A CRITICAL ANALYSIS OF INTERNAL CONTROL IN BANK TRADING

INFORMATION SYSTEMS IN RELATION TO BOURDIEUS CONCEPT OF

HABITUS

C. Richard Baker
School of Business
Adelphi University
Garden City, New York 11501 USA
Telephone: 1-516-877-4628
E-mail: Baker3@Adelphi.edu

A CRITICAL ANALYSIS OF INTERNAL CONTROL IN BANK TRADING

INFORMATION SYSTEMS IN RELATION TO BOURDIEUS CONCEPT OF
HABITUS
Abstract
The purpose of this paper is to develop a critical analysis of breakdowns in internal control over
bank trading information systems through an examination of a fraud perpetuated by a mid-level
derivatives trader at the large French bank, Socit Gnrale, at the beginning of 2008. The
theoretical framework for the paper is based on Bourdieus concept of Habitus. The paper
explores two research hypotheses regarding breakdowns in internal control over bank trading
information systems. The first hypothesis is that cultural differences among countries may lead
to a breakdown in controls over trading information systems. The second hypotheses is that
there may be a sort of willful blindness in which bank management turns a blind eye to risky
trading practices even when there are adequate controls in place to provide early warning signals
about the risky practices. Ultimately, we place greater credence on the second hypothesis
focusing on the possibility that bank management turns a blind eye to risky trading practices, as
long as these practices lead to profits, but that bank management will quickly take action when
such practices lead to losses, as was the case in the Kerviel fraud.

A CRITICAL ANALYSIS OF INTERNAL CONTROL IN BANK TRADING

INFORMATION SYSTEMS IN RELATION TO BOURDIEUS CONCEPT OF
HABITUS

1. INTRODUCTION
In January 2008, Socit Gnrale, the third largest bank in France, disclosed that Jrme
Kerviel, a mid-level derivatives trader, had lost 4.9 billion (US $7.2 billion), by making
unauthorized trades that were apparently not detected, as least initially, by the controls over the
banks trading information systems. The disclosure of these unauthorized trades revealed a
major breakdown in the control over trading information systems in one of the worlds largest
banks (Gauthier-Villars et al., 2008a). The purpose of this paper is to examine breakdowns in
controls over bank trading information systems through a case study of the fraud perpetuated by
Jrme Kerviel. The paper explores two research hypotheses concerning the breakdown of
controls in bank trading information systems. The first hypothesis is that there may be cultural
differences among countries which lead to breakdowns in controls over bank trading information
systems. The second hypothesis is that bank management may engage in willful blindness or a
type of Nelsonian knowledge1 in which established controls over trading information systems may
be intentionally ignored as long as they result in trading profits, but which are strongly and even
retroactively enforced when a loss occurs (Abolafia, 1996).

Nelsonian knowledge refers to a story about the famous British Admiral Horatio Nelson, who early in his career at
the Battle of Cape St Vincent in 1797, disobeyed a signal that had been raised on the ship of his commander. Nelson
withdrew his own ship HMS Captain from the line, ultimately capturing two Spanish battleships. The folklore
surrounding the incident alleges that Nelson knowingly placed a telescope to his blind eye and said I see no ships
to help justify his willful disobedience of orders.

2. THE FRAUD AT SOCIT GNRALE

2.1 Background
Socit Gnrale was founded in 1864 during the reign of Napoleon III, the nephew of
Napoleon Bonaparte. The bank became an important source of capital for the Frances rapidly
growing economy during the final few decades of the nineteenth century. Just prior to World
War II, Socit Gnrale had 1,500 branches, including several branches in the United States and
other countries. Following World War II, the left leaning French government nationalized
Socit Gnrale. In 1987, the government returned the bank to the private sector and by the end
of the 20th century, Socit Gnrale had reestablished itself as one of the worlds largest and
most important financial institutions. By 2007, the bank operated in almost ninety countries, had
total assets of 1.1 trillion Euros, and had more than 130,000 employees worldwide (Socit
Gnrale, 2008).

