CHAPTER23 Control Complacency Rogue Trading at Societe G.docx

CHAPTER23
Control Complacency
Rogue Trading at Societe Generale
STEVE LINDO
Principal, SRL Advisory Services
T his case study is divided into two parts. Part One seeks to
bring alive the circumstances leading up to the June 2010 public
trial involving Societe
Generale, the French banking group, and Jerome Kerviel, the
equities trader
whose positions caused Societe Generale to lose €4.9 billion
(U.S.$7.2 billion) in
January 2008. Part One concludes with an exercise in which the
reader is asked to
form his or her own opinion on who was to blame for the losses,
based on the infor-
mation contained in Part One. Part Two reveals the actual
outcome of the trial and
offers additional study materials for the reader. A Classroom
Guide, available sep-
arately to instructors wishing to facilitate interactive discussion
of the case study
in a classroom setting, identifies key risk management lessons
from the case study
and provides a session plan.
PART ONE: KERVIEL'S TRIAL-A MEDIA CIRCUS
On Tuesday, June 8, 2010, the criminal trial of 33-year-old

Jerome Kerviel began
in Paris's Palais de Justice. The charges against him were
forgery, abuse of trust,
and illegal use of computers, brought by the Paris public
prosecutor. Since the date
he was charged, January 28, 2008, Kerviel had been free on bail
and preparing his
defense.
Despite the long time lapse between the January 2008 events
that had caused
Societe Generale's losses and the commencement of the trial,
media attention was
at a fever pitch because of Kerviel's claims that he was a
scapegoat for high-risk
trading practices that were condoned by Societe Generale when
they were prof-
itable. Kerviel released an autobiographical book presenting his
version of the
events shortly before the trial.
Societe Generale, on the other hand, maintained from its earliest
public com-
munications the posture that Kerviel was a rogue trader who
single-handedly
developed methods to conduct unauthorized trading without
being detected and
used them to take massive trading positions that ultimately
backfired when mar-
kets turned against him. Societe Generale also sought to
mitigate the damage
to its reputation, due to the apparent facility with which Kerviel
conducted his
461

462 Implementing Enterprise Risk Management
Exhibit 23.1 Sample of News Headlines at the Time of Kerviel's
Trial
Headline
Rogue Trader Says Ex-Bosses Encouraged Him
French Trader Stays Silent as Trials Begin amid
Media Scrum
$62 Billion of Suspect Trades Exposed Lack of
Oversight
Kerviel Gets Day in Court, SocGen Too
Kerviel's Trial-The World of Finance Takes a
Hard Look at Itself (translation)
Rogue Trader Denounces "Banking Orgy" in Book
Source and Date
Reuters Gune 8, 2010)
The Guardian Gune 8, 2010)
CBC Gune 8, 2010)
Wall Street Journal Gune 7, 2010)
L'Express Gune 25, 2010)
Agence France Presse (May 4, 2010)
unauthorized trading, by publishing in May 2008, a detailed
examination of the

operational and managerial circumstances that had allowed
Kerviel's unautho-
rized trading to occur and the remedial actions it was taking to
prevent recur-
rence. Societe Generale stated from the outset its intention to
hold the individu-
als accountable whom it considered responsible for the
unauthorized trading, and
took the first step by filing a civil lawsuit against Kerviel on
January 24, 2008.
By June 2010, global financial markets were slowly recovering
from the 2008
crisis, but memories of Societe Generale's trading losses
remained especially vivid
because, at the time of their announcement in January 2008, the
incident seemed to
confirm investors' worst fears that banks in general were taking
massive amounts
of risk far beyond their traditional lines of business. Exhibit
23.1 shows selected
news headlines published at the time of Kerviel's trial, which
illustrate this loss of
public confidence in banks' risk management discipline.
Societe Generale-The Rise of Trading
In the years 1999 through 2006, Societe Generale's net income
increased 164 per-
cent, from €2 billion annually to €5.2 billion. Though its retail
and investment man-
agement businesses both prospered during this period, the main
driver of Societe
Generale's higher profitability was its Corporate and Investment
Banking (CIB)
division, whose net income increased 230 percent, from €708
million annually to

€2.3 billion. Within the CIB, the largest contributors to this
profit growth were fixed
income, foreign exchange (FX), equities, and commodities
trading, which together
accounted for 77 percent of CIB's net business revenues in
2006.
These results followed a strategic shift in business focus
engineered by Daniel
Bouton, who was appointed Societe Generale's CEO in 1993 and
became chair-
man and CEO in 1999. Bouton was not himself a trader or an
investment banker,
but a product of the French financial establishment. His early
career was spent in
government service with the French Finance Ministry. Like
most leading public
officials and executives of French financial institutions, he was
a graduate of the
Ecole Nationale d' Administration, France's elite college of
public administration.
Among France's top banks, Societe Generale was not alone in
pursuing growth
in the early 2000s through expansion of its trading and capital
markets business. Its
larger rival, BNP Paribas, adopted the same strategy, as did
major banks in other
CONTROL COMPLACENCY 463
countries such as the United Kingdom, Germany, Switzerland,
and the United
States. For many of these banks, this strategy backfired when

their fixed income
desks became deeply involved in structuring, selling, and
trading credit deriva-
tives and debt securities backed by U.S. residential mortgages,
and consequently
were unable to avoid massive write-downs and funding crises
when global credit
markets seized up in the second half of 2008. Though Societe
Generale suffered
some losses from its fixed income activities, the flaws in its
expansion into trading
truly came to light in the rogue equities trading incident that is
the subject of this
case study.
From Business to Retail to Investment Banking, from Private
to Public to State Ownership
Societe Generale was founded as a private bank by a group of
industrialists in 1864,
with the intention of providing finance for industry and
commerce. Its early years
were marked by a modest expansion of commercial lending
activity and bank-
ing locations, but little interest in deposit taking or retail
banking services. How-
ever, it demonstrated resilience in adverse times, such as
France's economic slump
in the 1880s. The tum of the century marked the beginning of
several new direc-
tions, as Societe Generale opened up its capital, actively sought
to capture deposits,
and launched itself into retail lending. It also established its
international presence,
principally in London and New York. After the upheavals of
World War I, Societe

