Lawsuit Risk Management

The story around Societe Generals ‘lost’ billions seemingly took another twist today with the news that Jerome Kerviel plans to launch court proceedings against his former employer to contest his sacking for gross misconduct.

According to his lawyers, the environment in which Mr Kerviel worked failed to enforce a limit on traders and encouraged them to take risks in the search for profits. They also claim that his superiors knew of the huge stakes he was trading and never tried to rein him in.

At the time the story unfolded many analysts were been quick to jump to the conclusion that back-logs in trade processing could have been a factor in the bank failing to spot Jerome Kerviel’s fictitious trades, while the media were even quicker to brand the back and middle office functions as ‘uninspiring’ and ‘like working in a mine’.

The basis for Mr Kerviels defence yet again underlines the fact that even though middle and back office activities have not historically shared the same profile as that of the front office the importance of these parts of the trade lifecycle should not be overlooked. If anything, Mr Kerviel’s alleged flouting of certain back office protocols and the Banks admission that his knowledge of the back office helped him circumvent a number of risk management processes, is testament to how important and necessary these operational functions are to the trading cycle.

The appropriate questions are still to be raised as to whether current back office infrastructures are sufficient and what the industry as a whole needs to do to make sure a loss of this magnitude doesn’t happen again – at the very least to protect banks from potential lawsuits resulting from disgruntled former employees!