IT evidence surrounds the missing $7 billion
IT evidence surrounds the missing $7 billion
January 29, 2008: Falsified documents, altered IT access codes, stolen passwords and emails confirming the impossible. Rogue French trader Jerome Kerviel allegedly used his previous working experience to get past stringent controls in order to make his fictitious trades.
Prosecutors in Paris have filed preliminary charges against Jerome Kerviel including ‘breach of trust’ and unauthorized computer activity, yet questions are still running rife as to how he managed to pass so many controls in order to gamble the billions of dollars that sent markets jumping.
The French trader at the centre of the Societe Generale trading scandal, weaved his false trading web at the bank through a technique he was employed to exploit, known as ‘arbitraging.’
This form of trading is designed to take accumulative tiny profits from futures markets with minimal risks involved. Profits (and loses) are made by taking advantage of price differences between two or more markets.
SocGen explains this method simply by stating a portfolio of instruments known as “A” is purchased at the same time as selling a portfolio of financial instruments known as ‘B.’
These two portfolios usually have similar characteristics and are chosen too minimise the risk by offsetting each other. Unfortunately this is not always the case – the risks still exist, but SocGen maintains it has the correct controls designed to monitor the risk involved and ultimately control operations.
But for Kerviel, a 31 year old who has worked with the Group since 2000, his five years working in the very departments undertaking these controls gave him some valuable knowledge when in 2005, he became a trader in the arbitrage department.
In the case of the missing $7 billion, the bank says, ‘the exceptional fraud which we have suffered consisted of avoiding these controls or making them inoperable.’ With this, the bank suggests the trader was using ‘fictitious operations’ in the B portfolio, giving off the impression that it could genuinely offset portfolio A.’
The bank claims these methods allowed the trader to hide what happened to be, a sizeable speculative position which was neither consistent or related to their normal business activities.
Further, the bank says the trader eluded their controls by using his years of experience working directly with the processing and controlling of market operations. He allegedly ensured the characteristics of the operation initially limited the chance of control, changed IT access codes and passwords and falsified documents to justify the operations.
On Friday the 18th January, a suspicious email alerted the bank to begin investigations into the matter. The email confirmed a booked trade with a large bank, but consequently sparked an emergency investigation as its whereabouts were questionable. The bank in question later claimed to have not known about the trade. When Kerviel was asked to explain, he eventually confirmed the fictitious trades.
The figures lost by SocGen through the rogue trades vary, but the bank says it’s the result of what is likely to be the largest trading fraud ever undertaken by a single person. While prosecutors have requested preliminary charges, they also claim the motive for the trader was not for personal profit, but rather his ambition to become ‘an exceptional trader.’