Generale rapidly expanded its domestic branch network,
domestic lending, and
deposit taking, as well as its shareholder base, surpassing Credit
Lyonnais in the
mid-1920s to become France's leading bank.
The next phase in Societe Generale's development was dictated
by external
events as France passed through the 1930s economic downturn,
World War II, and
the postwar rebuilding effort. In 1945, France's three largest
commercial banks
were nationalized, putting Societe Generale into state ownership
for the next 42
years. While economic policy prerogatives constrained the
bank's domestic activi-
ties during the recovery years, the postwar revival of
international trade presented
new opportunities for overseas expansion. The next 30 years
were transformative
for the banking industry in general and for Societe Generale in
particular. ATMs
and credit cards reinvented the economics of retail banking, and
the breakdown of
the Chinese wall between investment and commercial banking
opened up securi-
ties underwriting and trading business to commercial banks.
Societe Generale suc-
cessfully took advantage of these changes and, in 1987, became
the first of France's
nationalized banks to be reprivatized.
During the 1990s, the bank's primary strategy was to expand its
share of the
domestic banking market, which was undergoing a phase of
consolidation. In 1997,

it met with initial success by acquiring Credit du Nord, but in
1999 suffered a big
disappointment when its friendly merger with Banque Paribas
was snatched away
by a hostile bid from Banque Nationale de Paris (BNP). As a
consequence, Societe
Generale refocused its growth strategy in the 2000s on three
pillars: international
retail banking, investment management, and capital markets.
The first pillar led to
a string of retail banking acquisitions in former Soviet Union
countries and Africa.
The second pillar resulted in the establishment of a global
platform of investor
services, including fund management, mutual funds, and
securities processing.
The third pillar was entrusted to its newly formed Corporate and
Investment Bank-
ing (CIB) division, intended to achieve prominence in the
markets for debt and
equity securities and derivatives.
CIB Gets a Boost from Trading Talent
In 1997, Societe Generale's CIB contributed just €151 million to
the group's net
income of €933 million, barely 16 percent. Then, in 1998 the
CIB recorded a loss
of €67 million as global markets suffered from the liquidity and
volatility back-
lash from Russia's debt default and the collapse of Long Term

Capital Manage-
ment (LTCM). In 1999, shortly after Daniel Bouton was elected
chairman of Societe
Generale in addition to his role as CEO, the CIB received a
boost from the pro-
motion of Jean-Pierre Mustier from head of international equity
options trading to
head of fixed income, FX, commodities, and derivatives. Over
the previous 10 years
since joining Societe Generale, Mustier, aged 38, had gained
high internal recog-
nition for building a profitable equity derivatives trading
business. CIB's earnings
over the next four years proved Mustier's mettle. In 1999, CIB's
net income jumped
to €708 million, 35 percent of Societe Generale's worldwide net
income, and over
the next three years CIB accounted for 36 percent of Societe
Generale's €6.2 bil-
lion cumulative net income, amounting to €2.3 billion. Mustier's
contribution to
this impressive performance earned him promotion to the
position of CIB's global
head and membership in Societe Generale's Executive
Committee.
Now all under Mustier's leadership, Societe Generale's CIB
began to deliver
ever-higher profits. In 2003, its net income rose to €1.1 billion,
which was 46 per-
cent of the group total, followed by €1.4 billion in 2004, €1.8
billion in 2005, and
€2.3 billion in 2006. Consistent with Mustier's demonstrated
abilities, CIB derived
a higher proportion of its revenues from trading than
previously. In 2000, trad-

ing had accounted for 23 percent of CIB revenues. During the
next six years, the
percentage averaged 30 percent. This performance was made
possible by a rapid
expansion in the number of traders CIB deployed and the
markets in which they
were active. However, as the investigation into Kerviel's
unauthorized trading
later revealed, this growth in activity was not accompanied by a
corresponding
reinforcement of CIB's infrastructure and controls.
Societe Generale Group Snapshot, December 2006
As 2006 turned into 2007, Societe Generale's business
performance appeared to
be riding the crest of a wave. Compared to 2005, net income for
2006 increased
18.6 percent to €5.2 billion, net banking income increased faster
than operating
expenses (16 percent versus 12 percent), and all business units
delivered higher
returns. In 2006, Societe Generale raised €2.4 billion of new
capital, and Stan-
dard & Poor's and Fitch raised their long-term debt ratings from
AA- to AA.
Over the preceding seven years, the number of Societe
Generale's retail customers
had increased 2.4 times, the assets under management by its
wealth management
business had increased 2.8 times, and the number of Societe
Generale employees
had increased 1.9 times worldwide. As of December 31, 2006,
Societe Generale's

SOCIETE GENERALE GROUP
Strong long-term development at the Group
Change
since end-1999 over 1 year
■ 22.5 million individual clients in
Retail Banking and Financial Services
, 10.5 million individual customers in France
, 12.0 million individual customers outside France**
■ Global Investment Management and Services
• AuM : EUR 422bn (+ EUR 110bn• + EUR 61bn•)
, Assets under custody: EUR 2,262bn
■ Corporate and Investment Banking
, No. 3 bank in the euro zone in terms of NB! : EUR 7.0bn in
2006
, One of the most profitable platforms:
ROE in excess of 30% for 4 years in a row
■ Around 120,000 staff** in 77 countries
, 51 % outside mainland France
• Around 15,000 staff recruited in 2006, incl. 5,350 in France
x2.4
X 1.3
X 9.1

x2.3
x3.8
X 1.6
X 1.9
Exhibit 23.2 Highlights of Societe Generale' s 2006
Performance
+17.2%
+4.0%
+31.7%
+9.3%
+59.5%
+22.8%
+15.9%
14/02/2007
* GIMS' AuM do not include EUR ll0bn of assets held by
customers of the French Networks
(investable assets exceeding EUR 150,000) or EUR 61bn of
assets managed by Lyxor AM,
whose results are consolidated in the Equity & Advisory
business line (EUR 61bn).
** Excluding Rosbank (Russia).
Source: Societe Generale.