In the global banking industry, Socit Gnrale and several other large French banks
were known for developing a wide range of exotic financial instruments and derivatives. The
bank was one of the first to trade equity derivatives, which allow investors to bet on future
movements in stocks or markets.

Because of their leadership role in the development of

financial derivatives, French banks have control of about one-third of the global market for
derivative securities, a market that is measured in terms of hundreds of trillions of dollars. These
same banks have also become well known for their sophisticated trading information systems
which are necessary to maintain control over financial derivatives operations (Socit Gnrale,

2008). Socit Gnrales 2007 annual report indicated that nearly 3,000 employees were
assigned to control and manage the risks of the banks around-the-clock and around-the-globe
market trading activities. The most important of these activities were housed in the banks equity
derivatives division, which was the its most profitable operating unit. The majority of these
control specialists worked in Socit Gnrales back office.

The Chairman and Chief Executive Officer of Socit Gnrale in early 2008 was Daniel
Bouton a graduate of the cole Nationale d'Administration (ENA), one of the most prestigious of
the Grande coles in France. Bouton began his career with the French Ministry of Finance in
1973, and then he worked at the Finance ministry in various positions until 1991 when he was
appointed to be Chief Executive Officer of Socit Gnrale. He became Chairman and of the
bank in November 1997 (OECD, 2004b). Socit Gnrale has had a tradition of selecting its
officers from Frances most elite schools and universities. Many bankers and traders have had
doctorates in disciplines such as mathematics and statistics. They were known as quants
because of their mathematical trading skills, and they receive large salaries and bonuses. Many
of the banks top officers, such as Jean-Pierre Mustier, head of trading and investment banking,
were former students at the cole Polytechnique or the cole du Mines, which are two of the
most elite schools of higher education in France (Gauthier-Villars and Meichtry, 2008b).

Thus

it remains a largely un-answered question as to why such highly educated and talented people
apparently allowed a massive fraud to be perpetuated by a mid-level derivatives trader from a
working class background, who possessed no impressive educational background or credentials.

2.2 Anatomy of a Fraud2

Jrme Kerviel was born in 1977, and grew up in a working class family in the Brittany
region of France. His mother was a retired hairdresser and his late father, Louis, was a metal
worker, taking after Kerviels grandfather, who was a blacksmith. Kerviel obtained a Bachelor
degree in finance at the University of Nantes in 1999. He then completed a university diploma in
financial engineering and trading from a second tier business school affiliated with the
University of Lyon. He joined the compliance department of Socit Gnrale in the summer of
2000. In 2005 he transferred to the banks trading department in Paris where he became a junior
trader. The trading area dealt in program trading, exchange-traded funds, swaps, indexes and
quantitative trading. Kerviel earned a bonus of 60,000 on top of a 74,000 salary in 2006,
which was considered to be modest in terms of the salaries paid to other traders at Socit
Gnrale and in the financial markets generally. Kerviels role was to take positions that were
essentially bets on the way that large European stocks would move, particularly in the area of
futures contracts tied to a group of shares such as the Euro Stoxx 50. Kerviel also took positions
on Germanys DAX Index and Frances CAC-40 (Gauthier-Villars et al., 2008a).

Kerviels initial job at Socit Gnrale was in the operations area or back office. For
four years, he was an internal auditor ensuring that the banks traders were complying with the
banks internal control policies and procedures. His responsibilities included monitoring the
banks securities trades to identify unauthorized trades; for example, trades that exceeded the
monetary limits that had been established for individual traders. In 2004, Kerviel became a
2

This section is based on contemporary accounts written just after the revelation of the Kerviel fraud and appearing
for the most part in newspapers and blogs, including: Eyal (2008), Gatinois and Michel (2008), Gauthier-Villars et
al (2008), Hanes (2008), Jolly and Clark (2008), Kennedy (2008), Le Monde (2008), Peterson (2008), Routier
(2008), Schwartz and Benhold (2008).

securities trader. This new position provided him with an opportunity to make better use of his
educational background while at the same time allowing him to escape the back office (GauthierVillars et al., 2008a). (See diagram of red flags raised by the Kerviel fraud on the next page).

