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Kerviel Gets 3 Years, Must Repay SocGen Trading Loss

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Former Societe Generale SA CEO Daniel Bouton
The trading loss, announced Jan. 24, 2008, was the biggest ever and prompted then-chief executive officer Daniel Bouton, seen here, to describe Kerviel as a “terrorist.” Photographer: Antoine Antoniol/Bloomberg

Oct. 5 (Bloomberg) -- 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 crimes threatened the bank’s existence.

Judge Dominique Pauthe held Kerviel solely responsible for the loss, saying he deceived the bank in amassing 50 billion euros in futures positions. He found Kerviel guilty on all three counts: breach of trust, forging documents and computer hacking.

“There has never been anything like this,” said Arnaud de la Cotardiere, the Paris-based head of commercial practice for Linklaters LLP. “Five billion euros is a lot, it was the first time a bank had ever lost so much money.”

The trading loss, announced Jan. 24, 2008, 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.

“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,” Pauthe said today in reading excerpts of the judgment.

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 Expectations

“No one has any expectation that he’ll pay,” said Mesnooh, who isn’t involved in the case.

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.

‘Lack of Vigilance’

“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,” Pauthe said.

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.

Kerviel’s defense erred in going beyond saying the bank shared responsibility due to the failure of its controls, claiming his superiors actively knew of his actions, de la Cotardiere said.

“The Court was quite clear, there was not a single proof that the bank knew what Mr. Kerviel was doing,” he said. “Mr. Kerviel was the only one to have committed a crime, and Mr. Kerviel must pay.”

First Time Offender

Prosecutors had sought a five-year prison sentence with one year suspended; Kerviel received a five-year sentence, with two suspended. If an appeals court upholds the verdict, Kerviel would likely spend from 1 1/2 years to two years in prison, de la Cotardiere said, a substantial sentence for a first time offender in France.

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 amassing 50 billion euros in bets on futures and using fake hedges to cover the risk.

Delta One Trader

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. 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.

While he wasn’t accused of taking money for himself, prosecutors argued Kerviel was driven to boost his bonus. Kerviel said his sole motivation was to make money for France’s second largest bank.

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,” Falkner said. The only reason to exceed limits is “to increase profits both for the bank and for themselves in bonuses.”

Unauthorized Positions

At trial, Kerviel said taking unauthorized positions and covering them up was a common practice by Societe Generale traders. That assertion was contradicted by other witnesses.

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.

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.

To contact the reporter on this story: Heather Smith in Paris at hsmith26@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net.

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