When getting answers isn’t the end of the matter, only the beginning

Below is an extract from the SocGen Internal Interim Report into Kerviel’s activities

Intermediary conclusions of the internal audit mission

The conclusions of the internal audit mission confirm the main characteristics of the fraud, as explained on January 24th 2008 by Société Générale’s management.

The author of the fraud departed from his normal arbitrage activities and established genuine “directional” positions in regulated markets, concealing them through fictitious transactions in the opposite direction. The various techniques used consisted primarily of:

• purchases or sales of securities or warrants with a deferred start date;
• futures transactions with a pending counterparty;
• forwards with an internal Group counterparty.

The author of the fraud began taking these unauthorised directional positions, in 2005 and 2006 for small amounts, and from March 2007 for large amounts. These positions were uncovered between January 18th and 20th 2008. The total loss resulting from these fraudulent positions has been identified and amounts to 4.9 billion euros, after their unwinding between January 21st and 23rd 2008.

The General Inspection department believes that, on the whole, the controls provided by the support and control functions were carried out in accordance with the procedures, but did not make it possible to identify the fraud before January 18th 2008. The failure to identify the fraud until that date can be attributed firstly to the efficiency and variety of the concealment techniques employed by the fraudster, secondly to the fact that operating staff did not systematically carry out more detailed checks, and finally to the absence of certain controls that were not provided for and which might have identified the fraud.

The Inspection General department has refrained from drawing any conclusions at this stage regarding the responsibility of the front office managers supervising the fraud’s author, given the ongoing legal investigation which has not enabled it to interview all those concerned. At this stage of the investigations, there is no evidence of embezzlement or internal or external complicity (i.e. the existence of a third party who knowingly assisted the fraudster to conceal his positions).The investigations are continuing, in particular, to cover a wider area than the activities of the author of the fraud.

Separately FT Alphaville reports that the 75 alerts raised over the trading activities of Jérôme Kerviel at Société Générale were not unusual according to Daniel Bouton, chairman and CEO of SocGen. Hmmm, perhaps they weren’t at SocGen and that was the problem!

He went onto say that “The role of the middle office is to ask questions, so it’s not surprising he [Kerviel] was asked a lot of questions.” Shame they didn’t understand the answers since, according to the report, control procedures had been respected in many cases but “no initiative was taken to verify Mr Kerviel’s assertions or to communicate the information to his superiors,” even when his assertions lacked plausibility.

Hmmm. Perhaps the internal control manual failed to explicitly point out that having investigated and received answers to questions, you were supposed to apply a sense and reasonableness test to them.


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