Unlike Kerviel, Socit Gnrales typical trader was a graduate of one of Frances elite
institutions of higher education. In Frances hierarchical society, ones educational background
and socio-economic status have a disproportionate influence on not only employment

opportunities but also the ability to progress within an organization once hired. Kerviel wanted
to prove that despite his modest credentials and working class background, he could compete
with his well-educated colleagues. After joining the trading division, Kerviel worked hard to
impress his superiors. He refused to take advantage of the several weeks of vacation time that he
was entitled to each year. By late 2007, Kerviels annual salary was approximately 100,000
Euros, which was small in comparison with his fellow traders.

When he left Socit Gnrales back office, Kerviel initially joined a relatively minor
department within the banks equity derivatives division. The mission of Kerviels new
department was to mitigate the risks that Socit Gnrale faced due to its high volume of
derivatives trading. Kerviels job involved making simple hedges on European stock-market
indices. Beginning in 2005, Kerviel began exceeding the maximum transaction size that he had
been assigned for individual securities trades as well as engaging in other unauthorized
transactions. Because he was very familiar with the internal controls over the bank trading
information systems, he was able to use a variety of means to circumvent those controls and
thereby conceal his unauthorized trades. These measures included creating false emails from
superiors authorizing illicit transactions, intercepting and voiding warning messages triggered by
unauthorized trades that he had made, and preparing false documents to corroborate such trades.

In late January 2008, the President of Socit Gnrale, Daniel Bouton, announced that
over a period of just three days the bank had suffered losses of more than six billion Euros on a
series of unauthorized securities trades made by Kerviel. According to Bouton, Kerviel had used
his knowledge of the banks internal controls to circumvent the internal control over the banks

trading information systems. Within two days of Boutons announcement, Kerviel was arrested
by the French police and he was subsequently convicted of fraud.

In the weeks following the disclosure of Kerviels fraud, the banks board of directors
established

Special

Committee

to

investigate

the

fraud.

The

board

retained

PricewaterhouseCoopers to assist this committee. The interim report of that committee revealed
that Kerviel was particularly adept at manufacturing explanations for apparent irregularities
discovered in his trading activities by back office personnel. Kerviels explanations included
jargon intended to confuse back office personnel and discourage them from pursuing issues
raised by red flags. In addition, the report suggested that back office personnel were intimidated
by Kerviel and his trading colleagues, which caused them to be reluctant to vigorously
investigate apparent trading irregularities.

The key element Kerviels fraud was a technique that has been used in other stock market
frauds, namely, recording fictitious transactions that appeared to be hedges or offsetting
transactions for unauthorized securities trades that he had placed. For example, if Kerviel
purchased a large block of securities, he would then record an offsetting but fictitious sale of
similar securities. When he shorted a large block of securities, the fictitious hedge transaction
that he recorded would be a long position in those securities or similar securities. These fictitious
hedge transactions made it appear as if Socit Gnrale faced only minimal losses on the large
securities positions being taken by Kerviel. The ease with which Kerviel could overcome
Socit Gnrales back office controls allowed him to take enormous bets on future moves that
he anticipated in major European stock market indices. At one point, he had outstanding

positions that exceeded the banks total shareholders equity of 33 billion Euros. In late 2007, he
had a one billion Euro gain on a series of unauthorized transactions. During the first few weeks
of January 2008, he made several large trades predicated on his belief that European stock
market indices would turn sharply higher by late January. Instead, those markets declined,
resulting in an unrealized loss of one billion Euros. On Friday, 18 January 2008, Kerviels open
positions were discovered and reported to Daniel Bouton. Bouton decided that the positions should
be closed in order to avoid potentially catastrophic losses for the bank. Over a three-day period,

January 21-23, the open positions on Kerviels unauthorized trades were closed. Unfortunately
for Socit Gnrale, European stock market prices fell sharply during that three-day period.
Those falling stock prices caused the loss on Kerviels January trades to reach six billion Euros,
or roughly twenty percent of the banks equity capital.

