The trial of Jerome Kerviel, beginning more than two years after Societe Generale SA accused him of losing 4.9 billion euros ($5.8 billion) on unauthorized market bets, may turn on whether the trader can show the bank knew what he was doing.
Kerviel is charged with abuse of trust, faking documents and computer hacking related to the losses at France’s second-largest bank by market value. The Paris trial starting today has resulted in more foreign press accreditation requests to the court than at any time in a decade.
Kerviel and lawyer Olivier Metzner will battle prosecutors and Societe Generale, which is seeking to recoup the losses. The Paris-based bank disclosed the unauthorized bets on Jan. 24, 2008, with then-Chief Executive Officer Daniel Bouton calling Kerviel a “terrorist.”
“It’s important for the bank to prevail because it would prove that he was basically acting as a rogue trader, that this was not an institutional or systemic failure,” said Paris lawyer Christopher Mesnooh, who isn’t involved in the case. “If he gets exonerated, then it really would call into question management and internal controls at Societe Generale.”
Kerviel, 33, who has said he is innocent of the charges, claimed the bank knew of his activities.
“We will demonstrate the truth,” Metzner said outside the court. “If there was fraud, it was authorized and facilitated by the bank. We hope that Societe Generale doesn’t continue to hide elements.”
When asked in a Bloomberg Television interview last month about the possible punishment, including 375,000 euros in fines and as many as five years in prison, Kerviel said he has already been punished. He spent five weeks in detention in 2008 on concerns he might flee or tamper with evidence and witnesses during the investigation.
“I have been paying for two years now,” Kerviel said. “I was fired.”
Societe Generale, whose legal team is led by attorney Jean Veil, filed a criminal complaint the day it announced the loss, initiating the probe. The bank will participate in the trial as a civil party, a status that enables it to seek damages under French law. In France, criminal claims precede civil claims, so if Kerviel is cleared, the bank won’t be able to seek restitution.
‘Caused by a Man’
“This situation was caused by a man, Mr. Kerviel, who betrayed the trust of the bank and its employees, notably his work colleagues, to whom he lied and abused with forged documents,” Societe Generale said in a 26-page statement to the court. The bank asked the court to award it 4,915,610,154 euros, according to the filing.
Holding Kerviel solely responsible for the loss may be difficult, said Simon Maughan, an analyst at MF Global in London. Maughan cited Societe Generale’s acknowledgement that Kerviel’s positions had losses of 1.4 billion euros when it discovered them on Jan. 18, 2008, and that the rest was incurred unwinding his portfolio over three days of falling markets.
“Given that the loss when they took over the position was significantly less than when they exited it, it seems pretty unlikely they’re going to get completely exonerated,” the analyst said. “Even if this was deliberate rule-breaking and bending by somebody acting in an unpredictable and rogue fashion, the fact that it happened on your watch is a stigma that you have to live with.”
Kerviel’s job on the Delta One trading desk was to use large volumes to arbitrage small price differences between equity index futures and forward contracts. Instead, he allegedly took bets on the market’s direction while forging e-mails and documents to make it appear he’d hedged his positions.
Kerviel said such cover-ups were “a practice” at Societe Generale. Exceeding limits and trying to make up losses with bigger bets are “fairly frequent” at banks, said Richard Portes, an economics professor at the London Business School.
“Except for the numbers, this is absolutely in my view standard stuff,” Portes said in a telephone interview. “Guys go beyond their limits, they discover they’re down and they, as we say, gamble for resurrection.”
Kerviel became a popular figure in France following the loss as stories of his upbringing in a small Breton town and education outside the elite French “Grandes Ecoles” system contrasted his background with that of the bank’s leaders.
More than half a dozen books have been written about Kerviel, including one he wrote that appeared last month, and a September 2008 comic book. The cartoon recounted his SocGen career, contrasting his polyester off-the-rack suit with co-workers’ attire and showing him home eating frozen dinners in front of the TV watching “Casino” on DVD.
The amount awarded SocGen ultimately is less important than a clear statement by Judge Dominique Pauthe holding Kerviel responsible for the loss, said Veil, the bank’s lawyer.
“It’s hard to get 5 billion euros from a 33-year-old man, so the money is gone,” said Mesnooh, on the practicality of the bank’s demand. “The way the opinion will be written will obviously be very important.”
The bank has put the loss behind it, financially. SocGen booked it along with 2.05 billion euros of subprime mortgage- related writedowns and provisions in the fourth quarter of 2007. It then raised 5.5 billion euros in a capital-raising campaign in March 2008.
“That’s what they’d like to see for their own benefit, probably for their own internal peace of mind,” said Maughan. SocGen could use the ruling to “say, ‘There, look, see it wasn’t our fault, this was a rogue trading incident.’”