Reuters today reported that of French bank Societe Generale (SocGen) lost $7 billion due a “massive fraud” perpetrated by a “junior rogue trader.” All I know about this is what Reuters reported, but it sure sounds like SocGen is talking out of both sides of its mouth (note the reification of the entity; I teach BA 1 and 2, after all).
According to SocGen, this was a massive and “exceptional” fraud: "It was an extremely sophisticated fraud in the way it was concealed," said Societe Generale Chairman Daniel Bouton, who offered to resign but has been asked to stay on. However, the trader, who has been suspended pending dismissal, is reportedly “a man in his thirties who had worked for SocGen since 2002 and earned less than 100,000 euros a year.” SocGen states that the trader knew the bank's control systems because he had worked in the back office of SocGen’s trading rooms.
The Reuters article, written by Sudip Kar-Gupta, then states that SocGen said [the trader] had used a "scheme of elaborate fictitious transactions" to try to cover up his mistakes, but did not accuse him of profiting personally from his actions.
"He was not one of our stars," said a senior board member who declined to be named. It is hard to see how a low-level trader, who is apparently (or supposedly) not that good at his job, can have access to the amount of funding that leads to $7 billion in losses, much less be able to come up with a scheme of elaborate fictitious transactions without anyone else having a clue. I suppose the fact that the trader was able to pull off a $7 billion fraud without gaining any personal benefit supports SocGen's assertion that he was not, in fact, a star. But it seems to me there is either a seriously flawed oversight system at SocGen or someone (or multiple someones) noticed but decided not to act.
Yes, it is fraud, but it is not like these trades were completed without an electronic system. It is mind boggling (or mind bottling, if you prefer) that there was not some kind of trigger to know when the company’s money has been put at risk at this level. I can’t imagine any individual trader, even a “star,” could single handedly put that much capital in play.
If what SocGen says is true, then this starts to sounds to me an awful lot like Francis v. United Jersey Bank, 432 A.2d 814 (N.J. 1981) (holding a board member, an alcoholic widow, responsible for her sons’ “pillage” of funds from the company because she failed to even look at the financial statements). As the Francis court stated: "The sentinel asleep at his post contributes nothing to the enterprise he is charged to protect. . . . Detecting a misappropriation of funds would not have required special expertise or extraordinary diligence; a cursory reading of the financial statements would have revealed the pillage."
Okay, so this was likely a more sophisticated scheme, but I still find it hard to believe it would be that hard to notice a low-level trader (or anyone else for that matter) was trading on this scale. At least, that is, if anyone even bothered to look.