After closing Kerviels open positions, Socit Gnrale publicly reported the massive
loss and the fraudulent scheme that had produced it. That disclosure unsettled stock markets
worldwide, causing stock prices to fall around the globe. Kerviels fraudulent scheme caused the
international business press to raise a number of question about Societe Generales management
team and independent auditors. Among these questions was: how could Socit Gnrales
supposedly sophisticated internal control over bank trading information systems be overcome by
one trader. Likewise, how could the banks independent auditors fail to uncover what appeared
to be pervasive deficiencies in the internal control system. Prior to the Kerviel fraud, Socit
Gnrales control systems over trading were considered to be among the most effective among
major banks. Bank officials maintained that Kerviel overrode internal controls that would have
normally produced red flags. These overrides allowed Kerviel to violate credit and size controls

10

in a way such that the banks back office did not immediately notice the trades.

The

unauthorized trades were not detected because Kerviel had knowledge of the banks internal
control procedures and he knew when checks would be conducted. To hide the unauthorized
trades, when he took a position in one direction, he would enter a fictitious trade in the opposite
direction to mask the real one. It is also alleged that he used the computer log-in and password
controls of colleagues both in the trading unit and the information technology section. Eventually
the banks internal control procedures led to the discovery that a particular customer (Deutsche
Bank) had unusually large trading balances. When asked about the account balances, Deustsche
Bank denied knowing about the trades. This discovery eventually led to discovery of the Kerviel
fraud (Gauthier-Villars et al., 2008a).

3. CULTURAL DIFFERENCES AMONG COUNTRIES AND THE TRANSMISSION OF

CULTURAL CAPITAL
One possible difference between concepts of corporate governance and internal controls
in France versus the Anglo-Saxon countries is based on the idea of individual responsibility for
fraudulent or illegal acts in the Anglo-Saxon countries versus a greater sense of collective
responsibility in France. Shortly after the revelation of the fraud at Socit Gnrale, a survey of
readers of the French newspaper Le Monde indicated that a majority of the respondents did not
believe that it was possible that a single trader could commit a fraud like that which took place at
Socit Gnrale (Gatinois and Michel, 2008). In contrast, in most Anglo-Saxon countries, there
would generally be no fault ascribed to the system as a whole. Typically, at least prior to the
most recent financial crisis, it would be assumed that the illegal act or fraud was the fault of a
particular individual or several individuals acting in concert. However, after the enactment of

11

the Sarbanes Oxley Act in the United States, which followed a series of several prominent
frauds, there has been a greater recognition of the need for an effective system of internal control
over both financial reporting and operating activities of companies. However, the ways that the
systems of internal control have been implemented appear to be different in different countries.

The background and training of the officers of Socit Gnrale corresponds generally
with Bourdieus ideas about class distinctions (Bourdieu, 1977)(see the next section for an
explanation of Bourdieus ideas). Bourdieu maintained that class distinctions are created by the
aesthetic preferences that parents convey to their children. According to Bourdieu, class
distinctions are determined through a combination of social, economic, and cultural capital.
Society incorporates symbolic goods, especially those regarded as the attributes of excellence,
as weapons in the strategies of distinction (Bourdieu, 1977, p. 66).

Attributes that are

considered to be excellent or important are shaped by the interests of the dominant class.
Bourdieu emphasized the significance of cultural capital by arguing that differences in cultural
capital mark the differences between the classes (Bourdieu, 1977, p. 69). According this view,
it is difficult to understand how a trader without an educational or class background from a
Grande cole was able to perpetuate a massive fraud, apparently without the knowledge of his
superiors.

