JEROME KERVIEL: IS HE THE SOCGEN VILLAIN OR FALL GUY?

Jerome Kerviel is a name that will linger long in the mind of banking and fraud professionals around the world, making the exploits of Nick Leeson and Robert Maxwell look distinctly amateur!

His conviction in a Paris courtroom - for single-handedly bringing France's second largest bank to its knees through a series of Machiavellian insider frauds and scams - has closed the book on a chapter Société Générale would like us to quickly forget.

But the reality is that whatever has been said in judgment of Kerviel in the Paris courtroom during the last few weeks, if you're like me, you're left asking a very basic question: how could SocGen not see and know what was going on for so long?

After all, we are taking about numerous frauds undertaken by Kerviel over a four-year period. And it wasn't as though Kerviel didn't have a few question marks by his name; as the court heard throughout the trial, there were significant doubts about his honesty and probity for much of the time he worked on the trading floor!

So why is it that a junior member of the trading team was able to stack up unauthorised bets worth almost €70 billion that led to SocGen running up losses of €4.9 billion?

The reality is that almost as soon as Kerviel joined the bank's trading desk in the early part of 2005, he started taking large, unauthorised bets on the direction of the markets.

That year, the then 28-year-old hit the "jackpot" selling short shares in Allianz, the German insurer, shortly before terrorists bombed the London Underground on 7 July. With this trade - a big bet that the shares would fall - he claims to have earned €500,000 for SocGen.

After the Allianz trade, Kerviel admitted the "snowball" effect took hold of him.

Convinced he had discovered a new way to make the kind of profits earned by more senior traders who dealt in more risky and exotic products, he continued his unhedged trading - and managers, compliance officials and regulators were oblivious to what he was doing!

Using his knowledge of SocGen's back office and control systems, Kerviel entered false hedging contracts to make it appear as if he was taking minimal risks. By logging into the bank's computer system under different names, he then cancelled the fake contracts before they were settled, replacing them with new ones.

"He was always rolling one transaction into another. If he was ever caught, he just said it was a mistake and would start putting the trade somewhere else," Jean-Pierre Mustier, the head of SocGen's investment banking division, told the court.

But Kerviel's ability to avoid detection for years highlights the huge holes in SocGen's controls - holes no-one seemed bothered about filling. For example, the bank was not monitoring the gross trading positions he was taking but looking only at his net exposure, which he manipulated through fake hedging contracts. Kerviel's technique of regularly cancelling trades, or claiming to have made a mistake when challenged, should have alerted his superiors that something strange was going on. SocGen also admits it did not change its computer passwords regularly, as standard industry practice requires.

Most fundamentally, Kerviel's deception should have become obvious when SocGen reconciled its trading accounts with the bank's cash position. Yet the bank repeatedly failed to notice the discrepancy between Kerviel's actual position and the fake trades he entered into the system. At times the gap was several billion euros.

The shortfalls in controls may be explained by the explosive growth in SocGen's investment banking unit. In 1999 the division reported a net profit of €706m, while by 2006 that had grown to €2.34bn.

But financial success, and the pressure to keep performing, combined to produce an arrogant culture.

Maxine Legrand, a former trading floor inspector who left the bank in 2004, this week has complained that SocGen's risk controls were weak, traders were not punished for breaking rules and the inspection team was treated with disdain on the trading floor. SocGen dismisses his claims.

Kerviel's own testimony suggests his activities were founded on some fairly basic methods to fool his superiors. He created false e-mails by reproducing the format and header of e-mails he had received from clients, to rebuff any questions from the bank's internal controls team.

By July 2007- when the US subprime mortgage crisis was deepening - Kerviel's unauthorised short-selling strategy had racked up a $500m profit.

Apart from deficiencies in its own controls, SocGen missed external warning signs about Kerviel.

In March 2007, France's banking commission, after a series of inspections, twice wrote to SocGen's chairman about the need to reinforce controls at the bank, particularly in the equity derivatives team where Kerviel worked.

Then, on 7 November 2007, a surveillance officer at Eurex, the derivatives exchange, e-mailed SocGen questioning Kerviel's purchase of 1,700 Eurostoxx futures and 2,000 Dax futures.

François Martineau, SocGen's lawyer, said the enquiry was "of a technical nature and not related to the size of his position", which was not particularly large. Eurex was enquiring why Kerviel was using the London branch of Fimat, the bank's clearing-house, to handle his trades, instead of the Paris branch that was normally used.

Kerviel's explanation - using faked documents - satisfied SocGen that there was nothing amiss and, after another exchange with Eurex, the enquiry was dropped in early December.

Later that month, when SocGen's HR department alerted Kerviel's boss that he had only taken four days' holiday in eight months, he was ordered to take some leave. But Kerviel managed to maneouvre things to his advantage by telling the bank that December was the anniversary of his father's death and he did not want to be alone!

Yet another likely story - but one that bought Kerviel more time and ensured the hole SocGen was digging for itself got even bigger.

As we now know, Kerviel's wheeler dealing was eventually exposed in January 2008, after his bets were unraveled by a high-level internal team from SocGen.

I'm sorry, any way you look at the facts relating to this sorry case, you're left with more questions than answers.

I'd don't know what happened at SocGen during the four years between 2005 and 2008. Very few people do. But what experience tells me, is someone - or some people - are not saying everything they know.

And I do think SocGen have escaped very lightly. True, they may have lost a lot of money; but its reputation is still relatively intact.

Whether it should be, well that's another question I don't have an answer to at the present time!