total group assets amounted to €869 billion, its risk-weighted
assets amounted to
€285 billion, and its shareholders' equity amounted to €22.3
billion. Selected 2006
group performance highlights published in Societe Generale' s
annual shareholder
filing are shown in Exhibit 23.2.
Measured by 2006 net investment banking income, Societe
Generale's CIB
ranked #3 in the Euro-zone. Compared to 2005, its net income
increased by 27
percent to €2.3 billion, bolstered by trading revenue that
increased 37.5 percent
and worldwide front office head count, which increased by 490
( + 11 percent).
The CIB reported that its fixed income desk had been ranked #2
in corporate
eurobond issuance and its equity derivatives business named
global equity deriva-
tives house of the year by the International Financing Review.
Forecasting con-
tinued capital markets growth for 2007-2010, the CIB's
leadership saw no sub-
prime mortgage clouds on the horizon, while its 2006 provisions
for credit and
trading losses declined from their 2005 level. Selected 2006
CIB performance high-
lights published in Societe Generale's annual shareholder filing
are shown in
Exhibit 23.3.
For a more complete picture of Societe Generale's financial
profile, see its 2006
and 2007 income statements and balance sheets, presented later
in this chapter.

CORPORATE AND
INVESTMENT BANKING
Record results
■ Full year 2006
• GOI +31.2%* vs. 2005 with a
record 01 06 In EUR m
■ Fourth quarter 2006
• NBI: +26.8%* vs. 04 05
, Operating expenses: +21.7%*
vs. 0405
~ Very low C/I ratio: 55.1 % (vs.
57.6% in 04 05 excl. Cowen)
• Risk provisioning : another net
reversal
~ ROE after tax in excess
of 30% for 15th quarter
in a row: 46.2%
Net banking income
o.w. Equity & Advisory

o.w. Corp. Banking & Fixed Income
Operating expenses
Gross operating Income
Net allocation to provisions
Operating income
o.w. Equity & Advisory
o.w. Corp. Banking & Fixed Income
Net Income
ROE (after tax)
C/lratio
0406
+22.8% +25.5%* 1,688
t,31. 1% t,'.ll8%' 691
+16.1% +16.3%* 997
+17.2% +21.1%* (930)
758
-35.9% -35.4%. 16
n4
+52.8% +53.4%* 319

+9.0% +9.4%* 455
585
46.6%
55.1%
II W)~-i(I, f I FULL-YEAR AND FOURTH QUARTER 2006
RESULTS 14/02/2007
Exhibit 23.3 Highlights of CIB's 2006 Performance
* When adjusted for changes in Group structure and at constant
exchange rates.
Source: Societe Generale.
Jerome Kerviel, an Ambitious Outsider
Change
Q4/Q4
+26.8%.
+66.9%"
+8.7%*
+21.7%*
+33.7%"
~1.9% *
+27.1%'

x2.B*
-8.1%*
+19.1%"
m
Hidden behind the rosy outlook depicted in Societe Generale's
2006 financial
results were two fires smoldering in its CIB. One, exposure to
U.S. subprime
residential mortgage-backed securities (MBSs), was about to
spread like wild-
fire throughout the world's financial sector and engulf several
larger and more
ambitious banks than Societe Generale. The other, unauthorized
speculative
trading in European equity markets, was about to drive a huge
hole through
Societe Generale's reputation and profits at the hands of a single
trader, Jerome
Kerviel.
Kerviel's position in Societe Generale's CIB was unlikely to be
noticed. He was
one of seven traders in the Delta One Listed Products (OLP)
team, a part of the
Equity Finance section in the Equity Arbitrage group of the
CIB' s Global Equities &
Derivative
Solution

s (GEDS) business unit. At the end of 2006, the CIB had almost
5,000 front office personnel worldwide. GEDS itself had a head
count of over 1,300.
GEDS's proprietary trading activities comprised two groups-
volatility and arbi-
trage. As these names imply, GEDS's volatility traders were
charged with profiting
from directional trading positions, while the arbitrage traders
looked to profit from
long/ short combinations of offsetting positions by capturing
mispricing between
assets with similar market sensitivity. A common feature of
arbitrage trading is that
price differentials are typically very small, which requires large
notional amounts
of offsetting trades in order to capture meaningful profits.
Kerviel joined Societe Generale in August 2000 at age 23 to do
modeling
and process automation in CIB's middle office. In July 2002, he
was promoted

to trader assistant in CIB's Delta One Equity Derivatives
product team, respon-
sible for position valuations, price reserves, and risk analysis.
In March 2004,
he was appointed junior trader for the purpose of proprietary
arbitrage trading
in listed equity derivative products, including stock futures,
indexes, exchange-
traded funds (ETFs), and customized equity options such as
turbo warrants.
Though inconspicuous in Societe Generale's big picture,
Kerviel's career pro-
gression was quite an impressive achievement considering his
modest origins. He
grew up in a small town on the coast of Brittany, and obtained a
bachelor's degree
in finance in 1999 at the University of Nantes, a provincial
town in western France,
and a master's degree in financial markets organization and
control in 2000 at the
University of Lyon. Just as executive positions in France's
leading financial insti-
tutions were considered reserved for the alumni of elite colleges
such as the Ecole