3.1 Bourdieus Concept of Cultural Capital

The well known French sociologist, Pierre Bourdieu, developed a highly influential body
of work which emphasized the importance of analyzing social practices when engaged in
sociological research. Bourdieu stressed the idea that mechanisms of social domination and

12

reproduction involve the interplay of social practices among various actors. Bourdieu opposed
Rational Choice Theory as being grounded in a misunderstanding about how social agents
operate. Social agents do not, according to Bourdieu, continuously calculate economic benefits
pursuant to explicit rational criteria. Rather, social agents operate according to an implicit
practical logic. Social agents act in accordance with their feel for the game (the feel being,
roughly, habitus, and the game being the field)(Bourdieu, 1977, 1991). Bourdieus work
focused on analyzing the mechanisms of reproduction of social practices and the creation of
social hierarchies. In contrast with Marxist analysis, Bourdieu criticized the primacy given to
economic factors, and emphasized the capacity of social actors to engage productively with their
cultural and symbolic systems. This engagement plays a central role in the reproduction of social
structures. What Bourdieu called symbolic violence (i.e. the capacity to obscure the existence of
social structures and to accept them as natural, and thus to ensure the legitimacy of existing
structures) plays an essential part in his sociological analysis (Bourdieu, 1977, 1991).

For Bourdieu, the social world is divided into fields (Bourdieu, 1977). Differentiation
between social activities leads to the constitution of various, relatively autonomous, social spaces
in which competition centers around particular varieties of capital. These fields are hierarchical
and the dynamics of a particular field arise out of the struggle of social actors who try to occupy
the dominant positions within the field. While Bourdieu shares certain beliefs regarding the role
of class conflict as derived from Marx, he diverges from analyses that situate social struggle only
within economic antagonisms between classes. The conflicts that take place in each social field
have specific characteristics arising from within the field which involve social relationships
which are not economic. Bourdieu developed a theory of action centered around the concept of

13

habitus. This theory seeks to show how social agents develop strategies which are adapted to
the needs of the social worlds they inhabit. These strategies are unconscious and act on the level
of instinct (Bourdieu and Passeron, 1990).

Bourdieu argued that different social classes teach different aesthetic preferences to their
children (Bourdieu, 1984; Bourdieu and Passeron, 1990). Class distinctions are therefore
determined through a combination of varying degrees of social, economic, and cultural capital.
Bourdieu emphasized the importance of cultural capital by stressing that differences in cultural
capital mark the differences between the classes (Bourdieu, 1977, 1984). Bourdieus argued
that the acquisition of cultural capital depends upon early, imperceptible learning, performed
within the family from the earliest days of life (Bourdieu, 1977, p. 66).

Bourdieu argued for the primacy of social origin and culture capital by claiming that
economic and social capital, although acquired cumulatively over time, depended upon cultural
capital. Bourdieu claimed that one has to take account of all the characteristics of social
condition which are associated from earliest childhood with possession of high or low income
and which tend to shape tastes adjusted to these conditions (p. 177). According to Bourdieu,
tastes in food, culture and presentation, are indicators of class, because trends in their
consumption seemingly correlate with an individuals fit in society (p. 184). Each portion of the
dominant class develops its own aesthetic criteria. A multitude of consumer interests based on
differing social positions necessitates that each fraction has its own artists and philosophers,
newspapers and critics, just as it has its hairdresser, interior decorator or tailor (pp. 231-32).

14

Bourdieu did not disregard the importance of economic capital. In fact, the production of
art and the ability to play a musical instrument presuppose not only dispositions associated with
long establishment in the world of art and culture but also economic meansand spare time (p.
75). However, regardless of ones ability to act upon ones preferences, Bourdieu specifies that
respondents are only required to express a status-induced familiarity with legitimateculture
(p. 63). Taste functions as a sort of social orientation, a sense of ones place, guiding the
occupants of a givensocial space towards the social positions adjusted to their properties, and
towards the practices or goods which befit the occupants of that position (p. 466). Thus,
different modes of acquisition yield differences in the nature of preferences (p. 65). These
cognitive structuresare internalized, embodied social structures, becoming a natural entity
to the individual (p. 468). Different tastes are thus seen as unnatural and rejected, resulting in
disgust provoked by horror or visceral intolerance of the tastes of others (p. 56).

