I. The issue Significant deficiencies in internal controls, unauthorized trading activities, computer hacking and the breach of trust involving a conscious effort by the rogue trader to deceive his managers were noticed. Jrme Kerviel is accused of creating a huge loses by a single unauthorized trader in financial history. In the course of 2007 he made unauthorized trade worth 30 bn. on European stock market futures, winning 1.4 bn. by the end of the year. Having disguised the importance of his exposure, and earnings, with fictitious trades, he went on in January 2008 to make even bigger trades. The bank stated that he deliberately set out to lose money in 2008 to bring down the suspicious size of his 2007 earnings. II.The background Created on May 4th, 1864 under the reign of Napoleon III, Socit Gnrale is one of the very first groups of financial services in the Euro zone with 46.2 billion euro from market capitalization as of December 31st, 2007. He was graduated from the Universit Lumire in Lyon with a masters degree in finance. Jrme Kerviel joined Socit Gnrale, the second largest bank of France, in 2000, where he obtained a position in the compliance department. He was promoted to the Banks Delta One trading team in 2005, which specialized in the futures markets. In theory, this strategy does not allow the trader to take on significant directional risk, as any directional positions are hedged. Jrme Kerviel declared that he began to take bets on the market in 2005. He used to take genuine directional positions and created fictitious hedges, buying securities and warrants with deferred start dates and futures with a counterparty that did not require instant confirmation. Using other employees access details, he was able to later delete trades from Socit Gnrales system, leaving him with massive exposures, but fooling the monitoring tools into thinking that his portfolio was relatively flat. An internal investigation, the Mission Green, commissioned by the bank showed it had failed to follow up on at least 75 warnings on Jrme Kerviels positions. In November 2007 Eurex, the derivatives exchange, stressed that Jrme Kerviel Kerviels positions showed some irregularities. The Mission Green report stated that compliance and the traders managers were satisfied, without verification, with the traders explanations, in contradiction to Eurexs assertions. Jrme Kerviel is alleged to have used his considerable computing skills and inside knowledge gained during his five years working in the bank compliance department to hide 50 bn. of illegal trading which resulted in the loss of 4.9 bn. An internal investigation showed a total of some 1,000 cases in which the trader was involved in the entry and then cancellation of fictitious transactions, concealing market risks and the latent earnings from unauthorized directional positions. A. The operative mode of the fraud Jrme Kerviel had put together a first portfolio (A) composed of futures and representing the evolution of the European stock indexes (Eurostoxx, Dax, FTSE.) while at the same time he was establishing a second portfolio (B) composed of warrants which had the same characteristics as those of the futures but with a different value, these variances in value explain the losses or the gains of such activities. Because of their close characteristics, these two portfolios compensate each other and lower the market risks. Socit Gnrale had established internal controls to manage these risks. The fraud committed by Jrme Kerviel has consisted of evading internal controls or making them inefficient. Jrme Kerviel had registered and then cancelled fictitious transactions in the second portfolio. The fictitious transactions were registered in Socit Gnrale systems but were economically unreal. Within the framework of this fraud the financial instruments of portfolio (A) were seemingly compensated with the fictitious operations accommodated within portfolio (B) which showed only a very little residual risk. He gave to his fictitious operations some characteristics which limited the opportunities of control. He usurped computing access codes belonging to operators to cancel certain operations. He falsified the documents allowing him to justify his fictitious operations. He made sure that his fictitious operations related to a financial instrument different from those which he had just canceled to avoid control. B. The discovery of the fraud The discovery was Friday, January 18th. Few days before, an abnormally high position of a risk of counterpart was detected. The explanations given by Jrome Kerviel were insufficient and led to additional controls. On January 18th Jrome Kerviel's hierarchy was informed of this problem and alerted the hierarchy of the department. An e-mail supposedly from a large bank involved in a trade with Jrme Kerviel was found to have been falsified. A team was established to perform full scale investigations. On January 19th the hierarchy did not obtain clear explanations from Jrome Kerviel. The large bank, mentioned in the e-mail, did not recognize these operations. Jrome Kerviel admitted having committed irregularities and, in particular, having created the fictitious operations. The investigators soon detected the true situation. On January 20, the total exposure of Jrme Kerviels trade was closed at 50bn. Socit Gnrale Chairman, Daniel Bouton, informed the Governor of the Banque de France, the other members of his board and then the General Secretary of the AMF, the French markets regulator. On January 21, Asian markets collapsed. Socit Gnrale began unwinding the rogue traders positions as European markets went into free fall. On January 23, as the sell-off was completed the French government and the world major central banks were informed of the affair. On January 24, Socit Gnrale asked for its shares to be suspended as the losses were announced to the world. On January 25, Jrme Kerviels name was confirmed as the rogue trader and on January 26, he was brought in for questioning to the headquarters of the French financial police. On January 28, the rogue trader admitted to hacking into computers and creating false documents, he was charged by a French prosecutor on four counts.

How could societe general company avoid the fraud by jerome kerivel? (Answer in point)