SG Closes "Many" of Its Loopholes

Exactly how would one go about blowing $7 billion of someone else's money without that party knowing about it?

We learned the general outline of Jerome Kerviel's trading, uh, strategy not long after his erstwhile employer, Société Générale revealed the fiasco in January.

Some details came out in February, when an internal investigating committee released a "progress report" on its review of Kerviel's activities.

Now a British publication, Risk magazine, is providing a few more details about how Kerviel meticulously navigated Société Générale's internal controls to escape detection for as long as he did:

The internal report alleges that Kerviel was able to rack up huge directional trades on the Dow Jones Eurostoxx 50, Dax and FTSE 100 indexes totaling EUR49 billion by January 18, concealing his exposures by putting on fictitious offsetting trades. The audit claims Kerviel would enter into false trades with counterparties that did not require confirmation or would cancel the transactions before confirmation was due, replacing them with new, fictitious trades — often in different product types, managed by different parts of the operations department.

Specifically, Kerviel purchased or sold securities or warrants with deferred start dates, meaning he had plenty of breathing room before the trades were meant to be confirmed. Another technique was to enter into futures transactions with counterparties described as pending — meaning full details of the counterparty were not entered into the trading system. Kerviel also entered into forwards with internal counterparties within the SG group, which did not require margin payments.

The lack of controls in these areas was acknowledged by SG in its internal report: "No control exists over canceled or modified transactions or over transactions with a deferred start date, or over transactions with technical counterparties, or over positions with a high nominal, or over non-transactional flows during a given month — all analyses that would probably have allowed the fraud to be identified."

"Many of these shortcomings are being addressed," the article adds.

by Mark Stein