Jrme Kerviel was allegedly involved in an illegal trading scheme amounting to

50 bn., which resulted in a loss of 4.9 bn at Socit Gnrale, the second largest
bank in France.

I. The issue

Significant deficiencies in internal controls, unauthorized trading activities, computer hacking and the
breach of trust involving a conscious effort by the rogue trader to deceive his managers were
noticed. Jrme Kerviel is accused of creating a huge loses by a single unauthorized trader in
financial history. In the course of 2007 he made unauthorized trade worth 30 bn. on European
stock market futures, winning 1.4 bn. by the end of the year. Having disguised the importance of
his exposure, and earnings, with fictitious trades, he went on in January 2008 to make even bigger
trades. The bank stated that he deliberately set out to lose money in 2008 to bring down the
suspicious size of his 2007 earnings.

II.The background

Created on May 4th, 1864 under the reign of Napoleon III, Socit Gnrale is one of the very first
groups of financial services in the Euro zone with 46.2 billion euro from market capitalization as of
December 31st, 2007. He was graduated from the Universit Lumire in Lyon with a masters
degree in finance. Jrme Kerviel joined Socit Gnrale, the second largest bank of France, in
2000, where he obtained a position in the compliance department. He was promoted to the Banks
Delta One trading team in 2005, which specialized in the futures markets. In theory, this strategy
does not allow the trader to take on significant directional risk, as any directional positions are
hedged.

Jrme Kerviel declared that he began to take bets on the market in 2005. He used to take genuine
directional positions and created fictitious hedges, buying securities and warrants with deferred start
dates and futures with a counterparty that did not require instant confirmation. Using other
employees access details, he was able to later delete trades from Socit Gnrales system,
leaving him with massive exposures, but fooling the monitoring tools into thinking that his portfolio
was relatively flat. An internal investigation, the Mission Green, commissioned by the bank showed it
had failed to follow up on at least 75 warnings on Jrme Kerviels positions. In November 2007
Eurex, the derivatives exchange, stressed that Jrme Kerviel Kerviels positions showed some
irregularities. The Mission Green report stated that compliance and the traders managers were
satisfied, without verification, with the traders explanations, in contradiction to Eurexs assertions.

Jrme Kerviel is alleged to have used his considerable computing skills and inside knowledge
gained during his five years working in the bank compliance department to hide 50 bn. of illegal
trading which resulted in the loss of 4.9 bn. An internal investigation showed a total of some 1,000
cases in which the trader was involved in the entry and then cancellation of fictitious transactions,
concealing market risks and the latent earnings from unauthorized directional positions.

A. The operative mode of the fraud

Jrme Kerviel had put together a first portfolio (A) composed of futures and representing the
evolution of the European stock indexes (Eurostoxx, Dax, FTSE.) while at the same time he was
establishing a second portfolio (B) composed of warrants which had the same characteristics as
those of the futures but with a different value, these variances in value explain the losses or the
gains of such activities. Because of their close characteristics, these two portfolios compensate each
other and lower the market risks. Socit Gnrale had established internal controls to manage
these risks. The fraud committed by Jrme Kerviel has consisted of evading internal controls or
making them inefficient. Jrme Kerviel had registered and then cancelled fictitious transactions in
the second portfolio. The fictitious transactions were registered in Socit Gnrale systems but
were economically unreal.

Within the framework of this fraud the financial instruments of portfolio (A) were seemingly
compensated with the fictitious operations accommodated within portfolio (B) which showed only a
very little residual risk. He gave to his fictitious operations some characteristics which limited the
opportunities of control. He usurped computing access codes belonging to operators to cancel
certain operations. He falsified the documents allowing him to justify his fictitious operations. He
made sure that his fictitious operations related to a financial instrument different from those which he
had just canceled to avoid control.