Bourdieu believed that class distinctions and preferences are most marked in the
ordinary choices of everyday existence, such as furniture, clothing or cooking, which are
particularly revealing of deep-rooted and long-standing dispositions because, lying outside the
scope of the educational system, they have to be confronted, as it were, by naked taste (p. 77).
He believed that the strongest and most indelible mark of infant learning would probably be in
the tastes of food (p. 79). Bourdieu thinks that meals served on special occasions are an
interesting indicator of the mode of self-presentation adopted in showing off a life-style (in
which furniture also plays a part) (p. 79). In summary, likes and dislikes are indicative of class
distinctions.

15

Cultural capital derived from social origin affects preferences and surpasses both
educational and economic capital. At equivalent levels of educational capital, social origin
remains an influential factor in determining certain dispositions. How one describes ones social
environment relates closely to social origin because the instinctive narrative springs from early
stages of development. Also, across the divisions of labor economic constraints tend to relax
without any fundamental change in the pattern of spending (p. 185). This observation reinforces
the idea that social origin, more than economic capital, produces aesthetic preferences because
regardless of economic capability, consumption patterns remain stable.

3.2 The Transmission of Cultural Capital in the French Business World

The transmission of cultural capital in the French business world is based on a type of
meritocracy achieved through education pursued in a Grand cole or elite business school. If an
individual attends a Grande cole, they are usually assured of a position in government, banking
or business management. At least half of Frances 40 largest companies are headed by graduates
of the cole Polytechnique, which focuses on mathematics and engineering, or ENA, the
national school of administration. Interestingly, these two schools together produce only about
600 graduates a year, as compared with a graduating class of 1,700 at Harvard Business School.
Being admitted into Harvard, which accepts 9 percent of its applicants, is relatively easy
compared with getting into the cole Polytechnique. Out of 130,000 students who focus on
math and science in French high schools each year, roughly 15 percent do well enough on their
exams to qualify for the two- to three-year preparation course required by the elite universities.
Of those who make it through that, 5,000 apply to cole Polytechnique, and 400 are admitted.

16

Admission is based strictly on exam grades; there is no essay or interview. There are no legacy
admissions, sports scholarships or other shortcuts.
The French business establishment has been described as a close-knit brotherhood (it is
nearly all male) which shares school ties, board memberships and rituals like hunting and winetasting (Schwartz and Bennhold, 2008). Socit Gnrales chief executive, Daniel Bouton, was
not only a former student at the ENA; he was a member of the Club de Cent, which is one of the
most exclusive business clubs in France. The members of this club include leaders in business,
politics and law and its admission procedures are notable in that it is only when an existing
member dies that a space is made available for a new member. Officially, the club, founded
nearly 100 years ago, is devoted to gastronomy. When the members gather for lunch at Paris
restaurants, politics and business are not allowed. Jrme Kerviel was not a graduate of an elite
school or a member of any elite groups like the Club des Cent. The fact that Mr. Bouton and
other top managers of Socit Gnrale retained their positions for more than a year after the
fraud was revealed in January 2008, prompted criticisms that the French business elite has its
own rules (habitus) which act to protect the members of this field (Schwartz and Bennhold,
2008; Bourdieu and Passeron, 1990). Daniel Bouton would have most likely been quickly
relieved of his position or even pursued legally, if it were a British or American bank (Schwartz
and Bennhold, 2008).
3.3 Discussion of Cultural Differences in Internal Control
In 2001, the Enron and WorldCom scandals in the United States undermined the
confidence in the capital markets. The US Congress acted to restore confidence by passing the
Sarbanes-Oxley Act in the summer of 2002. This law forced companies with publicly traded

17

shares to spend large amounts of money to strengthen their financial reporting functions and
internal control systems.

