|
Page 3 of 3
Where Was Compliance?
At this point—and incredibly not until this point—SocGen's compliance people started to get antsy after receiving several queries from Eurex, the derivatives exchange, about Kerviel's unusual trading patterns. On Thursday, January 3, at 10:26 a.m., Kerviel sent his "Term Sheet" (the terms of a specific trading transaction) to a compliance officer identified only as agent 2 in the middle office control center. An hour later, agent 2 noted a discrepancy between Kerviel's Term Sheet and the Eliot entry dealing with the same trade, according to the committee report. Kerviel managed to explain this away, claiming the problem resulted from delays at ClickOptions, an online options trading facility affiliated with SocGen.
On Monday, January 7, however, a warning for very high risk appeared on the compliance group's trade tracking dashboard, called RISQ/CMC, which utilizes the Accurate NXG reconciliation, exception management and workflow software package (Accurate was bought by CheckFree, which, in turn, was purchased by Fiserv).
The alert referred to an unquestionably high underlying asset (likely the hidden 1.4 billion euros) without providing a value for that asset. At this, another compliance officer, agent 3, confronted Kerviel personally and pressed him for an explanation. He responded, "This materializes the give up of puts made late. I owe money to the counterparty." In a later interview, she admitted to not having understood Kerviel's explanation, which was understandable since Kerviel was basically uttering gibberish.
advertisement
It's not likely agent 3 would have taken Kerviel to task, anyway. At SocGen, as with a number of financial services firms, the traders were often beyond reproach. Maxine Legrand, a one-time floor inspector at SocGen, complained to Agence France-Presse that traders were never punished and the inspection team was treated with disdain on the trading floor.
After agent 3 talked to Kerviel, another agent, agent 4, asked Kerviel, twice, to regularize the situation. This he did by canceling the pending transactions that were causing the alert. By Thursday morning the alert had disappeared, but Kerviel's Ponzi scheme had begun to collapse. Over the next few days some 27 SocGen compliance agents worked round the clock to uncover what Kerviel has been up to. Kerviel was questioned and questioned again. He repeatedly dodged the bullet by changing his story and providing forged documents and bogus emails.
By Monday, January 21, when Kerviel came into work, however, SocGen knew the full extent of Kerviel's 50 billion euro wager and had begun frantically to unwind his position with a resulting loss, the biggest in banking history, of 4.9 billion euros ($7.1 billion). No one had seen anything like this since another rogue trader, Nick Leeson single-handedly brought down the hallowed Barings Bank of Britain through his extracurricular trading activities in 1995. And Leeson only blew $1.4 billion, chump change compared to Kerviel.
When Kerviel was confronted by his superiors, and later the French police, he said he thought that telling them about the still undisclosed 1.4 billion profit for 2007 would be enough to assuage them. After all, as he told his interrogators, "No one else (in the bank) had ever realized such a sum, which represented 50% of the total result of the equity index division of SocGen."
Besides, he noted. "I had a feeling the market was going to bounce up." All he needed was a few more days of trading to reverse his bad fortune, but he never got that chance. Monday morning January 21 he was unceremoniously fired from the bank and later arrested by officers from the financial branch of the Paris police.
Subsequently, Kerviel has argued that his bosses secretly condoned what he was doing and ignored the red flags as long as he was raking in the euros. "From March to July my superiors received a number of warnings that make me think that the size of my stands was known," he says.
He also maintained that he acted alone, and was jailed in January to ensure that he didn't talk to possible accomplices in an attempt to eliminate evidence. On March 18, however, he was released from detention and ordered to remain in Paris while the investigation continued.
"Kerviel didn't implicate other employees," Christophe Reille, the trader's spokesman, told reporters upon his client's release. "He said there were other employees who were aware of what he was doing. People who are aware and who are accomplices are not the same.''
Next: Part 3. What Were SocGen's Risk Management Systems?
Only registered users can write comments.
Please login or register.
|
