SOCIETE GENERALE JEROME KERVIEL AFFAIR Harvard Case Solution & Analysis

SOCIETE GENERALE JEROME KERVIEL AFFAIR Case Study Solution

  1. If it wasJanuary 1, 2008, - that is, before Kerviel’s trades became known – and you were the CEO of Societe Generale, how would you feel about the robustness of your firm’s business model and risk management practices?

Before Kerviel’s fraud trades were aware of, the robustness of the company’s business model and risk management practices of Societe Generale were known as the worldwide leader dealing in the equity warrants. The bank was in such a good performance in which I would even encourage the traders to make much more risky investments through the use of bank’s money. This, of course, would be reported to the small team of engineers and mathematicians who would make the calculations whether the investment is beneficial or loss.

The reason for feeling the robustness of the business model and the bank's risk management practices was mainly due to the Kerviel’s reporting of building long positions in the index futures for about the worth of $49 billion. Since Kerviel in the year of 2007 reported earnings of $25 billion for trading proprietary and also looking at the reported earning which was handed by Kerviel, it showed around $6 billion making for the year 2008. Kerviel was even given a nickname as a “cash machine” in the company due to his dealing with investments and forward contracts.

This proved that the company had a strong internal control system and efficient risk management practices that gave the traders an ample of opportunity for making risky and beneficial investments for the long run.

SOCIETE GENERALE JEROME KERVIEL AFFAIR Harvard Case Solution & Analysis

  1. Identify the internal control systems in place to address traders and trading risk.

There were certain rules and regulations which were developed by the top management for traders and trading desk managers to follow for controlling the internal system of the bank. The control task for the trading desk managers for managing the trading riskwas to:

  • The checking of net position and limiting the risk which should not exceed $125 million for Delta one listed.
  • The managers need to keep on regularly consulting with the trader's activities regarding their investments

The internal control system which was addressed to the traders were:

  • Handling of proper administrative and financial transactions
  • Managing the risks in operations
  • Participation needed in the financial reporting process
  • Carrying controls regarding regulatory and internal requirements
  1. Apply the fraud triangle to discuss the elements found in the Kerviel affair.

The fraud triangle is one of the frameworks which are used in explaining the worker’s decision on committing fraud. This involves three main steps which are Pressure, Opportunity and Rationalisation. The Pressure that led Kerviel into committing the fraud was mainly because of the ideology and ego. He neither had much cared for the money judging from his lifestyle, as he never spend much money on himself neither he didn’t prefer to show off. He wanted to prove to his colleagues that even with not having the elite educational background as his colleagues, he could still compete or perform better than them. Kerviel wanted to be recognized that he could be an excellent trader despite not having the same education as his colleagues..................

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