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Case Study: Trading Scandal at Societe Generale

Consider the case of the internal fraud committed by an employee, Jerome Kerviel, at Societe Generale, France's second largest banking establishment.

1. Peter Gumble, European editor for Fortune magazine comments: "[This] might be shocking for people unfamiliar with the high-risk, high-reward culture of most trading floors, but consider this: the only way banks can tell who will turn into a good trader and who won't is by giving every youngster it hires a chance to show his mettle. This means allowing even the most junior traders to take aggressive positions. This leeway is supposed to be matched by careful controls, but clearly they aren't foolproof." What is your response to this statement?

2. What explanations can there be for the failure of SocGen's internal control system to detect Kerveil's transactions while Eurtex detected many suspicious transactions?

3. Should banks and investment firms permit members of their compliance departments to become traders?

4. Do research on the Web to find out if Kerveil was found guilty and punished. What other outcomes resulted from this incident.

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1. My reaction to Mr. Gumble is that if there are other traders breaking the rules, concealing a position, discovered and dismissed, then these actions would become public if the positions were very large and the losses sustained by their employers were also large. Next, banks will have some criteria with which they judge potential traders. Allowing every youngster who joins a chance to show his mettle may not be advisable. The losses the banks expose themselves to are very high. That coupled with controls that have weaknesses create a scenario where scams can occur.

2. The explanation for the failure of SocGen's internal control is that Kerveil was familiar with the internal control system of SocGen and took steps to ...

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