Societe Generale : The Business of Ethics
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Societe Generale : The Business of Ethics

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This presentation was delivered at the Rider University Business Law and Business Ethics Class in March 2008.

This presentation was delivered at the Rider University Business Law and Business Ethics Class in March 2008.

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Societe Generale : The Business of Ethics Societe Generale : The Business of Ethics Presentation Transcript

    • The Business of Ethics
    EMBA 682 Business Ethics Dr. Ira Bruce Sprotzer Dated March 1, 2008 By: Chris Cano David Fortunati Dave Pelosi Prashant Rajopadhye
  • Agenda
    • Review of the Société Générale 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.
  • Erosion of Ethical Standards in Securities Trading Société Générale (France) Barings Bank (UK) Amaranth Hedge Fund (Can) China Aviation Oil (Singapore) Allfirst Financial Inc. (US) Sumitomo Corp (Japan) Daiwa Bank (Japan) US Treas bonds Currency Trading Gas Market Jet fuel Derivatives-forex Copper Trading Index Trading
  • Which brings us to this man….. Currently Trader and Market Maker Two years as Assistant Trader Two years in “Middle Office”, Compliance Dept. Employed by SocGen since 2000 Masters in Finance Jerome Kerviel,
  • How did he do it?
    • Made bets only one way
      • Fictitious balance
    • Stock Market Indices
      • Up or down
    • Prior Knowledge
      • Circumvent internal controls
    • Job/Mission
      • Minimal risk
      • Balance position
  • Fraud Diamond Incentive Opportunity Capabilities Rationalization
  • 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
  • Timeline Wed Jan 23
    • Unwinding Complete
      • Board convenes
    Mon Jan 21
    • Unwinding Begins
      • Unfavorable market conditions
    Sun Jan 20
    • Positions Identified
      • Inform Gov of Banque de France
      • Postpone all communication
    Fri Jan 18
    • Abnormal Trading Detected
    Thur Jan 24
    • Public Disclosure
  • Key Stakeholders Marketplace Investors Company Management Employees Trader
  • 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)
  • 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 management’s responsibility to review and understand Kerviel’s trading activity?
    • How did his “fake” trades pass for real ones?
  • Ethical Considerations - Corporate
    • Was there a culture of reckless risk taking?
    • How could the compliance department not have flagged Kerviel’s 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?
  • 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 doesn’t have a similar risk?
    • Should legislation be enacted to prevent a similar problem from occurring in the future (e.g. Sarbanes)?
  • Helpful Measures in preventing fraud… Source: Assoc. of Certified Fraud Examiners – Report to the Nation (Survey of 10,000 CFE’s)
  • 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 Kerviel’s positions.
  • 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
  • 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)
  • Sources
    • Too Many Days on the Job, Société Générale 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 Société Générale Traders
      • The Wall Street Journal, February 6, 2008
    • France Faults Société Générale's Controls in Report
      • The Wall Street Journal, February 4, 2008 8:53 a.m.
    • U.S. Prosecutors Seek Tie In Société Générale 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
  • 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 Société Générale
      • The Wall Street Journal, January 28, 2008; Page C1
    • Société Générale 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 ScandalJérôme 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
  • 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 Société Générale? 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
  •  
  •  
  •  
  • Back-Up
  • Key Elements of Controls Control Environment Risk Assessment Control Activities Information & Comm Monitoring
  • Key Elements of Controls
    • Code of Conduct/Ethics
    • Ethics Hotline
    • Hiring & Promotion
    • Audit Committee oversight
    • Investigative process
    • Remediation
    Control Environment Risk Assessment Control Activities Information & Comm Monitoring
  • Key Elements of Controls
    • Systematic process
    • Level within Organization
    • Likelihood and significance - magnitude & impact
    • Assessing & improving relevant internal controls
    • Risk management team – internal/external
    Control Environment Risk Assessment Control Activities Information & Comm Monitoring
  • Key Elements of Controls
    • Linking controls to identified risks
    • Identify processes, controls & procedures
    • Got Ira…..
    Control Environment Risk Assessment Control Activities Information & Communication Monitoring
  • Key Elements of Controls
    • Information systems & technology
    • Knowledge Management
    • Training – frequency & scope
    • Renewal
    Control Environment Risk Assessment Control Activities Information & Communication Monitoring
  • Key Elements of Controls
    • Ongoing monitoring by management
    • Continual testing
    • Separate “after the fact” evaluations by internal audit
    • Prepared response – discipline, legal action
    • Refine policies & procedures
    • Got Ira….
    Control Environment Risk Assessment Control Activities Information & Comm Monitoring
  •  
    • The Business of Ethics
    Q&A