Nationale d' Administration that Daniel Bouton had attended, so
high-earning
trading positions were also considered to be the preserve of
graduates from
France's top 23 business schools known as grandes ecoles, like
Jean-Pierre Mustier.
At First a Few Side Bets, Then Massive Speculation
Kerviel began experimenting with directional positions during
his first year as a
Delta One trader, creating small index futures and cash equity
positions that he
closed out before the end of each day. Although these trades
were unrelated to
Kerviel's arbitrage trading assignment, his supervising manager
monitored and
discussed them and allowed Kerviel to continue. In 2005,
Kerviel became bolder,
venturing into overnight trades. Initially, it seems that this
progression was also
tolerated because of the small amounts, but a €10 million
overnight cash equity
position drew his manager's concern in July 2005. Kerviel's next
move took him

over the line into fraudulent activity. In order to continue taking
overnight direc-
tional positions without arousing management concerns, he
began to create fic-
titious trades to offset them in DLP's books. This practice
continued in sporadic
fashion and in relatively small amounts through the end of
2006, peaking at €140
million in August, unnoticed by Kerviel' s manager or any of
DLP' s middle or back
office personnel. Meanwhile, in the other sector where trouble
was brewing for
Societe Generale, the first signs of distress were emerging in
the U.S. residential
mortgage finance market, as several subprime lenders started to
report high delin-
quencies and the U.S. home construction index tumbled.
In January 2007, Kerviel's manager left Societe Generale to take
another job.
For the next two months, Kerviel was effectively unsupervised.
Finally, in April
2007, a new manager was assigned to Kerviel's DLP team, but
this one had no
prior trading experience and received no orientation on his

critical duties. Mean-
while, in the European equity markets where Kerviel traded, the
accelerating U.S.
residential mortgage meltdown had not yet had any impact, but
the opportunity
to bet on a stock market correction proved irresistible. By
January 24, Kerviel's
directional short position in European equity index futures had
reached €850
million. During February, Kerviel increased his short position
to €2.6 billion
(U.S.$3.4 billion), and by the end of March it had risen to €5.5
billion. As news from
the U.S. residential mortgage market continued to deteriorate in
June and two Bear
Stearns collateralized debt obligation (CDO) funds collapsed,
Kerviel became even
bolder. By July 19, his short equity index position hit a peak of
€30 billion. So far
in 2007, Kerviel's accumulated mark-to-market loss was €2.2

billion, which was
hidden in the fictitious forwards that he entered into GEDS's
transaction system.
The forward counterparties Kerviel selected were either
"pending," Societe
Generale affiliates, or genuine but unsuspecting counterparties.
To avoid detec-
tion, Kerviel assigned deferred start dates to these forwards, for
which GEDS's
internal policies did not require formal counterparty
confirmations until the start
date, which he could manipulate by canceling and reentering
new fictitious trades.
The sheer volume of this trading was not completely unnoticed.
In fact, 41 queries
about transaction anomalies, accounting discrepancies, and
broker commissions
were raised by Societe Generale's back office during the period
from June 2006
to January 2008, but in each case they were satisfied by
Kerviel's trade amend-
ments, cancellations, and explanations. A summary of the
queries is shown in
Exhibit 23.4.

During the next four weeks, Kerviel's massive stock market bet
finally paid
off, as stocks around the world fell 8 percent. His short equity
futures posi-
tions erased their losses and began to show profits, allowing
Kerviel to gradu-
ally unwind them and accumulate €750 million in profits, which
he concealed in
fictitious counterparty trades and provisions. In November,
stocks began to
recover and Kerviel reversed his strategy by building a €30
billion portfolio of
unauthorized long equity futures positions matched by fictitious
offsetting trades,
which he liquidated in December with a further €750 million in
profits. Again,
the volume of Kerviel's activity attracted notice, this time in the
form of an alert
from Eurex about a large (€1.2 billion) purchase of equity index
futures by DLP in
November, which Kerviel's manager failed to follow up.
Exhibit 23.4 Internal Queries Raised about Kerviel's Fictitious
or Unauthorized Trades,

2006-2008
No.of
Dates Queries Focus of Query Source Department
June2006 1 Pricing discrepancies GEDS Operations
Dec. 2006 to June 2007 5 Earnings discrepancies CIB
Accounting
Jan. to Oct. 2007 9 Unidentified counterparty or GEDS
Operations
broker
Jan. to Nov. 2007 7 Unexplained balance sheet CIB Accounting
variations
Jan.2007toJan.2008 3 Trade entry errors GEDS Operations
Feb.2007 1 Trade settlement discrepancy GEDS Operations
March to Oct. 2007 12 P&L and provision GEDS Operations,
discrepancies, high notional CIB Accounting
amount of transactions
June to Aug. 2007 2 Reconciliation differences GEDS
Operations
Dec.2007 1 High broker commissions DLPtrading

management
Source: "Mission Green" report, General Inspection Services,
Societe Generale.
As 2007 came to a close on December 31, Kerviel was careful
to close out all
his unauthorized trades, ending with a €1.5 billion profit hidden
in fictitious for-
wards with Societe Generale affiliates. This was his prize for
having held unau-
thorized directional positions in European stock indexes, in a
volume equal to the
bank's entire capital, during two prolonged periods of the year.
Meanwhile, else-
where in Societe Generale, concerns were mounting that CIB's
exposure to U.S.
subprime mortgage-backed securities could prove very costly.
The first admission
of its troubles occurred in October 2007 when CIB's fixed

income, currencies, and
commodities business unit took a €230 million write-down in its
U.S. residential
mortgage-related assets. Even though European equity markets
ended the year
close to their levels before the July correction, Societe
Generale's year-end share
price was still down 37 percent from its May 2007 peak.
Discovery, Damage Control, and Retribution
As soon as 2008's equity markets opened, Kerviel resumed his
unauthorized direc-
tional trading, confident in his ability to keep calling market
movements correctly
and hiding his profits. Convinced that the European stock
markets would extend
their November rally into 2008, he began a series of
unauthorized equity index
futures purchases that reached a new peak of €49 billion on
January 18, offset-
ting these positions with fictitious trades as before. However,
unconnected to this
even bolder move, his strategy was about to unravel because of
an administrative,

