Enterprise Risk Management policies and their influences: Example 2 - Societe Generale

Another incident involving enterprise risk management policies happened in France at Societe Generale during the beginning of 2008. A small trader, Jerome Kerviel, was responsible for losing $7 billion through high-stake bets on the development of major European indices [1].The interesting part in this story is that even though he did not have the authority to make these bets, he was able to mask his trading through his internal knowledge of the security software. Even though he was triggering many security and policy rules, he was able to persuade his managers through fake order request e-mails by supposed customers that everything was conducted according to policies [2]. A further investigation showed that even though compliance officers received over 75 alarms concerning Kerviel’s activities, they “rarely went beyond routine checks and did not inform managers of anomalies, even when large sums were concerned” [3]. In the aftermath, Kerviel was sentenced to only three years in prison since he was not trading for his own benefits and majorly because the company fell short in supervising his actions.

In conclusion to this incident, Societe Generale did have risk management policies, including a tight network of alerts and personnel that supervised the systems, but failed short in recognizing the threat and taking the necessary precautions to reduce the impact. An independent audit of the policies could have led to better training of the persons in charge as well as a faster reaction to the incident.

References:

[1] New York Times, "Former Societe Generale trader had big bets in place as early as June", November 9, 2009, http://www.nytimes.com/2008/02/19/business/worldbusiness/19iht-socgen.5.10203247.html
[2] BusinessWeek, "The lessons of Societe Generale", Unknown date, http://www.actimize.com/index.aspx?page=news119
[3] The Times, "Societe Generale missed 75 warnings on trader Kerviel", http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3407991.ece