B. The discovery of the fraud

The discovery was Friday, January 18th. Few days before, an abnormally high position of a risk of
counterpart was detected. The explanations given by Jrome Kerviel were insufficient and led to
additional controls. On January 18th Jrome Kerviel's hierarchy was informed of this problem and
alerted the hierarchy of the department. An e-mail supposedly from a large bank involved in a trade
with Jrme Kerviel was found to have been falsified. A team was established to perform full scale
investigations. On January 19th the hierarchy did not obtain clear explanations from Jrome Kerviel.
The large bank, mentioned in the e-mail, did not recognize these operations. Jrome Kerviel
admitted having committed irregularities and, in particular, having created the fictitious operations.
The investigators soon detected the true situation. On January 20, the total exposure of Jrme
Kerviels trade was closed at 50bn. Socit Gnrale Chairman, Daniel Bouton, informed the
Governor of the Banque de France, the other members of his board and then the General Secretary
of the AMF, the French markets regulator. On January 21, Asian markets collapsed. Socit
Gnrale began unwinding the rogue traders positions as European markets went into free fall. On
January 23, as the sell-off was completed the French government and the world major central banks
were informed of the affair. On January 24, Socit Gnrale asked for its shares to be suspended
as the losses were announced to the world. On January 25, Jrme Kerviels name was confirmed
as the rogue trader and on January 26, he was brought in for questioning to the headquarters of
the French financial police. On January 28, the rogue trader admitted to hacking into computers and
creating false documents, he was charged by a French prosecutor on four counts.

III. The Role of Criminal and Financial Laws

A. The Role of Criminal Law

The French justice has never examined such a fraud. No French case law relating to similar situation
exists. Except for the fact that there was no breach of trust by bank officials the Socit Gnrale
affair is comparable in its impact and in some of its facts to the Daiwa Bank scandal which occurred
in New York in 1995, and is also similar to the John Lusnak case which occurred in Maryland in
2003.

A criminal complaint for falsification of banking accounts and computer hacking was issued by
Socit Gnrale in Nanterre, the jurisdiction where Socit Gnrale Headquarters is located. A
second criminal complaint of swindle, breach of trust and forgery, was issued in the name of the
group of shareholders in Paris. The scale of the swindle Jrme Kerviel is accused of is usually
sanctioned with 5 to 15 years prison term. Originally, the Public prosecutor's office would have asked
to indict Jrome Kerviel for attempt of swindle, but it was rejected by the judges. Socit Gnrale,
the plaintiff, never declared that Jrome Kerviel had personal ambition in this affair. The prosecutor
recognized that Jrme Kerviel had behaved like a financial drug addict as he bet wildly on stock
markets and that Jrme Kerviel had not swindle the bank but had hoped to secure a higher salary
and large bonus and expected to increase his reputation as an exceptional trader. Jrme Kerviel
could be fined and sentenced to 3 years in jail.

Jrme Kerviel is facing:
- Multiple charge of forgery, fictitious transactions and falsifying documents to justify his actions,
- Hacking into the banks computer to input falsified informations,
- Breach of trust, in a usual way, concerning the properties of third party, (taking positions that
exceeded his trading limits),

The rogue trader, served 5 weeks in preliminary detention at Pariss Sant prison, during which he
was fired, to ensure his availability to investigators and prevent contamination of evidence or
witnesses. Since then he has been placed under official investigation but allowed to walk free on
condition he remain in France. He is now working at a computer services company owned by a
specialist who had counseled his defense.

In the United States, in New York, the procedure would have been similar to the French one. The
bank would have immediately informed the New York Federal Reserve Bank about the rogue
traders trading losses. The New York Federal Bank would have alerted the U.S. District attorney,
who would have arrested the rogue trader. The trading losses would have been made public and the
rogue trader would have been charged with fraud.

In the United State the sanction of such a fraud would probably be more severe. Jrme Kerviels
case is similar to John Rusnaks. In 2002, this rogue trader was caught concealing $ 691 million in
currency markets losses at Allied Irish Bank (Maryland). He was sentenced in January 2003 to a
seven and a half year prison term. His punishment included a $60.000 fine, mandatory counseling
and a lifetime trading ban. During his time at Allied Irish Bank, John Rusnak made bad bets on the
yen, sought cover with riskier trades, his losses, falsified profits and protected undeserved bonuses.
John Rusnack could have faced up to 30 years in prison. The seven and a half year sentence was
part of a plea bargain with the US prosecutors. Upon his release, he must start paying US$ 1.000 a
month for five years of probation. John Rusnak still must refund the full amount of the loss, but the
prosecutor stipuled the amount he pays back will depend on how much money he is able to earn
after leaving prison.

