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1/28/2008
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Rogue Trader Stole Passwords To Dodge Risk Controls, French Bank Says

Jerome Kerviel hacked Societe Generale's IT systems to carry out the fake arbitrage scheme which lost his employer $7 billion.

Rogue trader Jerome Kerviel on his resume says he's a sailor and an accomplished judo instructor. He might also add the following: artful dodger.

Kerviel for months stole computer passwords and used a series of complex transactions to hide fraudulent activities that cost his employer, France's Societe Generale, $7 billion, according to a statement released by the bank.

Societe Generale typically makes profits in European futures markets through a technique known as arbitraging. The profits are usually small because the practice involves purchasing bundles of stocks that offset each other.

The upside is that arbitrage trading carries little risk. At least it's supposed to.

But Societe Generale now admits that Kerviel gamed its arbitraging systems by making futures purchases that were not offset by countervailing buys. Instead, he entered fictitious offset purchases into the bank's trading systems so that automated risk controls would not be activated.

Societe Generale, in a statement released Sunday, said Kerviel gained the knowledge necessary to subvert its control systems through five years of back office work. "Consequently, he had a very good understanding of all of Societe Generale's processing and control procedures," the bank said.

Kerviel also stole computer passwords that allowed him to enter his phony deals into various trading systems and to bypass security measures. "He misappropriated IT access controls belonging to operators," Societe Generale said.

The bank said Kerviel's undoing came on January 18, when officials became suspicious of a confirmation e-mail supposedly sent by one of his trading partners. The next day, Kerviel "acknowledges committing unauthorized acts and, in particular, creating fictitious operations."

The magnitude of Kerviel's fraud helped trigger a global market meltdown last week that, in part, forced the U.S. Federal Reserve to announce an emergency, 0.75% interest rate cut.

Kerviel is now in police custody in France and is facing charges of fraud, computer hacking and other crimes.

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