The Société Générale Fiasco - Lessons in Risk Management

            
 
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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.



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Case Details:

Price:

Case Code : FINC052 For delivery in electronic format: Rs. 400;
For delivery through courier (within India): Rs. 400 + Rs. 25 for Shipping & Handling Charges

Themes

Sources of Finance, Capital Structure, Capital Budgeting
Case Length : 24 Pages
Period : 2005-2008
Pub. Date : 2009
Teaching Note : Not Available
Organization : Société Générale
Industry : Banking & Financial Services
Countries : France

Abstract:

The case discusses in detail the fraud that took place at Société Générale, second largest bank in France, leading to losses of € 4.9 billion. The bank held Jérôme Kerviel (Kerviel), a trader, for creating fraudulent trading positions that led to the losses. Kerviel, an arbitrage trader, was required to purchase a portfolio of stock index futures and at the same time, sell a similar mix of futures, with slightly different value. His job was to take bets on small price differences between futures contracts and not to place directional bets. However, in the year 2005, he began taking directional bets and concealed them using fake counter portfolios, to make it appear that the transaction was hedged. He took small positions initially, but continued to increase directional bets far exceeding his trading limits.

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During mid-January 2008, the compliance officers at the company found abnormalities in Kerviel's trades and after being confronted by the higher authorities, Kerviel admitted conducting unauthorized trades. Then, Société Générale began unwinding Kerviel's positions, in the markets that were falling rapidly due to growing concerns about the impact of subprime crisis in the US, leading to a net loss of € 4.9 billion to the bank.

The case discusses in detail, how Kerviel began taking directional positions, how his supervisors failed to keep a check on his fraudulent activities, how Kerviel admitted the fraud and different methods used by him to conceal the fraud. The case details the main reasons that include lack of internal controls, inadequate supervision and risk taking culture due to which the fraud occurred.

Issues:

» Analyze the fraud at Société Générale.

» Study different methods used by Kerviel to conceal the fraud.

» Understand the importance of proper internal controls and supervision mechanisms.

» Discuss the main reasons due to which the fraud occurred.

» Understand the role of risk taking culture in organizations that encourage such frauds.

» Analyze how Société Générale handled the fraud once it was revealed.

Contents:

  Page No.
Introduction 1
Background Note 2
The Execution of the Fraud 3
Events Leading to the Disclosure of Fraud 6
How was the Fraud Concealed? 9
Why did it happen? 11
The Aftermath 15
Exhibits 17

Keywords:

Société Générale, Delta One, Risk Management, Corporate Frauds, Jérôme Kerviel, Control Procedures, Internal Controls, Rogue Trading, Concealment of Fraud, Risk taking Culture, Turbo warrants , Arbitrage trader, Euro Stoxx 50, German DAX, FTSE 100, Hedging, Directional bets, Index futures

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