not operational, slip. In the first days of 2008, Kerviel changed
the counterparty of
the fictitious trades concealing his €1.5 billion 2007 profits
from a Societe Generale
affiliate to an unsuspecting third-party counterparty. During
2007, he had made
this kind of change many times without tripping any alarms. On
this occasion,
however, the counterparty he selected did not have a collateral
agreement in place
with Societe Generale, which triggered a massive overage in the
counterparty's
credit value at risk (CVaR) limit.
Caught by surprise when queried by Societe Generale's group
risk manage-
ment department, which was responsible for monitoring
counterparty exposures,
Kerviel decided to cancel the fictitious trades and create a
provision in order to
keep his 2007 profits out of sight. Without any signs of concern
over this incident,
Kerviel calculated an amount for the provision that would leave
€15 million of
his undisclosed profits to be accounted for in DLP's 2007

yearbook-end trading
results and assure him of a high ranking among DLP's traders.
Seemingly in the
clear again, Kerviel did not know that a second trip wire was
about to end his long
and eventful trading journey. The query that unraveled his
strategy did not come
from risk management or operations, but from financial
reporting.
January 15 marked the first consolidation of Societe Generale's
2007 year-
end financial reporting, which included regulatory capital. It
also coincided with
another slump in global equity prices, triggered by fears that
U.S. and international
banks were more exposed to subprime mortgage losses than
previously disclosed.
As Societe Generale's preliminary risk-weighted asset (RWA)
numbers began to
be checked, the massive counterparty exposure that had
triggered risk manage-
ment's CVaR inquiry showed up in the bank's RWA numbers.
When queried,
Kerviel explained that the trades had been canceled, but the

financial reporting
group was not satisfied with his explanation. A flurry of e-mails
and phone calls
took place over the next two days between financial reporting
and the DLP mid-
dle office and back office, during which Kerviel insisted that
the trades had been
canceled but gave no satisfactory explanation. Finally, a
meeting took place where
Kerviel discovered that the outsize RW A number was the result
of his fictitious
counterparty not having a collateral agreement in place; he
thereupon changed his
explanation, claiming that the wrong counterparty had been
entered for the for-
wards and identifying another counterparty as the correct one.
The meeting ended
with Kerviel promising to provide documentary evidence of the
replacement coun-
terparty' s agreement to the trades.

However, the financial reporting team were skeptical of
Kerviel's new expla-
nation and decided to escalate …
PATIENT FILE
69
PATIENT FILE
The Case: The case of physician do not heal thyself
The Question: Does the patient have a complex mood disorder,
a
personality disorder or both?
The Dilemma: How do you treat a complex and long-term
unstable
disorder of mood in a diffi cult patient?
Pretest Self Assessment Question (answer at the end of the
case)

Frequent mood swings are more a sign or symptom of a mood
disorder
than they are of a personality disorder
A. True
B. False
Patient Intake
• 60-year-old man
• Chief complaint is “being unstable”
• Patient estimates that he has spent about two thirds of the time
over
the past year being in a mixed dysphoric state and about one
third as
depressed, but waxing and waning every few days, or even
every few
hours
Psychiatric History: Childhood and Adolescence
• As a young child, had symptoms of generalized anxiety and
separation anxiety

• Also, as a child, remembers “emotional trauma” from mother,
herself
with recurrent episodes of either unipolar or bipolar depression
who
was often physically unavailable because of hospitalizations, or
emotionally distant when depressed at home
• Has had a lifetime of multiple turbulent interpersonal
relationships
since childhood, with family members, with friends and
especially
with women
• As an older child and adolescent, continued to have not only
subsyndromal generalized anxiety but developed at least
subsyndromal levels of OCD with ruminations, checking and
rigidity
• He was told these were good traits and would make him a
good
student, which he was, with good grades through high school
and
college, gaining admission to medical school

Psychiatric History: Adulthood
• Diagnosed as major depression for the fi rst time at age 23,
early in
medical school
– Was his worst depression so far, as other depressions
previously
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PATIENT FILE
70
characterized as unhappiness and transient depressed moods
of a few days duration and with more anxiety than depression,
improving without treatment
– Actively suicidal and overdosed on his medications at this

time but
recovered
– In retrospect, patient believes that he has long experienced
rejection sensititivity with up to 2 depressive episodes per year
since age 16 up to the present
• No clear history of any full syndromal manic or hypomanic
episodes
• Since age 23, however, has had many episodes lasting a week
or
more of irritability, infl ated self esteem, increased goal-
directed work
activity, decreased need for sleep, overtalkativeness, racing
thoughts,
psychomotor agitation and risky behavior; could also experience
euphoria or expansiveness to a signifi cant degree but only for 2
or 3
days at most and usually shorter
• He interpreted these as good traits, indicative of creative
persons, and
were the reason he was productive as well as creative

• In getting his history, it is not clear whether he has had an
irritable
dysphoric temperament since childhood, a superimposed
episodic
subsyndromal dysphoric mixed hypomania, or both
• First marriage ages 32–33
– Depressive episode and overdosed again when fi rst marriage
broke up
• Second marriage between 35 and 36
– Another depressive episode after breakup of this marriage
• Third marriage ages 46 to 58
– Another depressive episode after breakup of this marriage
Medication History
• Starting with his fi rst diagnosed episode of depression in
medical
school, treated off and on with TCAs and benzodiazepines,
starting
and stopping them over many years in relationship to his
symptoms

• First received lithium at age 43, 17 years ago
• Unclear whether this was an augmentation strategy for
resistant
depression or for bipolar spectrum symptoms
• Was not that helpful according to the patient
• States he has had many, many medication trials since then
• Valproate (Depakote) not tolerated
• Clonazapam (Klonopin) helped sleep
• Oxcarbazapine (Trileptal) caused dysphoria and agitation
• Verapamil caused/worsened depression
• Risperidone (Risperdal) caused depression
• Fluoxetine (Prozac) caused rapid fl eeting relief of depression,
but also
insomnia and headache
distribution.

