The French banking company Socit Gnrale (SocGen or the Company) was founded on May 4, 1864. The

The French banking company Société Générale (“SocGen” or “the Company”) was founded on May 4, 1864. The bank has grown to serve 19.2 million individual customers in 76 countries. It employs 103,000 workers from 114 different nationalities. SocGen operates in three major businesses: retail banking and financial services, global investment management and services, and corporate and investment banking. The core values at the Company are professionalism, team spirit, and innovation.

In 2006, SocGen ranked 67 on Fortune’s 2006 Global 500 and had managed to build a $72 billion position in European stock index futures. The year before, the Company ranked 152 on Fortune’s list. In addition to top-line growth, SocGen also posted a more important improvement in overall profitability, at $5.5 billion, up 42 percent from the prior year. It was the 14th-largest company among the banking institutions on the list.

The Beginning of the Story

Things were about to change for SocGen. In 2006, turmoil revolved around the collapsing housing market and a mortgage industry that witnessed loan defaults in record numbers. Several banks engaged in purchasing high-risk mortgage loans, but the overall economic recession, primarily in the United States but also felt globally, constrained this bank’s financial status. SocGen saw its stock price cut almost in half throughout the year, but this was not the only potential pitfall for this once-robust Company. It was the actions of one rogue trader, Jerome Kerviel, that could have brought about the ultimate downfall of SocGen.

On January 24, 2008, Jerome Kerviel found himself in the international media spotlight, but not as he would have hoped. On this day, SocGen announced to the world that it had discovered a $7.14 billion trading fraud caused by a single trader, Kerviel. Additionally, a nearly $3 billion loss was posted resulting from the loss in investments in the U.S. subprime mortgage industry. The second-largest bank in France had its shares halted to avoid a complete market collapse on the price of the stock.

From his modest roots to the upscale Paris suburb where he resided, friends and family never expected that this unmarried 31-year-old could be capable of such a scandal. With a relatively modest salary ($145,700), Kerviel did not profit from his trading scheme. He had been an employee at SocGen since 2000. He began in a monitoring support role and oversaw the futures traders for five years. He was then promoted to the futures trading desk. He traded European futures by betting on the future performance of these funds. Kerviel saw his trading profits increase throughout 2007 as he bet that the markets would fall during this time. By the end of the year, he needed to mask his significant gains, so he created fictional losing positions to erode his gains. These included the purchasing of 140,000 DAX futures (the German stock index, a blue chip stock market index that includes the 30 major German companies trading on the Frankfurt Stock Exchange). By mid-January, Kerviel had lost over $3 billion. He was hedging more than $73.3 billion, an amount far in excess of the trading limits created by SocGen for a single trader. This amount even exceeded SocGen’s overall market cap of $52.6 billion.

Despite the Company’s five levels of increased security to prevent traders from assuming positions greater than a predetermined amount and a group compliance division that was put in charge of monitoring trader activity, Kerviel was able to bypass internal controls for over two years.

Kerviel’s motive was not to steal from the bank but to have his significant trading gains catapult his career—and to cash in on a significant bonus given to traders who exhibit the type of profitability he created for the Company. Red flags were triggered, but e-mails to his superiors on his trading activity were ignored because of his overall profitability for the Company. Kerviel admitted his wrongdoing but said that SocGen was partially responsible for not monitoring his activities correctly and for rewarding his behavior with a proposed bonus of $440,000. Kerviel stated that his actions were similar to those of other traders; he was just being labeled as the scapegoat in this investigation.

Once the fraud was detected in mid-January 2008, SocGen immediately reported it to France’s central bank, Bank of France. Over the next three trading days, SocGen employees began to unload all of Kerviel’s positions into the marketplace. The Company attempted to complete this significant sale of securities in a manner that would not disrupt the normal market movement. The ripple effect of this action may have created additional pressure on the already falling world markets. Some analysts speculated that this action may even have influenced the U.S. Federal Reserve rate cut. SocGen management denied that action after it discovered that the trading fraud had a meaningful impact on the world marketplace. Co-CEO Daniel Bouton stated that the three-day sell-off was in accordance with guidelines and that the liquidation of a position at any one time could not be more than 10 percent of the given market.

After Kerviel admitted his guilt, his employment was terminated along with that of his supervisors. Bouton submitted a formal resignation, along with second-in-command Phillipe Citerne; however, both resignations were rejected by the board of directors. Employees at the Company staged demonstrations where they showed their support for Bouton. The bank has stated that since the activity was brought to light, there has been a tightening on the internal controls, so that actions such as Kerviel’s are no longer possible for a trader. On January 25, 2008, SocGen took out a full-page newspaper article apologizing to its customers for the scandal. On January 30, the board announced the formation of an independent committee to investigate the current monitoring practices and determine what measures could be put in place to prevent it from happening again. The committee would enlist the services of the auditing company PricewaterhouseCoopers. The Company also announced that it needed an influx of capital to stay afloat and began looking to outside help to raise $8.02 billion in new capital.

Government Reaction

On January 26, 2008, Kerviel was taken into police custody for questioning regarding his trading activity at SocGen. Three complaints were issued to police, one by SocGen and two others by small shareholders.

This event was the focus at the World Economic Forum in Davos, Switzerland, which brought to light questions on how risk is managed within organizations. French finance minister Christine Lagarde was assigned the task of investigating the events and compiling a report on the failure of internal controls at SocGen. The report was then publicized in an effort to prevent similar fraudulent trading events from occurring in the future. A timeline of the events leading up to the trading losses was created in an effort to better understand the events that transpired. In the report, Lagarde stated that there should be an increase in penalties for banks that violate the commission’s set rules. The then-president of France, Nicolas Sarkozy, stated that the events at SocGen did not affect the “solidity and reliability of France’s financial system.” He wanted the board of directors to take action against senior management, including Bouton.

On January 28, 2008, Kerviel was charged with unauthorized computer activity and breach of trust. Plans were also announced to charge Kerviel with fraud and misrepresentation, which could carry a maximum prison time of seven years and fines of $1.1 million. At the time of this writing, the fraud charge had not been accepted by the courts; however, prosecutors were seeking to appeal this to a higher court.

The government sought to prevent a hostile takeover of SocGen during this period. However, the European Union was in disagreement with the French government and stated that all bidders should be treated equally: “The same rules apply as in other takeover situations under free movement of capital rules. Potential bidders are to be treated in an undiscriminatory manner.” The current standout bidder is the largest bank in France, BNP Paribas. Many competitors are contemplating making an offer for the distressed Company—to purchase a portion or all of the bank’s assets.

Questions for Discussion

1. Is Kerviel the only guilty one in this case with regard to his actions? Also, does the punishment fit the crime in this case? Explain both of your answers.

2. Should other individuals and the bank be held legally responsible and liable for Kerviel’s actions? Why or why not? Explain.

3. Describe what you believe to have been Kerviel’s personal and professional ethics. Use the terms from this chapter as well as your own reasoning.

4. Compare your personal and professional ethics to Kerviel’s.

5. Explain how a stakeholder and issues analysis can help you understand this case.

6. What are the lessons students in accounting, business, and organizational studies fields can take away from this case?