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Governance, Risk Management, and Compliance: It Can't Happen to Us—Avoiding Corporate Disaster While Driving Success by Richard M. Steinberg

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Société Générale

You know the story, how “rogue trader” Jerome Kerviel was at the center of what's been called the largest bank fraud in history. In brief, this mid-level employee, supposedly unbeknownst to anyone else at one of the most venerated banks in France, bet $73 billion of the bank's money, costing it $7.2 billion. The newspapers covering the story promptly dusted off all the familiar names in the annals of bank fraud, including Joseph Jett of Kidder Peabody and Nick Leeson of Barings Bank, among others. But this one tops them all by far.

Having been involved in a number of the most high-profile frauds—let me rephrase that: having been involved in investigating and cleaning up after a number of such frauds—I'd like to share some thoughts on what went wrong. And clearly a lot did go wrong. Let's refresh memories.

What Happened

Basically, Kerviel made unauthorized trades and hid them from others at Société Générale. He was authorized to trade in the European stock indexes, so long as he hedged much of the risk. But he didn't complete the hedge transactions, in effect placing what became bad bets that European markets would continue to rise. To cover his tracks he fed false transaction data into Soc Gen's computer system to make it appear that he had indeed carried out the hedges. When bank executives finally found out, they moved to unwind the $73 billion of Kerviel's bad bets, resulting in the loss.

The accompanying news reports show the bank's responses to be fascinating. ...

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