Jerome Kerviel was sentenced to three years in prison and ordered to repay Societe Generale SA’s 4.9 billion-euro ($6.8 billion) trading loss by a judge who said the former trader’s actions threatened the bank’s existence.
“By his deliberate actions, he put in peril the existence of the bank that employed 140,000 people, of which he was a part, and whose future was threatened,” Judge Dominique Pauthe said today in finding Kerviel guilty of breach of trust, forging documents and computer hacking.
The trading loss, announced Jan. 24, 2008, was the biggest ever and prompted then-chief executive officer Daniel Bouton to describe Kerviel as a “terrorist.” The court placed the blame for the loss on Kerviel alone, rejecting defense arguments during a three-week trial in June that his superiors knew of his actions and that the bank’s decision to unwind the bets over three days of falling markets caused the loss.
The 4.9 billion-euro award “is obviously symbolic,” Christopher Mesnooh, a Paris-based lawyer with Field Fisher Waterhouse LLP, said in a telephone interview. “It goes a very long way in exonerating the bank and putting responsibility for the losses, including the winding down of the positions by Societe Generale, entirely in Jerome’s court.”
“No one has any expectation that he’ll pay,” said Mesnooh, who isn’t involved in the Kerviel case.
Dark Suit, Phone
Olivier Metzner, Kerviel’s lawyer, said he would appeal the ruling, and that Kerviel would “obviously not” be able to repay the loss. Dressed in a dark suit, Kerviel, 33, sat in court following the decision reading on his iPhone. He will remain free during the appeal.
The former trader is “revolted that those that created him put all responsibility on him,” Metzner said, noting Kerviel wouldn’t comment directly. “Prison is unacceptable for a man who didn’t make a penny.”
Pauthe said problems with Societe Generale’s computer controls and management’s encouragement of traders to speculate wasn’t enough to absolve Kerviel.
“The lack of vigilance by the bank in monitoring the only existing limits, acting as alert signs, hardly exempted Jerome Kerviel from his duty to inform his hierarchy of the reality of his excesses or to come back to the limits imposed,” Pauthe said in reading excerpts of the decision.
France’s Banking Commission fined Societe Generale 4 million euros in 2008 for “serious shortcomings” in its risk controls. A report commissioned by the bank’s board faulted its internal monitors, saying in May 2008 Kerviel’s supervisors failed to “react in an appropriate manner to several alert signals” and missed at least 1,071 bogus trades.
Prosecutors had sought a five-year prison sentence with one year suspended; Kerviel received a five-year sentence, with two suspended.
Jean Veil, the lawyer representing Societe Generale, said he was satisfied by the guilty verdict and award, which the Paris-based bank had requested at trial.
The award “confirms what Societe Generale has always told its shareholders and employees,” Veil said.
In response to questions on how Kerviel might repay the bank, Veil said, “Bill Gates became rich, he could become rich with the Internet.”
Kerviel was charged after he amassed 50 billion euros in unauthorized bets on futures, using faked hedges to make it appear the risk was minimized.
After joining Societe Generale in 2000, Kerviel rose to trader in 2005. He worked on the Delta One trading desk, where, according to the bank, his job was to arbitrage small price differences between contracts, not take bets on market directions. Societe Generale said a routine check exposed one of these bets on Jan. 18, 2008. That set in motion a three-day selloff of his stakes as markets fell worldwide.
Kerviel, who was held in provisional detention at Paris’s La Sante prison for five weeks in 2008, admitted throughout the investigation and trial he had hidden his bets. Kerviel conceded at trial that accumulating positions worth 50 billion euros was “probably not” in his mandate. He also told police he wouldn’t be a scapegoat for the “blind eye” the bank turned.
Prosecutors argued Kerviel was driven to boost his bonus, while Kerviel said his sole motivation was to make money for France’s second largest bank. He was never accused of taking money for himself.
The two goals are linked, said Robert Falkner, a litigator with Reed Smith in London.
“It is the raison d’être for a trader to make money for the bank and for himself through the bonuses, which depend on the profits,” Falkner said.
“It is the nature of the job to have limits,” he said. The only reason to exceed them is “to increase profits both for the bank and for themselves in bonuses.”
At trial, Kerviel said taking unauthorized positions and covering them up was a common practice by Societe Generale traders. That assertion was contradicted by almost all the witnesses who testified.
Societe Generale had to turn to shareholders for 5.5 billion euros in a stock offering following the losses in 2008. Bouton, 60, stepped down as chairman in April of last year after complaining of “repeated attacks” in the media during the months following the loss. Bouton was replaced as chief executive officer and chairman by Frederic Oudea.
The bank posted a record 3.35 billion-euro loss in the fourth quarter of 2007, hurt by the unauthorized trading and writedowns on subprime-related securities.
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