Jrome Kerviel is, at the present time, the only person indicted in a significant way in the Socit
Gnrale affair, Jrome Kerviels assistant, Thomas Mougnard, is also indicted but only for
subordinate facts.

B. The accomplices

Two people are suspected being Jrme Kerviels accomplices.

Jrme Kerviels assistant, Thomas Mougnard, 24 years old, is suspected of having helped the
rogue trader. He registered in the system the "provisions" which allowed Jrme Kerviel to feign the
result of his unauthorized positions, in 2007 and in the year 2008. Thomas Mougnard was already
indicted on August 1st, 2008, for "complicity of fraudulent introduction of data in a computer system".

In February 2008, Moussa Bakir, a 32 year old sale trader at Fimat, a firm of brokers owned, at this
time, by Socit Gnrale and specialized in the derivatives which Jrme Kerviel traded in has
been interviewed by French financial police on suspicion of links to Jrme Kerviel. This link
between the rogue trader and Moussa Bakir was discovered by the banks own internal
investigators, who uncovered previously undetected communication between the two traders. There
is a suspicion that they had been working in tandem in this affair. Moussa Bakir is suspected of
being aware of Jrme Kerviels unauthorized trading at Socit Gnrale. There is a strong
presumption that many of Jrme Kerviels transactions on the European stock market passed via
Fimat. Fimats offices were also searched as part of the investigation.

C. The financial consequences

Further to the Daiwa Bank scandal in 1995, the President of the Federal Reserve Bank of New York
which has significant regulatory responsibility has observed :

based on our experience, we believe that a successful risk management system should satisfy at
least four basic principles:
- first, it should be subject to active oversight by the board of directors and senior management of
the financial institution,
- second, it should embody well-conceived risk identification measurement and reporting system,
- third, it should include comprehensive internal controls emphasizing the clear separation of duties,
- and, fourth, it should incorporate a well-defined structure of limits on risk taking.

A review of Socit Gnrales case confirms that there was a significant failure in the design or
implementation of one or more of these basic principles.

The fraud which lasted one year has been blamed by the Banking Commission, a collegial agency
chaired by the Governor of the Banque de France and in charge of the control of credit institutions in
France. The Banking Commission fined Socit Gnrale 4 million in July 2008 for failure of
internal controls. Regarding the control of the risks this failure constitutes malpractices against the
banking regulations. In the U.S these investigations would have been conducted by U.S. Federal
Reserve, the Federal Deposit Insurance and the State Banking Department.

The maximum penalty that the Banking Commission can impose is 5 million that is to say that the
one imposed on the Socit Gnrale is very severe. The decision of the Commission states
important deficiencies of internal control system were made. These deficiencies which exceed the
repetition of simple individual failures have facilitated the fraud and its grave financial consequences.
These deficiencies continued over a long period, the year 2007, and the internal controls were
unable to reveal them and also to correct them. The Commission questioned " the follow-up and the
control of first level " clarifying that the detailed and daily follow-up of Jrome Kerviel's activity " was
not ensured " as well as the permanent controls exercised by the other services of the bank " which
were insufficiently made aware of the problems of frauds and diversion ". According to the
Commission, the variances which appeared repeatedly in 2007 did not arouse in depth
investigations, while the explanations given by Jrome Kerviel contained abnormalities and
deficiencies.

The Commission highlighted the grave failings of the banks computer system of security, in
particular, at the level of the system of information. The banking Commission judged that the fact
that these gaps were not known by the management, which could not remedy it, cannot be invoked
by the SG to exempt itself from its responsibility towards the banking regulations. The bank broke
several essential provisions of the banking regulations.

If this fraud had occurred in the United States the deterrent for an institution in a similar situation
would have probably been the class action litigation. The link between the class action and the
regulatory sanction exists. In the United States, because of the exposure to litigation, most
regulatory sanctions are agreed upon without admission of culpability and therefore liability. In
France, the settlement of regulatory actions does not exist at the present time.

Several shareholders of the bank filed a complaint with the French financial markets regulator after it
appears that a member of Socit Gnrale board sold shares worth 86 million on January 9,
2008. The investigations are ongoing.