PATIENT FILE
71
• Other SSRIs caused activation and were not tolerated and
discontinued after a few doses
• Presents now only taking methylphenidate (Ritalin), which he
prescribes for himself as he does not think his physicians know
as
much about his case, or what he needs, as he does and they will
not
prescribe it for him
Social and Personal History
• Married and divorced 3 times, currently single
• No children
• Non smoker
• No drug abuse, rarely drinks
• Physician and successful businessman
Medical History
• Crohn’s disease

Family History
• Father: sleep disorder
• Mother: either bipolar or unipolar depression, unsure, but
successfully
treated with ECT
• Maternal uncle: depression
• Maternal aunt: depression
• Maternal grandmother: hospitalized for “manic depressive
disorder”
Current Medications
• Azothiaprine and Remicaid for Crohn’s
• Methylphenidate
Based on just what you have been told so far about this
patient’s history
what do you think is his diagnosis?
• Recurrent major depression with an anxious/dysphoric
temperament
• Bipolar II depression
• Bipolar II mixed episode
• Bipolar NOS

• Bipolar NOS superimposed upon a personality disorder
(narcissistic,
borderline, other)
• Primarily a cluster B personality disorder
(antisocial/histrionic/
narcissistic/borderline)
distribution.
PATIENT FILE
72
Attending Physician’s Mental Notes: Initial Psychiatric
Evaluation
• Here is a case that could be a complex combination of a mood

disorder plus a personality disorder in someone who has never
experienced mania and probably has never reached the threshold
of
experiencing unequivocal hypomania as defi ned by DSM IV or
ICD10
• It is very diffi cult to separate the mood disorder from the
personality
disorder in a one hour initial evaluation session, plus looking at
the
medical records
• A complete diagnosis will have to await spending more time
with the
patient, and if possible, having access to the input of other
observers
as well
• However, seems likely that there is more to this case than a
mood
disorder, and probably cluster B personality traits if not
personality
disorder is comorbid
How would you treat him?

• Continue his methylphenidate
• Discontinue his methylphenidate
• Start an antidepressant
• Restart lithium
• Start an anticonvulsant mood stabilizer
• Start an atypical antipsychotic
• Make sure he agrees to weekly insight oriented psychotherapy
• Consider psychoanalysis
Attending Physician’s Mental Notes: Initial Psychiatric
Evaluation, Continued
• Since the patient lives in another city, psychotherapy will
have to
be an option via another mental health professional, although
some
supervision of that plus advice on medications can be possible
as a
consultant
• The patient is open to pursuing psychotherapy as long as he
respects
the therapist

• Before recommending psychopharmacologic treatment, it
would be
good to review what we know from the available history about
his
response to medications already taken
• As shown from the history of this case, it can be impossible to
determine with great accuracy the effects of the medications by
taking a history. One should be skeptical of the information as
it
can be unreliably reported in records and by a patient because it
is
complex and the medication effects can be subtle
distribution.
PATIENT FILE
73

– How many medications were taken long enough to have had a
chance to work?
– Did some medications provoke mood instability while others
stabilized mood?
– If the person has a mood disorder with an underlying
personality disorder, will medications treat only the mood
disorder and expose the symptoms of the personality disorder,
or
– Will treating the mood disorder with medications allow the
patient to recompensate and thus have improvement not only in
mood but in personality disorder symptoms?
– These questions are better answered if you live the ups and
down along with the patient and experience the signs and
symptoms of such a patient in real time
– However, the real question is what can you do to help such a
patient and what are the realistic goals of treatment
– Finally, is treatment defi ned as medications, insight oriented
psychotherapy, or both?

• About the only thing solid here is that antidepressants seem to
be
provocative at times in terms of causing activation and thus
should
be given cautiously and only concomitantly with mood
stabilizing
medication
• Has taken numerous mood stabilizing medications that he
reported
cause depression, especially those that are used to treat mania
• He has a demanding job and is not willing to put up with much
sedation and will not accept weight gain
• It is possible that he is a bipolar spectrum patient with more
depression than mania and with more pure depressive states
alternating with mixed states of dysphoria/irritability
superimposed
upon depression, but not full syndrome mixed bipolar disorder
• Thus he has four needs”
– Treat from “below” (i.e., antidepressant)
– Stabilize from “below: (i.e. prevent cycling into depression)

– Treat from “above” (in his case, not to treat euphoric mania,
but
to treat irritability)
– Stabilize from “above” (i.e. prevent cycling into mixed states
of
dysphoric/irritable depression)
• Highly unlikely that this will be possible with a single agent
• For now, decided to avoid an antidepressant and to stop the
methylphenidate which may help depression but at the expense
of
destabilizing him and causing cycling into irritable mixed states
• For now, a low side effect mood stabilizing agent with
antidepressant
and maintenance potential (i.e., treating from below and
stabilizing
from below) such as lamotrigine seems to be a good bet

distribution.
PATIENT FILE
74
• After this is given, might consider adding lithium which he
has
tolerated in the past although unclear what therapeutic actions it
had for him; however, might treat and stabilize him from above
in
synergy with lamotrigine for a total therapeutic picture
Case Outcome: First Interim Followup, Week 12
• Patient fl ies back for a followup appointment 3 months later
• Has stopped methylphenidate and his psychiatrist in his home
city
started lamotrigine by slow upward titration, but a bit faster and
to a
higher dose than recommended and now taking 400 mg/day
• Mood stabilized but at a level of low grade consistent

depression with
decreased libido and sexual dysfunction
• Told to reduce lamotrigine to 200 mg and wait another month
or two
because it can take a while yet for lamotrigine’s antidepressant
effect
to kick in and its mood stabilizing effects may have already
started
Case Outcome: Second Interim Followup, Week 16
• Phone consultation
• Learned that the patient decided that lamotrigine was making
him
depressed and ruining his sex life, so discontinued it and
completely
relapsed in terms of depression
• Patient agrees to restart lithium after blood and urine tests
from his
physician
Case Outcome: Third, Fourth, and Fifth Interim Followup
Visits,

