Case Of Societe Generale Jerome Kerviel
LexInter | March 14, 2008 | 0 Comments

Case Of Societe Generale Jerome Kerviel

The “equity derivatives” department ( desk ), within which Jérôme Kerviel worked, was recognized as one of the best in the world, if not the best. It was crowned number one in its category for 2007 ( equity derivatives house of the year ) in the issue of Risk magazine published in January 2008

 

 

NOVEMBER 2005
According to the press, Jérôme Kerviel indicated that he began to exceed his commitments without covering the risks since November 2005

 

FEBRUARY 2007-JUNE 2007
End of February beginning of March Jérôme Kerviel reads the first articles on subprimes who claim that there is no risk of spillover to the economy. He then takes the opposite bet and goes up a small position at the beginning of March. From March to July, it loses because the market is constantly rising. He continues to document the subprime sectors and continues the position “( PV of hearing) In June 2007 Jérôme Kerviel would have lost € 2.2 billion following the declarations of Jean-Raymond Lemaire in an interview published on Thursday February 14, 2008 by Paris Match . Jean Raymond Lemaire is a judicial information expert who recounts in this interview the discussions with Jérôme Kerviel. Jean Raymond Lemaire indicates that Jérôme Kerviel is ” not a computer prodigy “.

 

JULY 2007
At the end of July, the market cracks under subprime and the markets turn around. Jérôme Kerviel unbuckles his position which is therefore at zero. The result is 500 million euros (minutes of hearing)

 

AUGUST 2007
August 2, 2007  Daniel Bouton declares ” An extremely large credit bubble has exploded” but nothing suggests “that large financial players are involved at levels which are very large in relation to their size “.
August 16, 2007  A mysterious trader bought 245,000 put options on the Eurostoxx, with a notional position of 6.9bn (Financialnews.com, August 16, 2007) betting on the decline at the end of September, with a potential profit of 1.1bn €

 

SEPTEMBER 2007
According to an article in the “Financial Times” of February 18, 2008, citing “a source close to the matter”, that a manager, alerted by an abnormally high volume level on his desk, investigated in September 2007 on four transactions executed by one of his brokers on behalf of Jérôme Kerviel. According to this source these investigations would not have revealed anything and would have been put aside due to the merger of Fimat with Calyon Financial, (Crédit Agricole), which gave birth to Newedge. According to the economic daily, the broker, had executed a third of the trades on the futures contracts on the stock index of the trader of the Societe Generale.
September 9, 2007  Daniel Bouton declares about the financial crisis ” the situation is under control, although we cannot rule out an incident somewhere in the world”

 

NOVEMBER 2007
Eurex, sends Société Générale a letter alerting it to bizarre transactions coming from Jérôme Kerviel’s desk.

According to the press ( Les Echos, February 6, 2008) Eurex, would have sent a letter to the Société Générale, worrying about interventions of Jérôme Kerviel the previous month, on the Eurostoxx,   What would have been in question would have been 1,700 futures contracts on one index and 2,000 contracts on the other.

That same month of November, the personnel department would have alerted the supervisor of Jérôme Kerviel, who has not taken any leave since his four days in August. Jérôme Kerviel would have mentioned the anniversary of his father’s death by indicating that he was to go on vacation in January. ( Les Echos February 8, 2008, p. 10).

November 8, 2008 When the SocGen accounts were published, the Financing and Investment Bank (BFI) indicated that its net profit fell under the impact of depreciations but also a loss of 180 million euros for the quarter in the trading. The CIB indicates that the damage is limited by the good performance of equity activities, in particular derivatives, whose turnover increased by 13.4%

 

DECEMBER 2007
December 19, 2007 Daniel Bouton declares ” Thanks to the 1984 banking law, France benefits from one of the broadest control perimeters.
December 31, 2007 On that date, Jérôme Kerviel’s operations would generate a profit of € 1.4 billion. Its “classic” operations would have amounted to € 55 million for 2007 (see minutes of hearing)

 

 

JANUARY 2008
Early 2008 At the beginning of 2008, I Jérôme Kerviel put himself “long” (in the position of buyer) ( PV of hearing )
January 18, 2008  

Deutsche Bank, wanting to verify an operation, would have sounded the alarm to the Bank of Finance and Investment (BFI). It would be ( Les Echos , February 6, 2008, p. 10) of a transaction analyzed as a claim of the bank on a German broker, Baader, which would be an unauthorized counterparty. An internal controller would have come to ask Jérôme Kerviel for explanations. He would have explained that Baader is in fact acting on behalf of Deutsche Bank. The latter, contacted, would have said to ignore everything about the transaction.

Jean Pierre Mustier is alerted. An internal investigation is initiated. Jérôme Kerviel is summoned to La Défense the next day

 

According to information in the press (Thierry Lévêque, Reuters 10/29/08) as of January 18, 2008, Jérôme Kerviel’s positions were still potentially profitable.

 “On Friday 18th (January 2008), during the day, I was positive with regard to the high volatility of the market (…), it was only at the close of the session on the 18th that I was negative . I think then that I will see the evolution of the market by returning on Monday and count on the rise of the American market on Tuesday. “( PV of hearing )

 

Jan. 19, 2008 According to the note established by Socgen (see Le Parisien 28 January 2008 p. 2) ” The hierarchy does not obtain clear explanations from the trader. The large bank mentioned does not recognize these transactions. The trader admits having committed irregularities and, in particular, having created fictitious transactions “.

