A distracting end to SocGen’s scandal

No wonder there were gasps around the Palais de Justice in Paris when Jérôme Kerviel was sentenced on Tuesday. The court order that the ex-trader should not only go to jail but also pay €4.9bn damages to Société Générale, his former employer, gave the world’s biggest rogue trading scandal another entry in the record books.

Granting SocGen the full damages it sought – the amount of the losses caused by unwinding Mr Kerviel’s €50bn of uncovered positions in January 2008 – is a substantial victory for France’s second biggest bank. SocGen was not on trial here, but the ruling looks like a clear signal from the court that it is Mr Kerviel’s actions rather than the bank’s that are to blame for what happened. The prospect of shareholder legal action must now have receded.

The exemplary damages seem intended to deter anyone else tempted to conceal unauthorised trading positions. That is a worthwhile aim. It is absolutely right for the courts to show they take white-collar offences seriously. Coming on top of the three-year custodial sentence – itself a powerful disincentive – it sends a clear message that walking away from financial crime is no easy matter.

Yet the outcome remains unsatisfactory in other respects. First, imposing so extreme a penalty on an individual whose monthly salary is €2,300 looks disproportionate rather than effective. It will not make good the losses, and may even enable Mr Kerviel to play the victim rather than the villain of the piece. Second, it supports a narrative in which a lone rogue trader can be solely responsible for putting a bank in jeopardy. This is misleading.

Of course employees have a duty to behave honestly towards their employers, and carelessness by the employer does not obviate that obligation. But the classic case of the rogue trader is someone whose trading spirals out of control and who believes that continuing to trade will at some point provide a solution. Such potentially disastrous behaviour can happen only in a corporate culture that allows traders to cover their tracks even after they have bet the bank.

So the jaw-dropping damages award is distracting. The real lesson is that banks need to be stringent in their compliance regimes. SocGen admitted to weaknesses and is spending €130m strengthening its systems. If only the record €4m fine imposed by the French regulator after it found “serious failings” in SocGen’s internal controls had been as eye-catching as the penalties Mr Kerviel faces.