Weeks 20, 24 and 28
• Phone consultations
• Patient has normal labs and starts lithium at week 20 only has
a
blood level of 0.4, so told to increase dose
• At week 24 calls and states that higher doses give him
unacceptable
diarrhea and exacerbates his Crohn’s disease symptoms, so he is
back down to the low dose of lithium
• Also, restarted methylphenidate as needed for dysphoric mood
and
low energy
• Told to increase his lithium again, more slowly and not to
1800 mg/
day which caused diarrhea but only to 1500 mg a day or 1500
mg alternating with 1800 mg/day on alternate days and to stop
his
methylphenidate
• Also told to restart lamotrigine titrating up to only half his
previous

dose, namely 200 mg/day with the strategy that both drugs
together
would allow him to take each in lower tolerable doses for him,
yet
working together to add their therapeutic effects
distribution.
PATIENT FILE
75
Case Outcome: Sixth and Seventh Interim Followup Visits,
Weeks 32 and 36
• Brief phone consults with the patient and his psychiatrist on
the
phone together
• Getting regular psychotherapy “whatever”

• Monitored by his local psychiatrist monthly face to face
appointments
• Lithium level 0.7, occasional tremor and diarrhea but mostly
tolerable
• Mood is stable and overall “feels much better”
Case Outcome: Eighth Interim Followup, Week 40
• Emergency phone call
• Can’t get a hold of his psychiatrist where he lives
• Patient calls from a football stadium where his alma mater is
playing
in a big football game
• “I’m in trouble”
• Patient states he has been much troubled recently about always
feeling somewhat dysphoric, not really worse recently, but just
tired
of never being “well”
• Denies psychosocial stressors but feels desperate and suicidal
• Now at the football game, his thoughts are entirely about
suicide,
making his will, shooting others at the game, and killing

himself
• Fortunately, he states he neither has a gun with him nor does
he own
one
• Has weird reaction to the football game, because when his
team
scores, he is not euphoric but bursts into tears
• “help me”
What would you do now?
• Tell him to call his local psychiatrist
• Tell him to go to the emergency room
• Tell him to call the suicide hot line
• Tell him to settle down and that you will either call in a
prescription for
an antipsychotic or coordinate it with his local psychiatrist
• Tell the patient to fi nd another consultant

distribution.
PATIENT FILE
76
Case Outcome: Eighth Interim Followup, Week 40, Continued
• Told the patient to settle down and you would call his
psychiatrist to
meet him at his local emergency room which he agrees to do
after
the game ends
• Also patient states he feels much better now that he has
spoken on
the phone, and also now that his team is now winning
• Local psychiatrist sees him in the emergency room and starts
him on
aripiprazole 2.5 mg increasing if tolerated and not effective to
5.0 mg

1 to 3 days later, increasing to 7.5 mg if tolerated and not
effective 1
to 3 days later
Case Outcome: Ninth Interim Followup, Week 41
• One week later, phone consult with his psychiatrist on the line
• Patient states he contacted his local psychiatrist the same day
as
his phone call from the football stadium, and saw him a week
later
(which was yesterday)
• Got the prescription for aripiprazole and the next day
following the
phone call from the football stadium, left on a business trip
from
California to New York
• In New York, the aripiprazole was not effective at 2.5 mg, so
the next
day he became desperate and took 20 mg (not an overdose
attempt,
just to hurry up the therapeutic response)

• Also increased his lamotrigine on his own to 400 mg/day
• Lowered his lithium dose
• Flew back to California
• Had gait disturbance, tremor, word-fi nding problems, memory
loss,
yet still verbally provocative, desperate with recurring suicidal
and
homicidal ideation
• “I want to hang myself”
What would you do now?
• Start another antipsychotic
• Reinstate the original doses of lamotrigine and lithium
• Tell the patient and his local psychiatrist to fi nd another
consultant
Case Outcome: Ninth Interim Followup, Week 41, Continued
• Actually, this time, felt as though the patient was
manipulating and
scolded him with his psychiatrist on the line
• Told him that his psychiatrist is the treating physician, not the

consultant, and the consultant’s advice is to see his psychiatrist
and
to have future contacts with the consultant either by phone with
his
psychiatrist on the line, or face to face with his psychiatrist on
the line
distribution.
PATIENT FILE
77
• Told to decrease lamotrigine, increase lithium back to
previous levels
and to discontinuie aripiprazole
• Also advised starting ziprasidone 40 mg at night with food