The principle of embezzlement would be that the trader constituted a first portfolio made up of real transactions, which would apparently have been offset by fictitious transactions within a second portfolio. The trader could have concealed a speculative position without any measure with the normal activity for which he was responsible. He would have used several techniques to hijack the controls ” by usurping the computer access codes belonging to operators to cancel certain operations or by falsifying documents allowing him to justify the fictitious operations carried out .” “So that these fictitious transactions are not immediately identified, the trader relied on years of experience in processing and controlling market transactions to successively defeat all the controls allowing the bank to verify the characteristics and consequently the reality of operations initiated by its operators “.

” The transaction with Baader was a buy-sell which showed a zero differential at first glance, but if it was finely valued it showed a potential profit of € 1.4 billion ” said a source at the bank (Les Echos, February 6, 2008 , p. 10)
January 20, 2008 In the evening, all the positions taken on behalf of Socgen having been identified, Daniel Bouton informed the Governor of the Banque de France, Christian Noyer and the AMF of the situation.

The fraudulent position identified “amounts to around € 50 billion.

 

These would be futures contracts on the eurozone index , Eurostox for € 30bn, 18bn on the benchmark index of the German market, the DAX and € 2bn in the UK, still in the form of contracts. of futures (La Tribune, January 28, 2008 p. 8)

On Eurostox  it would be 700,000 contracts, on the  DAX  140,000 contracts.

January 21, 2008 The unwinding of positions is engaged.Overnight the Nikkei index lost 3.86%, Hong Kong 5.5%, Singapore 6%.

Paris fell 6.8%. The Footsie gave 5.5% shortly before the close. The Dax lost 6.92%.

The dramatic fall in financial markets is attributed to investor fear of contagion from the financial crisis (resulting in particular from subprime mortgages) to the “real economy”.

Volumes traded on the stock index markets are up sharply (€ 11 billion on the CAC 40)

January 21 to 23, 2008

Liquidation of disputed positions by Socgen

The products are futures and forwards

The positions mainly concern the Liffe and Eurex markets , ie the London and Frankfurt markets respectively.

On Wednesday 23 all assets were sold.

January 22, 2008 US Federal Reserve unexpectedly lowers key donation rate three-quarters of a point to 3.50% to deal with weakening economic conditions that have plunged stock markets into turmoil

This announcement straightens the European stock markets. The New York Stock Exchange (which was closed the day before) falls, the Dow Jones drops 3.60% and the Nasdaq 5.1%

 

January 23, 2008
January 24, 2008 Société Générale announces an asset depreciation of € 2 billion and indicates that it has been “the victim of fraud within its brokerage activity valued at € 4.9 billion “. The listing is suspended.

A capital increase of € 5.5 billion guaranteed by JP Morgan and Morgan Stanley is announced.

Société Générale is filing a complaint for “forgery in bank writings, use of false bank writings and computer intrusions”.

The Paris prosecutor’s office opens a preliminary investigation, entrusted to the financial brigade, after complaints from shareholders for fraud, breach of trust, forgery and use of forgery, complicity and concealment

 

January 25, 2008  Investigators from the financial brigade search the trader’s apartment in Neuilly and the administrative headquarters of Soc Gen in La Défense The share yields 2.56% to € 73.87, buyback speculations slowing the fall.
January 26, 2008 Jérôme Kerviel is taken into custody at 2 p.m. in the premises of the financial brigade in Paris.

Daniel Bouton defends himself against any ” concealment ” of losses linked to “subprimes “

January 27, 2008 Jérôme Kerviel’s custody is extended by 24 hours.
January 28, 2008 Jérôme Kerviel is indicted by the examining magistrates Renaud Van Ruymbeke and Françoise Dessel. for ” forgery and use of forgery, [ article 441-1 of the Criminal Code ] breach of trust, entry into an automated data system [ articles 323-1 of the Criminal Code ]”. The judges do not accept the ” attempted fraud ” or ” aggravated breach of trust “.

He was left at liberty under judicial supervision against the advice of prosecutor Jean Claude Marin. The latter is demanding his detention to ” protect” him from pressure “and because of the risk of seeing him” flee the country “.

The prosecution appealed on Monday evening.

Jérôme Kerviel would have admitted while in police custody having produced false emails confirming his position (AFP 05/02/02/08). He would be suspected of having hijacked computer access codes to conceal his position. He would have declared in front of the police officers “I cannot believe that my hierarchy was not aware of the amounts which I committed”.
January 29, 2008 The AMF informs that Robert Day, director of the general company, sold for 40 million € of shares of the bank on January 18, 2008

Société Générale is a civil party. Employee shareholders file a complaint c / X

January 30, 2008 At its meeting of January 30, 2008, the Board of Directors of Société Générale decided to create a Special Committee made up of three independent directors (Jean Azema, Jean Martin Folz and Antoine Jeancourt-Galignari) chaired by Jean Martin Folz.
January 31, 2008 BNP Paribas confirms that it is considering an offer on SocGen

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