The Business of

Ethics

EMBA 682
Business Ethics
Dr. Ira Bruce Sprotzer
Dated March 1, 2008

By:
Chris Cano
David Fortunati
Dave Pelosi
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Prashant Rajopadhye

Agenda

Review of the Socit Gnrale Case

Ethical Issues

Individual
Management
Corporate
Market

Conclusions
Recommendations
Sources

Recent and Continuing Erosion

of Ethical Standards in
Business

WorldCom
$11 Billion Accounting Fraud

Enron
Loss of thousands of jobs
$60 Billion in market value
$2 Billion in pension plans

Tyco International
CEO and CFO convicted of Grand Larceny
and Fraud, total losses of $550 Million.
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Erosion of Ethical Standards in

Securities Trading

Socit Gnrale (France)

Amaranth Hedge Fund (Can)
China Aviation Oil (Singapore)
Allfirst Financial Inc. (US)

Index Trading
Gas Market
Jet fuel
Currency Trading

Sumitomo Corp (Japan)

Copper Trading

Barings Bank (UK)

Derivatives-forex

Daiwa Bank (Japan)

US Treas bonds

Which brings us to this man..

Jerome Kerviel,
Masters in Finance
Employed by SocGen
since 2000
Two years in Middle
Office, Compliance
Dept.
Two years as Assistant
Trader
Currently Trader and
Market Maker
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How did he do it?

Job/Mission
Minimal risk
Balance position

Prior Knowledge
Circumvent
internal controls

Stock Market
Indices
Up or down

Made bets only

one way
Fictitious balance

Fraud
Diamond
Incentive

Rationalization

Opportunity

Capabilities
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Methods Used to Avoid Controls

Ensured that the characteristics of the fictitious

operations limited the chances of a control (eg. He
chose very specific operations with no cash
movements or margin call and which did not require
immediate confirmation)

Misappropriated the IT access codes belonging to

operators in order to cancel certain operations

Falsified documents allowing him to justify the entry

of fictitious operations

Ensured that the fictitious operations involved a

different financial instrument to the one he had just
cancelled, in order to increase his chances of not
being controlled
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Timeline

Unwinding
Complete
Board convenes
Unwinding Begins
Unfavorable market
conditions

Positions Identified
Inform Gov of
Banque de France
Postpone all
Abnormal Trading
communication

Detected

Wed
Jan 23
Mon
Jan 21

Sun
Jan 20
Fri
Jan 18

Public Disclosure
Thur
Jan 24

Key Stakeholders
Marketplace
Investors
Company
Management
Employees

Trader
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Ethical Considerations
Individual

What motivated Kerviel?

Inferiority Complex
Ego
Arrogance

Did Kerviel believe his actions were

wrong?
Were co-workers aware of his activities?
Is greed really good? (G.Gecko)

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Ethical Considerations Management

How could management not have

known what Kerviel was doing?
Did management look the other way
for the sake of profits?
What was managements responsibility
to review and understand Kerviels
trading activity?
How did his fake trades pass for real
ones?

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Ethical Considerations Corporate

Was there a culture of reckless risk

taking?

How could the compliance department

not have flagged Kerviels positions?

What internal controls were in place to

monitor and track trading activity (e.g.
Gross vs. Net positions)?

Should companies prohibit employees

from moving from the back office to front
office?
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Ethical Considerations - Market

What legal or ethical obligations does

a company have to disclose this type
of incident?

How can an investor be sure another

company doesnt have a similar risk?

Should legislation be enacted to

prevent a similar problem from
occurring in the future (e.g. Sarbanes)?

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Helpful Measures in preventing

fraud

Source: Assoc. of Certified Fraud Examiners Report to the Nation (Survey of 10,000 C

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Conclusions

There was definitely an ethical violation

Kerviel knew he was doing something unethical and/or illegal but
chose to do it anyway

Internal controls should have been stronger

The internal accounting controls should have prevented or
detected much earlier the fraudulent activities, (e.g. Net vs.
Gross positions)

The leaders of Societe Generale should have managed the

issue better
Societe General should have immediately informed investors of
the fraud/magnitude, etc.

Management and Colleagues were complicit

Managers were driven by profits and too willing to look the
other way. The most likely did not investigate Kerviels
positions.

