9 billion in company losses. He served five months in prison and was fined €1 million.
Jerome Kerviel was born on January 11, 1977, in Pont L'Abby, Brittany, France. He completed his education at the University of Nantes, earning a bachelor's degree in 1999, and later obtained a master's degree in finance from the University of Lyon in 2000.
In the summer of 2000, at the age of 23, Kerviel embarked on his career at Société Générale. Initially working in the compliance department, he transitioned to a role as a junior trader in 2005, specializing in derivatives. His responsibilities included leveraging pricing discrepancies between equity derivatives and the market value of the underlying stocks.
During the period from 2006 to early 2008, Kerviel faced charges for his involvement in unauthorized and false trades, resulting in losses exceeding €4.9 billion in company assets. Upon the discovery of his actions, company managers swiftly closed the open positions, which predominantly consisted of specialized equity arbitrage trades, to contain the extent of the fraud. However, due to a declining market, the closure of several trades led to significant losses.
Derivatives Trading and Risk Management
Derivatives are financial instruments that derive their value from underlying assets such as commodities, stocks, or indices. They include various types like futures, options, and swaps.
To manage risk in derivative trading, it is common to offset a long position with a corresponding short position. This strategy helps balance potential gains and losses. For example, if a trader expects the price of a certain asset to rise, they might take a long position in its derivatives. To hedge against potential losses, they may simultaneously take a short position in a related asset or its derivatives.
However, Jerome Kerviel deviated from this risk management approach. He engaged in unauthorized and unbalanced derivative trades, focusing solely on one side of the bets. This disregarded the practice of offsetting positions to mitigate risk and exposed the trading activities to potential losses.
Kerviel's Fraudulent Trading
Jerome Kerviel, with experience in Société Générale's back office, conducted unauthorized trading activities between late 2006 and early 2008. Exploiting his knowledge of the company's trading policies, he created fictitious trades in the bank's computers and logs to offset his one-sided bets, successfully evading detection by the bank's oversight systems. Initially profitable, Kerviel grew concerned that the bank would uncover the fraudulent transactions. To conceal his actions, he intentionally generated losing trades to offset his earlier gains.
In January 2008, Société Générale's management discovered the unauthorized trading and took immediate action to unwind Kerviel's positions. The losses incurred amounted to a substantial €4.9 billion. Kerviel argued that his superiors were aware of his fraudulent trades but chose to ignore them due to the profits he generated for the bank. In a 2016 judgment, an appeals court in Versailles sided with Kerviel, acknowledging that it was not mere negligence but deliberate managerial choices that allowed him to carry out his criminal acts.
Definition of a Rogue Trader
A rogue trader is someone who trades recklessly on behalf of others, often disregarding company policies and risk management procedures. They typically engage in speculative activities involving high-risk securities and significant capital.
Kerviel's Abilities and Personal Gain
There are conflicting accounts of Jerome Kerviel's abilities as both a trader and a student. While some professors considered him an average student at the University of Lyon, the former Bank of France governor praised him as a "computer genius." Nonetheless, Kerviel wasn't seen as a standout trader among his colleagues.
Despite his risky and unauthorized trading, Kerviel didn't personally profit. He became part of the infamous group of rogue traders responsible for significant financial losses for their employers. During his case, Kerviel embarked on a pilgrimage from Paris to Rome, meeting the Pope to discuss challenges posed by capitalism.
In 2010, Kerviel was convicted for breach of trust and other offenses, receiving a minimum three-year prison sentence and a €4.9 billion restitution order. He served five months before being released in 2014, and his fine was later reduced to €1 million in 2016.
Kerviel and Société Générale Today
Jerome Kerviel's net worth is negative, as he owed €4.9 billion following his conviction, which was later reduced to €1 million in 2016. Currently, Jerome Kerviel works as an IT consultant at Lemaire Consultants.
Société Générale is still an active global financial firm with headquarters in Paris. It operates offices worldwide and offers a wide range of services, including retail banking, sales and trading, and investment banking.
Jerome Kerviel, a trader at Société Générale, conducted rogue trades involving derivatives, causing the bank to suffer losses of €4.9 billion. He received a three-year prison sentence but served only five months. Initially, he was ordered to pay fines amounting to €4.9 billion, but the amount was later reduced to €1 million.