Who is Jerome Kerviel
Jerome Kerviel was a junior level derivatives trader for French securities firm Société Générale. He was charged with losing more than €4.9 billion in company assets by conducting a series of unauthorized and false trades between 2006 and early 2008. When company managers discovered that Kerviel had conducted tens of billions of euros worth of unauthorized trades, they rushed to close out the open positions (most of which were specialized equity arbitrage trades) and contain the extent of the fraud. Several of the trades were closed out with heavy losses due to a falling market at the time of sale.
BREAKING DOWN Jerome Kerviel
Jerome Kerviel joined Société Générale in the summer of 2000 at the age of 23. His first position at the company was in the compliance department, but in 2005 he moved to a junior trader job working with derivatives. Kerviel's role was to capitalize on pricing discrepancies between equity derivatives and the market price of the stocks upon which the derivatives were based.
Derivatives are investment instruments that derive their value from another asset, such as the price of corn, a stock or an index. There are many different kinds of derivatives, such as futures, options and swaps. To limit risk in derivative trades, a long derivative position is generally offset with a similar short position. For example, if a trader purchased Euro stock market futures hoping the market would go up, typically, this bet would be offset by shorting U.S. stock futures to profit if markets decline, as European and U.S. stocks tend to move in similar fashion. Kerviel began making only one side of these bets.
Kerviel and Unauthorized Trades
With several years' experience in Société Générale's back office, Kerviel was well-versed in the company policies for approving and regulating trading among its brokers. He took advantage of this knowledge in late 2006 and early 2008 to offset his one-sided bets with the opposite position that did not actually exist by creating fake trades in the system's computers and logs, so the trades were not flagged by the bank's oversight systems. Initially, these trades were profitable. With so much early success, Kerviel feared the bank would discover the false transactions. To conceal the activity, he began creating losing trades intentionally to generate losses to offset his early gains. Managerial staff at Société Générale uncovered the unauthorized trading activity in January 2008 and took steps to unwind the positions created by Kerviel. When the dust settled, Kerviel's losses were estimated at €4.9 billion. Notably, Kerviel is not believed to have profited personally from his reckless trading, though he now falls into the infamous group of rogue traders that have collectively lost their employers billions of dollars through risky and unauthorized trading activity.
Kerviel was convicted of breach of trust and other charges in French court in 2010. He was sentenced to at least three years in prison and ordered to pay restitution of €4.9 billion, though these sentences were later reduced on appeal.