Definition
Jerome Kerviel is not a financial term, but rather a person who gained infamy as a French trader. He is best known for his role in the 2008 Société Générale trading loss, where he conducted unauthorized trading activities that resulted in a massive loss of approximately €4.9 billion ($7.2 billion). Kerviel’s actions ultimately led to legal repercussions and his name became synonymous with rogue trading and risk control failures.
Phonetic
The phonetic pronunciation for the name “Jerome Kerviel” is: juh-ROHM kehr-VEE-el
Key Takeaways
- Jerome Kerviel was a French rogue trader who was convicted of unauthorized trading, forgery and breach of trust at Societe Generale, where he accumulated significant losses in 2008.
- He circumvented the bank’s risk control mechanisms and accumulated a massive position in futures trading that led to a financial loss of approximately €4.9 billion ($7.2 billion) for Societe Generale.
- Kerviel was eventually sentenced to three years in prison and was ordered to pay damages exceeding €4.9 billion, but the damages were later reduced to €1 million by a French court.
Importance
Jerome Kerviel is an important figure in the world of business and finance due to his involvement in one of the largest trading scandals in history. As a former trader at Societe Generale, a French banking institution, Kerviel incurred losses amounting to approximately €4.9 billion by conducting unauthorized trades. His actions not only highlighted the need for tighter regulatory measures and enhanced risk management systems within the banking industry, but also exposed existing flaws in the internal control processes at financial institutions. The financial debacle caused by Kerviel in 2008 remains an enduring lesson in risk management and serves as a stark reminder of the potential repercussions of unconstrained and unethical trading practices.
Explanation
Jerome Kerviel is not a finance or business term, but rather the name of a French trader who made headlines in 2008 for his unauthorized and fraudulent trading activities. Kerviel was working for a French bank, Société Générale, as a junior trader specializing in arbitrage at the time his deceitful actions were uncovered. The discovery of Kerviel’s fraudulent operation resulted in losses of around €4.9 billion ($7.2 billion), making it one of the largest trading scandals in history. While discussing Kerviel in the context of finance and business, it is essential to understand the gravity of his misdeeds and their impact on the financial industry, bringing attention to the importance of regulation and transparency in trading.
Kerviel’s scandal exposed numerous loopholes in the risk management and control systems in financial institutions and served as a warning for future traders. Following this high-profile scandal, regulators and banking institutions around the world stiffened their efforts to detect and prevent fraudulent trading activities. In response to the crisis, new policies and regulations were put in place to ensure closer monitoring of traders and greater transparency in the trading activities of financial institutions.
The aftermath of the Jerome Kerviel scandal thus led to a heightened focus on risk management and internal controls within the finance industry, emphasizing the importance of robust systems and ethical behavior to maintain trust and prevent significant losses.
Examples
Jerome Kerviel is a former French trader who initiated one of the largest trading frauds in history while working at the Société Générale bank. Here are three real-world examples related to his story:
1. Rogue Trading Incident at Société Générale: In January 2008, Société Générale discovered unauthorized trading activities by Jerome Kerviel, which led to a massive loss of approximately €4.9 billion (around $7.2 billion). Kerviel had taken massive trading positions in futures contracts on three European equity indexes: the DAX, Euro Stoxx 50, and CAC 40. He was able to hide his positions by creating fake offsetting trades and bypassing internal controls. This incident is one of the largest and most famous examples of rogue trading, where an employee makes unauthorized trades that result in significant losses.
2. Legal Consequences and Imprisonment: After the discovery of Kerviel’s unauthorized trading activities, he was arrested by the French police and charged with abuse of trust, forgery, and unauthorized computer use. In October 2010, he was found guilty by a French court and was sentenced to three years in prison, with an additional two-year suspended sentence. Additionally, he was ordered to repay the total loss of €4.9 billion to Société Générale. However, later in 2014, the amount to be paid back was significantly reduced to €1 million by a French appeals court.
3. Repercussions on Société Générale’s Reputation and Internal Controls: The rogue trading scandal caused significant damage to Société Générale’s reputation and stock price. Investors and the public questioned the bank’s ability to manage the risks associated with its trading operations. In response to the scandal, the bank took steps to bolster its internal risk control policies and procedures. The bank also faced regulatory scrutiny, and in 2008, the French regulator Autorité des Marchés Financiers (AMF) fined Société Générale €4 million for inadequate internal controls. The incident served as a lesson for financial institutions worldwide, emphasizing the importance of risk management and robust internal controls in preventing unauthorized trading.
Frequently Asked Questions(FAQ)
Who is Jerome Kerviel?
Jerome Kerviel is a former French trader, known for his infamous role in the Société Générale trading loss scandal in 2008. He was convicted of fraudulent trading activities that resulted in a loss of approximately €4.9 billion for the bank.
What was Jerome Kerviel’s position at Societe Generale?
Jerome Kerviel was employed as a junior trader at Société Générale, working in the bank’s Delta One products team which dealt with futures and options on European equity market indices.
When did the scandal involving Jerome Kerviel take place?
The trading scandal involving Jerome Kerviel took place in early 2008, with the unauthorized trading activities discovered by Société Générale in January of that year.
What were the consequences of Jerome Kerviel’s actions?
As a result of Kerviel’s unauthorized trading activities, Société Générale suffered a reported loss of €4.9 billion. Jerome Kerviel was convicted of breach of trust, forgery, and unauthorized computer use. He was initially sentenced to five years in prison, with two years suspended, and ordered to pay €4.9 billion in damages. However, on appeal, the damages were significantly reduced.
How was Jerome Kerviel able to conduct these unauthorized trades?
Jerome Kerviel was able to conduct his unauthorized trading activities by masking his trades with fake offsetting positions, utilizing his knowledge of the bank’s internal systems and controls. He also used fake documents and forged emails to conceal his activities.
Why did Jerome Kerviel conduct these fraudulent trades?
According to Kerviel, his actions were motivated by the desire to increase his own profits and to outperform his peers, earning him substantial bonuses. However, he also argued that his superiors were aware of his activities but turned a blind eye as long as he was generating profits.
What was the impact of the scandal on Société Générale and the finance industry?
The scandal led to significant financial loss and reputational damage for Société Générale, and it also resulted in stricter regulations and increased scrutiny of banks and their internal controls. The incident highlighted the need for stronger risk management practices in the financial sector.
What is the current status of Jerome Kerviel?
Jerome Kerviel was released on parole in 2014 after serving less than five years of his initial sentence. While the entire sum of €4.9 billion in damages was not upheld, he was still ordered to pay €1 million in damages to Société Générale in 2016. Since his release, Kerviel has been successfully working to rebuild his life and career outside the financial industry.
Related Finance Terms
- Societe Generale
- Rogue trading
- Unauthorized trading
- Financial risk management
- Trading scandal
