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Societe Generale Offers Findings on Breach Investigation

Trader's creativity, lack of proper controls combined to create perfect storm that lost the company $7 billion

It was a perfect storm -- a creative, security-savvy trader working for a supervisor who didn't know much about trading in an environment without the proper trading controls.

Those are the conclusions of the Mission Green report, which was issued by Société Générale and its breach consulting firm, PricewaterhouseCoopers, on Friday.

The Mission Green was initiated after a rogue trader named Jerome Kerviel cost Société Générale some $7 billion in January by overriding trading limits and executing a series of transactions that put his company -- and entire online markets -- in dutch. The goal of the probe and the report was to determine why the fiasco occurred, and define ways to prevent it from happening again. (See Societe Generale: How Did It Happen?)

The report gives Kerviel some credit for navigating the system of checks and balances that was designed to prevent such overtrading: "The conclusions of this report show that the trader's maneuvers and skill in concealing his positions, risks, and earnings allowed him to evade detection of his massive directional positions."

But the report also blames Kerviel's managers, and a lack of proper company controls, for the breach. "The fraud was facilitated -- or its detection delayed -- by weaknesses in the supervision of the trader and in the controls over market activities," it says.

Key points in the study lay blame at the feet of Kerviel's supervisors. "The direct supervisor lacked trading experience and was not given a sufficient degree of support in his new role," the report says. Neither the supervisor or the manager above him took the time to adequately review Kerviel's trades or benchmark Kerviel's falsified reports against the company's actual financial positions, the investigators say.

Kerviel's actions also revealed some significant flaws in the company's trading control systems, which did not immediately identify the fraud, the report says. For example, the company's IT systems did not grow in a fashion that was consistent with the "very strong growth" in transaction volumes in Kerviel's equities division, it says.

Société Générale says it has shored up the immediate threat, eliminating the ability of other traders to navigate the systems as Kerviel did. However, more lasting controls and processes continue to be put into place, and the company expects to be implementing more checks and balances throughout 2009, acording to the report.

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