Will Jerome Kerviel's hefty sentence check rogue trading in France?

Rogue trader Jerome Kerviel, responsible for one of the biggest banking frauds ever, has been sentenced to at least three years in prison and ordered to pay back the nearly $7 billion that he lost for his bank, Sociéte Générale, as a result of bad trades.

The sentence, which many considered an extraordinarily harsh one, is intended as a stern message to French banks and traders that irresponsible and risky trading and financial irregularities won't be tolerated.

The decision comes as French mistrust in banking institutions is running high, and even though this ruling concerns only Mr. Kerviel, it's being seen as an indictment of a banking system that many blame for France's current financial crisis.

Breach of trust

A panel of three judges in Paris said Jerome Kerviel was guilty of breach of trust and other crimes when he made a series of unauthorized trades that eventually cost the prestigious French bank Société Générale more than 50 billion euros (more than $69 billion) put it on the brink of collapse.

The court rejected Mr. Kerviel’s argument that his superiors had tacitly encouraged him to make risky bets outside his limits as long as he was earning the bank money. It concluded that Kerviel was solely responsible for his actions.

“The lack of vigilance by the bank in monitoring the only existing limits acting as alert signs, hardly exempted Jerome Kerviel from his duty to inform his hierarchy of the reality of his excesses or to come back within the limits imposed,” said presiding judge Dominique Pauthe. “By his deliberate actions he put in peril the existence of the bank that employed 140 thousand people, of which he was a part, and whose future was mortgaged.”

Kerviel stood stone-faced with his arms crossed as Mr. Pauthe read the sentence. Shortly after the judges left the courtroom, Kerviel broke down in tears. His lawyer Olivier Metzner told reporters outside the court that Kerviel was “appalled” by the sentence and that he would appeal.

“This sentence is completely unreasonable,” he said. “Prison is unacceptable for a man who didn’t make a penny.”

French mistrust of banking system

Although the financial penalty is hefty, the length of the prison sentence is lenient by US standards. The maximum in France for this kind of crime is just five years. Stéphane Bonafassi, a lawyer and expert in white collar crime, said French judges have only gone that high when an accused person has made a large profit or where large-scale corruption is involved.

Mr. Bonafassi said the judges’ finding of nearly $7 billion in damages was the highest such order ever made against an individual in France. Société Générale lawyer Jean Veil admitted Kerviel would never be able to pay that amount, however the orders limits damage to the bank’s reputation by putting all the blame on Kerviel.

A product of a high-risk culture?

During his defense, Kerviel tried to portray himself as a fresh-faced young man from Brittany who was corrupted by a bank culture that encouraged its traders to take “crazy risks.” He called the system “a great banking orgy” and said his managers turned a blind eye to his activities.

Gael Giraud, an investment banking expert at the Paris School of Economics, says it would have been “impossible” for Kerviel to take such big risks without any of his superiors noticing. But he said that instead of winning peoples’ sympathies, Kerviel came to symbolize a general mistrust in France of the global banking system.

“A lot of people think we haven’t done the job to prevent another financial crisis so there’s a popular reaction that we need to do something,” says Mr. Giraud. “In some sense, that is what he is being punished for. The judgment is trying to say the game is over.”

Banking reforms

European banks have made some reforms since the global financial crisis to ensure greater bank stability. New rules agreed to last month force European banks to hold much more capital in order to prevent a repeat of the financial crisis.

Banks have also capped traders’ bonuses. French banks tightened internal controls to try to prevent rogue trading after Kerviel’s activities came to light. Société Générale has invested 130 million euros in new systems to try to reduce risk and adopted a new mantra “deliver growth with lower risk.”