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Bank employee’s fraud scheme must be warning to U.S. banks

February 14, 2008
If the gigantic French bank at which Jerome Kerviel worked is correct, the 31-year-old securities trader was involved in a truly breathtaking scheme.

U.S. financial institutions and government regulators should be looking into it, in the hope of erecting safeguards to ensure that something similar does not happen in this country.

According to the French bank Societe Generale, Kerviel single-handedly set up a $73.5 billion investment portfolio without the institution’s knowledge.

Eventually, Societe Generale officials said the scheme had cost the bank $7.1 billion in losses — an astronomical amount at any financial institution.

Kerviel had been arrested after his scheme came to light, and French officials were continuing to investigate it.

They told reporters that it appeared that Kerviel — who did not benefit personally from his crimes — hacked into bank computers and used “several fraudulent methods” to cover up his trading.

Kerviel eventually was caught — but, again, not before the bank suffered $7.1 billion in losses. Its customers will pay for Societe Generale’s security failures.

Could it happen at a U.S. financial institution? Despite the many safeguards put in place by the financial services industry and government agencies, it is impossible to rule out such a fiasco.

The Societe Generale disaster, then, is a reminder to U.S. financial institutions and government regulators that as quickly as they erect barriers against such fraud, criminals are at work tunneling under them.

Kerviel’s success in doing so in France should prompt financial institutions and government here to take a comprehensive look at safeguards against fraud.


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