Who is Jérôme Kerviel?
Jerome Kerviel was a junior level derivatives trader for the French securities company Société Générale. He was charged with losing more than € 4.9 billion in business assets through a series of unauthorized and spurious transactions between 2006 and early 2008. When business leaders discovered that Kerviel had carried out tens of billions of euros in unauthorized transactions, they rushed to close. open positions (most of which were specialized trades in equity arbitrage) and contain the extent of the fraud. Several transactions were closed with heavy losses due to a fall in the market at the time of sale.
About Jerome Kerviel
Jérôme Kerviel joined Société Générale in the summer of 2000 at the age of 23. His first position with the company was in compliance, but in 2005 he landed a position as a junior trader working with derivatives. Kerviel’s role was to capitalize on the price differentials between the equity derivatives and the market price of the stocks on which the derivatives were based.
Derivatives are investment instruments that derive their value from another asset, such as the price of corn, a stock or an index. There are many types of derivatives, such as futures, options and swaps. To limit the risk in derivative transactions, a long position in derivatives is generally offset by a similar short position. For example, if a trader buys futures on the euro stock market hoping that the market will rise, this bet is usually offset by the futures sale of US equity futures so that the markets go down, because European and American stocks tend to move in the same way. Kerviel started to make only one side of these bets.
Key points to remember
- Jérôme Kerviel is a French rogue trader found guilty of having carried out false and unauthorized transactions at Société Générale.
- Kerviel’s transactions resulted in losses of € 4.9 billion in business assets.
- Kerviel served five months in prison and had to pay € 1 million in fines.
Kerviel and unauthorized trades
With several years of experience in the back office of Société Générale, Kerviel was well aware of the company’s policies in terms of approving and regulating exchanges between its brokers. He took advantage of this knowledge in late 2006 and early 2008 to compensate for his one-sided bets with the opposite position which did not actually exist by creating false transactions in the computers and the logs of the system, so that the transactions were not reported. by the bank’s surveillance systems. .
Initially, these exchanges were profitable. With so much success at first, Kerviel feared that the bank would discover the false transactions. To conceal the activity, he began to create losing trades intentionally to generate losses in order to compensate for his early gains. Societe Generale management discovered an unauthorized trading activity in January 2008 and took steps to close out the positions created by Kerviel. Once the dust settled, Kerviel’s losses were estimated at 4.9 billion euros. Kerviel maintains that his bosses were aware of his fraudulent transactions but that he had intentionally looked away when he was making profits for the bank. A Versailles Court of Appeal sided with Kerviel in 2020 and declared in a judgment that it was not “occasional negligence” but “management choices” that enabled Kerviel to get away with his actions criminals.
There are conflicting accounts of Kerviel’s talents as a trader and student. Professors from his alma mater, University of Lyon, have reportedly declared that he was “a student like the others”. The former Governor of the Banque de France described Kerviel as a “computer genius”, but his colleagues claim that he was not a star trader in their ranks.
It should be noted that Kerviel does not seem to have profited personally from his reckless trade, although he is now part of the infamous group of rogue traders who have collectively lost billions of dollars to their employers due to risky business activity and not allowed.
Kerviel was found guilty of breach of trust and other charges before a French court in 2020. He was sentenced to at least three years in prison and sentenced to € 4.9 billion in restitution. He served five months in prison in 2020 before being released. His fine was also reduced to 1 million euros in 2020.