Testimony in the trial of Jérôme Kerviel, accused of the biggest rogue-trading scandal in history, ended with an emotional confrontation. On June 22 in an ornate 19th-century courtroom near Paris's Notre Dame cathedral, the former trader who nearly sank Société Générale came face to face for the first time with Daniel Bouton, the French bank's former chief executive who stepped down after the scandal. Bouton, his voice shaking on the stand, called Kerviel "a liar" who created "a fraudulent enterprise within the bank."
It was a dramatic conclusion to three weeks of testimony that laid bare the mechanics of Kerviel's trades—as well as severe weaknesses in the bank's management and risk-control systems.
Kerviel built his defense on the idea that his former bosses encouraged him to take oversized positions, then turned on him when his bets went bad. Comparing his superiors to traffic cops, he told the court that "the police saw me exceed the limits. Nobody was worried." The bank denied that accusation. Kerviel's own testimony showed he went to great lengths to cover his tracks. He admitted logging fictitious transactions into the bank's computers, forging e-mails, and lying to controllers. He told the court that he realized in hindsight that his actions had been "moronic."
Still, testimony showed that the bank missed scores of chances to stop him. Kerviel amassed $61 billion in unhedged market positions that led to a $6 billion trading loss when they were unwound in January 2008. Bouton acknowledged that SocGen had neglected back-office controls. "We did not look enough at operational risks," he told the court.
In July 2005, just weeks after Kerviel became a trader on the bank's Delta One desk, he was caught making an $18 million market bet, more than five times the limit for traders on his desk. "They should have fired him immediately," says Catherine Lubochinsky, who runs a program at Pantheon-Assas University in Paris that trains future traders. Instead, Kerviel was allowed to keep his job. By the time Kerviel was caught in January 2008, his trades had triggered at least 75 internal alerts, as well as questions from German authorities. Witnesses described the bank's control systems as so fragmented and overburdened that they generally accepted traders' explanations without further investigation. One controller, Marine Auclair, recalled that Kerviel justified a trade by showing her documents that later proved to be faked. "I never called the back office to see if the transactions were confirmed," she testified. "That wasn't my job." Auclair said Kerviel promised her a bottle of champagne for clearing up the problem but never delivered it.
The trial, which was slated to end on June 25 after closing arguments, was heard by a panel of three judges who aren't expected to issue a verdict for months. Kerviel, 33, faces up to five years in prison and $464,000 in fines if convicted.
Kerviel's defense had "tremendous difficulties explaining why he had to forge documents if he felt that he was being transparent and his hierarchy knew," says Stephane Bonifassi, a white-collar criminal defense lawyer with the Paris firm of Lebray et Associés who is not connected with the case. "This is a big chink in his armor."
Evidence of SocGen's flawed oversight, by itself, probably isn't enough to acquit Kerviel, says Stephen J. Brown, a finance professor at New York University's Stern School of Business. Brown, who has studied Nick Leeson, the Singapore-based rogue trader who brought down the former Barings Bank, says there was "ample evidence that his supervisors looked the other way" when Leeson exceeded his trading limits. The trader pleaded guilty to fraud after his arrest in 1995 and was sentenced to 6½ years in prison. Says Brown: "These cases always involve a very significant lapse of supervision."
The bottom line: Société Générale had many chances to stop Kerviel, but that may not protect him from a guilty verdict.