Jerome Kerviel and the Four Point Nine Billion Euro Societe Generale Fraud

Friday, the eighteenth of January, two thousand and eight. A control officer at Societe Generale, in an office block outside Paris, is pulling on one loose thread. One trade that doesn't quite add up. By the end of that day, the bank has found a hole somewhere between thirty and fifty billion euros.

Thirty to fifty BILLION? Hidden by who, a whole division?

One man. Thirty-one years old. Jerome Kerviel. And that number is more than the entire shareholders' equity of the bank he works for.

So he's betting more than the bank is worth. On what?

Which way Europe goes. Just that. European stock indexes... Eurostoxx, the DAX, the FTSE. And hold on to one detail for me, because it comes back at the end. A French court will eventually order him to pay all of it back... and then a different court will cut that bill to one million euros.

From billions to one million? Okay, I want that story.

You'll get it. But first... how he got there without anybody standing up and shouting. Kerviel didn't start on the trading floor. He started in the back office. The plumbing. The part of the bank that checks and settles everybody else's trades. He learned which boxes get looked at... and which ones never do.

So he's the security guard who later robs the building.

That's the whole con in one sentence. Then he moves up to Delta One, equity derivatives, where his actual job is boring arbitrage. Tiny spreads. Instead he starts making enormous directional bets.

Which lights up a risk screen the second he hits enter, surely.

So he builds a mirror. For every real position, he types a fictitious offsetting trade into the system. On paper he's perfectly hedged. Flat. Boring. A man doing his job. Underneath... one of the biggest bets in Europe.

But fake trades have fake counterparties. Somebody asks for paperwork eventually.

They did. He produced it. He was later convicted of forgery and use of forged documents, and of fraudulently entering data into an automated processing system. Forged confirmations. And whenever a control officer got close, he had an answer ready, and the answer always sounded technical enough to make the question go away.

And that worked how many times?

Dozens. The alarms had been ringing for a year. October two thousand and seven, there's a single purchase of six thousand DAX futures contracts. Over a billion euros. One click. Nothing happens. November... the Eurex derivatives exchange itself phones Societe Generale about unusually large positions.

The exchange rang THEM? That's the airport calling to say one of your planes is missing.

And they still didn't find it.

Okay, so the obvious question. Did his bosses know?

His defence was blunt: they turned a blind eye while he was making money, and discovered their principles when he lost it. In two thousand and seven he reported a gain of around twenty-five million euros. The bank has always said he knew the limits and nobody encouraged him.

Those two stories can't both be true.

No. Keep that in your pocket too. Friday night, they know. Over the weekend a tiny group of executives works out the size of the hole and decides to liquidate everything... quietly, before the market understands what it's looking at.

Quietly. With tens of billions in index futures. Sure.

Monday the twenty-first of January. And of all the Mondays in history, this is the one where European markets fall off a cliff. Global panic, the credit crisis gathering, indexes dropping all day. And the bank is selling into that.

He's long, the market's collapsing, so waiting costs them... and selling makes it fall further. There's no good move.

Three days. On the twenty-fourth, they go public. Massive fraud. Final loss, four point nine billion euros. And by the way, we've already arranged a capital increase to absorb it.

Four point nine billion. From one guy on a salary.

The finance minister, Christine Lagarde, produced an eleven-page report with the banking commission and the markets authority. It said the bank unwound the positions professionally... but that its internal controls had failed, or been ignored.

Did the bank get punished, or was it all pointed at Kerviel?

A formal reprimand, and a four million euro fine. The language was brutal, though. Serious deficiencies in the internal control system, going well beyond repeated individual failures. Running right through two thousand and seven.

Four million euros. Against four point nine billion.

That was the legal maximum at the time. Lagarde said it should be substantially increased.

Very reassuring.

October two thousand and ten. Kerviel, convicted of breach of trust, forgery, unauthorised use of the bank's computer systems. Five years, two suspended... and ordered to repay all four point nine billion.

Which isn't a real number for a human being.

The appeal court in twenty-twelve agreed anyway, calling him the sole creator, inventor and user of a fraudulent system. Then in twenty-fourteen, France's highest court kept the prison sentence but threw out the damages. And in September twenty-sixteen, Versailles cut the bill... to one million euros.

There it is. On what grounds?

That he was only partly responsible. The court ruled the bank's own deficiencies in management, controls and security contributed to the scale of the loss. A prosecutor had already put it more plainly, months before. The bank left the door open.

So it was never a perfect con. It just needed a building where nobody checked the locks.

He didn't beat the controls with genius. He beat them with familiarity. He knew which alert nobody reads on a Friday afternoon. And every bank, every hospital, every company you have ever worked in has one of those.

The alarm that rings so often it turns into furniture.

Tens of billions of euros, hiding behind a screen that nobody wanted to be the one to question.