Many countries subsequently enacted legislation which mimicked the reforms of the
Sarbanes-Oxley Act. The leaders of the French business community also commissioned a study
to determine what measures were necessary to strengthen financial reporting, internal controls,
and corporate governance among Frances large companies. Many of Frances most prominent
business leaders were asked to serve on the committee that would carry out this study. Daniel
Bouton was chosen to chair the committee, and the committees report came to be referred to as
the Bouton Report. According to the Bouton Report, many of the reforms included in the
Sarbanes-Oxley Act were unnecessary in France. It was argued that French companies are
generally better protected against the risks of excessive or misguided practices due to their well
established internal control procedures and practices.

This observation appears to be borne out by the fact that relatively fewer scandals arising
from so-called rogue traders have actually taken place in France, apart from the Kerviel case.
Most cases of rogue traders have actually occurred in Anglo-Saxon banks, including Britain and
the United States.

Consequently, the hypothesis that there are cultural differences among

countries which may lead to breakdowns in internal controls over bank trading information
systems, seems not be upheld. However, the idea of the difference in habitus as proposed by
Bourdieu may be of greater importance, in that because Kerviel came from a background which
did not fit the mold of the typical well-educated trader, he may have tried very hard to impress
his superiors by making large trading profits for the bank. Ultimately, this effort on Kerviels

18

part to impress his superiors, failed due to adverse market conditions which he was unable to
anticipate. However, if conditions had been different he might have continued to make large
profits from trading, as he did in late 2007 (Gauthier-Villars et al. 2008; Peterson, 2008).
3.4 Discussion of the Hypothesis of Willful Blindness
Kerviel has consistently claimed throughout all of the legal proceedings which have been
brought against him, that his superiors consciously overlooked his fraudulent activities because
he was making profits. Evidence of the possibility of willful blindness can be found in an
investigative report issued by PricewaterhouseCoopers in 2008, which revealed that Kerviels
activities had raised red flags at the derivatives exchange Eurex, the Frankfurt-based derivatives
exchange, and also led to 75 internal alerts at Socit Gnrale well before the bank discovered
the unauthorized trades in January 2008.

Kerviels immediate supervisor, Eric Cordelle,

admitted that he had been contacted by the banks compliance department in November 2007
following an inquiry from Eurex. Eurex was seeking explanations about Kerviel's trades. One
trade in particular, a purchase on 19 October 2007, reportedly involved 6,000 DAX index futures
contracts valued at over 1 billion euros. However, nothing was done of about this finding and
ultimately, Frances banking regulator fined the bank 4 million euros in July 2008 as a result of
this trade for having deficient internal controls over trading information systems (GauthierVillars, 2008b).
The PWC report also said that Kerviels supervisors had overlooked unusually high
levels of cash flow, accounting anomalies, high brokerage expenses, Kerviels failure to take a
vacation and a huge jump in his trading gains in 2007, when he reported gains of 25 million
euros stemming from proprietary trading. The report stated that only 3.1 million of trading

19

profits could be explained by legitimate operations. Kerviel was reported to have made 500,000
Euros through an unspecified one-way trade. The trade breached the banks risk limits.
Ultimately, Kerviels immediate supervisors were both fired shortly after the fraud was
announced. The Chairman of the bank, Daniel Bouton, was also force to resign in mid 2008. In
addition, Jean-Pierre Mustier, head of investment banking, was replaced with Michel Peretie, the
former chief executive of Bear Stearns in Europe. Frdric Oudea, who replaced Bouton in
2008, denied that there was a failure of internal controls. However, after the loss due to
Kerviels activities and writedowns from investments in U.S. subprime mortgage products, the
bank suffered a 63% decline in 2008 profits compared with a year earlier and it was vulnerable
to a hostile takeover bid from BNP Paribas. Socit Gnrale eventually managed to raise 5.5
billion euros through a rights issue and thereby avoided.
There are several factors which can lead to an environment where rogue trading develops,
like that present with the Kerviel fraud. Among these factors are: ambiguity and ambivalence.
Many white collar crimes receive an ambiguous amount of censure or punishment. In the case of
the rogue trader, Nick Leeson at Barings Bank in the 1990s, there was ambivalence by the
management of Barings towards Leesons trading activities because of the profits that he
generated for the bank (Nelken, 1994). This ambivalence towards the trader persisted because of
the ambiguity that permeates financial trading.

