Wednesday, June 11, 2008

SocGen Knew of Fictitious Trades Months Before Trading Scandal

According to court documents seen by the Financial Times, Societe Generale knew that Jerome Kerviel, Rogue Trading King, was using fictitious trades several months before the bank lost $7.6 billion.  An internal accounting auditing committee raised concerns about Mr. Kerviel's use of fake transactions in April 2007, but the bank took no action.  Apparently, the outcome of the SocGen/Kerviel case now hinges on determining whether Mr. Kerviel used a "virtual trade," which was tolerated, or a "fake trade," which was most definitely not.  If you can tell the difference between the two, well, I suggest you go volunteer to help with the ongoing investigation into the incident. 
SocGen has claimed in the past that Mr. Kerviel concealed losses on futures positions by fabricating fictitious offsetting trades that were undetected until January 18th.  Upon its discovery, SocGen was forced to puke enormous positions into a market that was not in a buying mood.  Even the Fed was suckered into a 75 basis point emergency easing, which it must certainly regret to this day.  According to the Financial Times, Vincent Guyot, a controller at SocGen, told the police that anomalies discovered in March 2007 indicated that some of Mr. Kerviel's operations amounted to "real fake trades which had no economic significance."  Guillaume Selnet, one of Mr. Kerviel's lawyers countered with: "From the moment when an accountant says, 'We have detected fictitious trades' this becomes more than negligence.  It looks like complicity.'  SocGen's lawyer, Jean Veil, maintains that SocGen was deceived: "The ingenious explanations of Mr. Kerviel, which were falsehoods, deceived the controllers."
Perhaps we can speculate a bit about how this trial might play out in court....

Selnet:  You say you are ze risk manager?

SG Inspector: Oui!  I am also ze Chief Inspector!  Zat is very important title.

Selnet:  When did you first dizcover ze fictitious trade?

SG Inspector: Non! Zey were not fictitious trades!  Zey were fake trades!

Selnet:  What is ze differance?

SG Inspector: We know fictitious trade!  Fake trade we do not know! Very Big Differance!  You idiot!  Mr. Kerviel is great genius.  He fool even ze most careful inspector!

Selnet:  When you question Mr. Kerviel about fictitious trade, what did ze man say that was so, how to say, ingenius?

SG Inspector:  He say emphatically 'Zat is not real trade, zat is fictitious trade!'

Selnet:  And you accepted zis response?

SG Inspector: Yes, you see, ze man was a genius!  Had he said ze trade was fake and not fictitious, we might have caught him!  But he never slip up!  Not once!

Selnet:  In January, when you dizcover zat ze trade was fictitious, and not fake..

SG Inspector: Non!  It was fake and not fictitious!

Selnet:  Is that not what I just said?

SG Inspector:  Non!  You say fictitious and not fake!  You see the trades were fake!  Not fictitious!  We were all tricked!

Selnet:  Yes, I am beginning to see...So what did ze man say zen in defense of zis horrible deceptive trickery?

SG Inspector:  He said 'Sir, zat is not my trade!'  And when I say 'But whose trade can it be?'  He say 'Ze man's name is Nick Leeson.'

Selnet: Did you attempt to find zis Leeson character?
SG Inspector:  Yes.  And as a good inspector, I find him and call.  

Selnet:  What did ze man say?

SG Inspector:  First he say zat Kerviel is genius.  Then he say he'd be happy to dizcuss ze situation further, but he requires a $50,000 deposit for his motivational speeches.
Selnet:  Sacre nom d'um chien!

SG Inspector:  Yes, zat is when I knew we had beeg problem....  

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