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Published by:
IBS Center for Management Research (2009)
Length:
25 pages
Data source:
Published sources
Abstract:
This case discusses in detail the fraud that took place at Societe Generale, the second largest bank in France, leading to losses of 4.9 billion euros. The bank held Jerome Kerviel, a Trader, responsible for creating fraudulent trading positions that led to the losses. Kerviel, an Arbitrage Trader, was required to purchase a portfolio of stock index futures and at the same time, sell a similar mix of futures, with a slightly different value. His job was to take bets on small price differences between futures contracts and not to place directional bets. However, in the year 2005, he began taking directional bets and concealed them using fake counter portfolios, to make it appear that the transaction was hedged. He took small positions initially, but continued to increase directional bets far exceeding his trading limits. During mid-January 2008, the compliance officers at the company found abnormalities in Kerviel's trades and after being confronted by the higher authorities, Kerviel admitted conducting unauthorised trades. Then, Societe Generale began unwinding Kerviel's positions in the markets that were falling rapidly due to growing concerns about the impact of the sub-prime crisis in the US, leading to a net loss of 4.9 billion euros to the bank. The case discusses in detail, how Kerviel began taking directional positions, how his supervisors failed to keep a check on his fraudulent activities, how Kerviel admitted the fraud and different methods used by him to conceal the fraud. The case details the main reasons how the fraud occurred which include: (1) lack of internal controls; (2) inadequate supervision; and (3) the risk taking culture. This case is designed to enable students to: (1) analyse the fraud at Societe Generale; (2) study the different methods used by Kerviel to conceal the fraud; (3) understand the importance of proper internal controls and supervision mechanisms; (4) discuss the main reasons how the fraud occurred; (5) understand the role of the risk taking culture in organisations that encourage such frauds; and (6) analyse how Societe Generale handled the fraud once it was revealed. This case is meant for MBA / MS students as part of the finance / corporate frauds curriculum. The teaching note includes: (1) the abstract; (2) the teaching objectives and methodology; (3) assignment questions; (4) feedback of the case discussion; and (5) additional readings and references. The teaching note does not contain an analysis of the case.
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