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Recommendations

Individual
Anonymous hotline to encourage employees
to report rogue activities
Standards of Ethics and Compliance Training

Management
Compliance officers should look at the
entirety of an employee's trading activity, or
the person's gross positions, rather than only
the net positions
Enforce use of all vacation time
More rigorous forensic audit checks
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Recommendations (cont)

Corporate
Sr. Leadership needs to demonstrate ethical
behavior and set a tone of sound risk/reward
incentives
Systematic controls to monitor and track
trading activity

Market
Legislation should be enacted to prevent a
similar problem from occurring in the future
(corporate ethics not enough)
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Sources

Too Many Days on the Job, Socit Gnrale Scandal Shows

Forced Vacations May Help Catch Fraudsters
The Wall Street Journal, January 29, 2008; Page C14

Would a vacation for Kerviel have prevented SocGen's woes?

THE WALL STREET JOURNAL EUROPE, January 29, 2008

Bonus Nightmare Scares Socit Gnrale Traders

The Wall Street Journal, February 6, 2008

France Faults Socit Gnrale's Controls in Report

The Wall Street Journal, February 4, 2008 8:53 a.m.

U.S. Prosecutors Seek Tie In Socit Gnrale Case

The Wall Street Journal, February 6, 2008; Page C6

SEC Probes French Bank U.S. Investigation Of SocGen

Focuses On Stock Sales
The Wall Street Journal, February 5, 2008; Page A3

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Sources

Kerviel Felt Out of His League

The Wall Street Journal On-Line, January 31, 2008; Page C1

A Quest for Glory and a Bonus Ends in Disgrace

The New York Times, January 29, 2008

The Loss Where No One Looked How Low-Level Trader Cost

Socit Gnrale
The Wall Street Journal, January 28, 2008; Page C1

Socit Gnrale Blew Chances To Nab Trader Kerviel Said to

Fake Counterparts' Emails; Talk Rises of Takeover
The Wall Street Journal, January 29, 2008; Page A1

Hometown Boys: Tiny French Ville Drawn Into ScandalJrme

Kerviel Is Blamed In $7.2 Billion Trading Loss; Mystery
Surrounds Brother
The Wall Street Journal, January 28, 2008; Page A1

Banks' High-Tech Security Can't Keep Up With Traders

The Wall Street Journal, January 30, 2008; Page A14

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Sources

Tasks Mount for a Point ManExplaining Scandal Is Latest

Challenge On Mustier's Plate
The Wall Street Journal - January 29, 2008; Page A12

Will Bets Haunt Socit Gnrale? Write-Downs Expected As

Mortgage-Loan Risk May Be Underestimated
The Wall Street Journal - January 22, 2008; Page C2

France Presses Bank to Dump Besieged Chief Over Trading

The Wall Street Journal, January 30, 2008; Page A1

SECOND CONSULTATION BY THE SERVICES OF THE INTERNAL

MARKET DIRECTORATE-GENERAL OF THE EUROPEAN
COMMISSION

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BackUp

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Key Elements of Controls

Control
Environment

Risk
Assessment

Control
Activities

Information
&
Comm

Monitoring

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Key Elements of Controls

Control
Environment

Risk
Assessment

Control
Activities

Information
&
Comm

Monitoring

Code of Conduct/Ethics
Ethics Hotline
Hiring & Promotion
Audit Committee oversight
Investigative process
Remediation
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Key Elements of Controls

Control
Environment

Risk
Assessment

Control
Activities

Information
&
Comm

Monitoring

Systematic process
Level within Organization
Likelihood and significance - magnitude &
impact
Assessing & improving relevant internal
controls
Risk management team internal/external
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Key Elements of Controls

Control
Environment

Risk
Assessment

Control
Activities

Information
&

Monitoring

Communication

Linking controls to identified risks

Identify processes, controls & procedures

Got Ira..

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Key Elements of Controls

Control
Environment

Risk
Assessment

Control
Activities

Information
&

Monitoring

Communication

Information systems & technology

Knowledge Management
Training frequency & scope
Renewal

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Key Elements of Controls

Control
Environment

Risk
Assessment

Control
Activities

Information
&
Comm

Monitoring

Ongoing monitoring by management

Continual testing
Separate after the fact evaluations by
internal audit
Prepared response discipline, legal action
Refine policies & procedures
Got Ira.
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The Business of Ethics

Q&A

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