A certain level of ambiguity surrounds the

definition, causes, regulation and handling of white collar crime in general, and these factors can
be mutually reinforcing.

Misconduct can therefore become endemic to the business of bank

trading, and ambiguity helps to provide a cloaking device that protects the trading practices from
public scrutiny. Scandals in the bank trading sector are usually portrayed as being exceptional
rather than structural features of the industry. The bad apple metaphor is frequently applied, but

20

ultimately such metaphors serve as a sort of camouflage regarding white collar crime which
leads to high levels of ambiguity. Ambiguity is an inherent feature of banking regulation because
the application of many regulatory rules is judgmental. This makes rule ambiguity inevitable
because it is difficult to standardize regulation. This uncertainty is underlined in the bank trading
sector where innovation and outperformance highly prized.

In the securities industry in

particular, deviant behavior may not be viewed as criminal, but merely as a type of
disequilibrium in the market which requires efficiency adjustments. These systemic tendencies
put pressure on banking regulators to establish tolerable levels of deviance. However, the
problem is that they then must develop a definition of what actually constitutes misconduct (i.e.
what is a deviation from internal control).

Ambiguity also surrounds the notion of intentionality, and while some white collar
crimes are intentional it can be difficult to clearly distinguish between behaviors that are
intentionally deceptive from those involving incompetence. Consequently, it is in an
environment of ambiguity and ambivalence in which rogue trading can emerge. These problems
are compounded by the increasing disintermediation of financial markets and the practical
difficulties of identifying specific misconduct among the large number of transactions conducted
daily, allied with the international nature of much bank trading activities with its attendant
problems of jurisdiction. These factors inevitably limit the effectiveness and legitimacy of
internal control mechanisms and financial regulatory agencies. Moreover, the compliance and
regulatory bodies do not ordinarily have as secure a moral mandate as other enforcement
agencies such as the police or other institutional entities which might mitigate the potentially
harmful effects of rogue trading. The culture of the bank trading industry is a crucial factor

21

regarding these issues, because tolerance of business misconduct is a question of moral

legitimacy and many financial professionals rationalize these activities as being relatively rare.
Hence the second hypothesis explored in this paper, that there may have been willful blindness in
the case of the Kerviel fraud seems to be quite likely.
4. Conclusion
The purpose of this paper has been to examine breakdowns in controls over bank trading
information systems through a case study of the fraud perpetuated by a mid-level derivatives
trader at the large French bank, Socit Gnrale, at the beginning of 2008. The paper has
explored two research hypotheses regarding breakdowns in controls over bank trading
information systems. The first hypothesis is that cultural differences among countries may lead
to a breakdown in controls over bank trading information systems. This first hypothesis was
addressed through the theoretical model of habitus as put for the by Bourdieu. Ultimately, this
first hypothesis was not upheld, in that scandals from rogue trading in France have actually be
relatively rare.

The second hypotheses was that there may be a sort of willful blindness in which bank
management turns a blind eye to risky trading practices even when there are adequate controls in
place to provide early warning signals about the risky practices. The evidence seems to support
this second hypothesis in that the management of Socit Gnrale seems to have turned a blind
eye to the misconduct of Kerviel as long as he was making a profit for the bank, but that as soon
as his trading activities turned to losses, he was fired and charges with significant crimes, for
which he will ultimately spend many years in prison. Ultimately, therefore, we place greater
emphasis on the second hypothesis which deals with the possibility that bank management turns

22

a blind eye to risky trading practices, as long as these practices lead to profits, but that bank
management will quickly take action when such practices lead to losses, as was the case in the
Kerviel fraud.

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