Case Outcome: Tenth Interim Followup, Week 42
• Phone call with local treating psychiatrist and the patient one
week
later
• Patient was compliant with instructions
• Now states the ziprasidone “turned a switch”
• By this he means that suicidal ideation abated immediately,
depression no longer dysphoric but only low grade at worst
• Some fatigue/inertia
• Some tongue chewing suggesting a mild ziprasidone induced
EPS
• Dramatically better and very pleased
• Suggest to them that the consultant will now resign from the
case
• Did he live happily every after?
Case Outcome: Eleventh Interim Followup, Week 54
• About 3 months later, that is, 1 year after the initial
psychiatric
evaluation, got phone call from a new psychiatrist in the
patient’s

home city where the patient had transferred his care
• States that the patient decided to add fl uoxetine 10 mg,
stopped
lamotrigine, tried 160 mg of ziprasidone, now back to 40 mg
• The story goes on. . . .
Case Debrief
• This intelligent and manipulative patient with a genuine mood
disorder and a personality disorder is decidedly unstable, but
able to
function as a physician even though not able to maintain long-
term
interpersonal relationships
• Is not very compliant, often making therapeutic decisions on
his own
about how to treat his own case, especially when things are not
going
well
• It is diffi cult to determine whether his periods of mood
stability are

related to drug treatment or to the lack of psychosocial
stressors,
but there is the sense that medications are somewhat helpful for
the worst of his mood swings even though the medications are
not
helpful for his responses to psychosocial stressors
distribution.
PATIENT FILE
78
Take-Home Points
• Diffi cult patients are diffi cult
• To paraphrase Tolstoy in Anna Karenina
– “Happy families are all alike; every unhappy family is
unhappy in

its own way”
– One could say in cases like this one, “Stable patients are all
alike;
every unstable patient is unstable in his own way”
• Temperament and personality are factors in bipolar disorder
and might
even be part of bipolar disorder and are certainly part of the
barriers
to treatment effectiveness and to treatment
compliance/adherence
• A realistic goal in a case like this may be less of a roller
coaster,
but not full stabilization or true remission, yet well enough to
stay
employed, have relationships and not be desperate, suicidal or
homicidal
• Patients tend to hate depressed states more than mixed states
whereas those around patients tend to hate the patient’s mixed
irritable states more than their depressed states
Performance in Practice: Confessions of a

Psychopharmacologist
• What could have been done better here?
– Should the consultant have stayed engaged after the intial
consultation?
– The involvement of two psychiatrists allowed the patient the
opportunity for splitting and chaos
– Should psychotherapy have played a more prominent role
here?
• Possible action item for improvement in practice
– Make a more concerted effort to defi ne the role of a
consultant
versus a primary psychiatrist, who is the quarterback of the
team,
allowing the consultant to play a secondary role, and perhaps
in cases like this, try and ensure no direct contact with the
consultant without the primary psychiatrist also being present
– Set realistic goals for a patient like this and realize long term
stability may not be attainable
Tips and Pearls

• Lamotrigine, lithium and an atypical antipsychotic can be a
useful triple
combination for unstable cases of mood and personality disorder
and
combinations and doses can be found that are relatively
tolerable
• Stimulants have no role in a case like this
• Antidepressants can be destabilizing in a case like this
• Physicians can be especially diffi cult to treat when they are
patients
as they tend to interfere with their own treatments
distribution.
PATIENT FILE

79
Table 2: Personality disorders vs mood disorders
• Cluster A disorders (paranoid, schizoid personality disorders
or
schizotypal personality disorder)
– Tend to overlap with psychotic mood disorders
• Cluster B disorders (antisocial, borderline, histrionic and
narcissistic personality disorders)
– Can be easily confused for a bipolar spectrum disorder
– Especially if no overt manic episode or any unequivocal
hypomanic episode
– Nevertheless, symptoms can empirically improve when
treated
with agents for bipolar disorder
– A very confusing and chaotic condition can be the
combination
of a bipolar disorder with a cluster B personality disorder

• Cluster C disorders (avoidant, dependent and obsessive
compulsive personality disorders)
– Can be confused with anxiety disorders
– Often predate the emergence of a mood disorder and can
reappear when mood disorder symptoms under control
Table 1: General symptoms of a personality disorder
overlap with general symptoms of a mood disorder,
particularly a bipolar spectrum mood disorder
• Frequent mood swings
• Anger outbusts
• Stormy professional and personal relationships
• Social isolation
• Suspicion and mistrust of others
• Diffi culty making friends

• Need for instant gratifi cation
• Poor impulse control
• Frequent drug or alcohol abuse
Two-Minute Tute: A brief lesson and psychopharmacology
tutorial (tute) with relevant background material for this case
– Distinguishing personality disorders from mood disorders
distribution.
PATIENT FILE
80
Posttest Self Assessment Question: Answer
Frequent mood swings are more a sign or symptom of a mood
disorder

than they are of a personality disorder
A. True
B. False
Answer: False
Mood swings are prominent signs of both mood disorders and
personality disorders; not all mood swings are mood disorders
References
1. Stahl SM, Mood Disorders, in Stahl’s Essential
Psychopharmacology, 3rd edition, Cambridge University Press,
New
York, 2008, pp 453–510
2. Stahl SM, Antidepressants, in Stahl’s Essential
New
York, 2008, pp 511–666
3. Stahl SM, Mood Stabilizers, in Stahl’s Essential
New

York, 2008, pp 667–720
4. Stahl SM, Lamotrigine in Stahl’s Essential
Psychopharmacology The
Prescriber’s Guide, 3rd edition, Cambridge University Press,
New
York, 2009, pp 259–66
5. Stahl SM, Lithium, in Stahl’s Essential Psychopharmacology
The
Prescriber’s Guide, 3rd edition, Cambridge University Press,
New
York, 2009, pp 277–82
6. Stahl SM, Ziprasidone, in Stahl’s Essential
Psychopharmacology
The Prescriber’s Guide, 3rd edition, Cambridge University
Press,
New York, 2009, pp 589–94
7. Stahl SM, Aripiprazole, in Stahl’s Essential
Psychopharmacology
The Prescriber’s Guide, 3rd edition, Cambridge University
Press,
New York, 2009, pp 45–50

8. Schwartz TL and Stahl,SM, Ziprasidone in the treatment
of bipolar disorder, in Akiskal H and Tohen M, Bipolar
Psychopharmacotherapy: Caring for the Patient, 2nd edition,
Wiley
Press
distribution.

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