Wednesday, June 09, 2010

Those Traders, Partners in Fraud

Today's focus is on the first hearing held of Jerome Kerviel and others, proved guilty associates in fraud. Hunt by the press and walls of cameras before to answer the Court. Today is his second day of hearings. He attacks the double standard of banks with staff and with the justice. His boss says that his actions put him alone in front of the justice. Although the amount of his fraud is said that it had never had a parallel in the history of finance, Jerome Kerviel is not the only trader to have hit the headlines. Before him, Nick Leeson, Hamanaka Yasuo, Toshihide Iguchi, or Brian Hunter, to name only the best known, had lost millions, even billions, to the firm employing them. Small selection of some "mad trader". Although banking scandals on the planet are rampant since the establishment of the Bank of St George in Italy in 1407, various swindles have particularly rocked the financial world during the last 100 years. These included the famous BCCI scandal of 1991, which had sunk with liabilities of $10 billion.

Quotes and tales

Jerome Kerviel is a French trader charged with causing a 4.9 billion Euro loss to the Societe Generale Bank, which characterized the culprit as a rogue trader who had worked these trades alone without authorization. This figure was far higher than the bank’s total market capitalization then. Kerviel told investigators that his superiors knew of his trading activities. Kerviel had generated Euros 1.4 billion in hidden profits at the beginning of 2008. He was charged with breach of trust, falsifying documents and computer abuse after the Societe Generale had filed a suit against him on January 24, 2008. Kerviel was formally charged in January 2008 with abuse of confidence and illegal access to computers. He was released from custody a short time after. The charges filed carried a maximum three-year prison term. Earlier, the investigating judges had rejected prosecutor’s bid to charge Kerviel with the more serious crime of “attempted fraud” and refuse bail.

"In March 2009, Madoff pled guilty to 11 crimes and admitted to operating what has been called the largest investor fraud ever committed by an individual. Madoff was arrested in December 2008, on a tip-off from his sons."

... continuing ...

While Madoff said that his firm had liabilities amounting to $50 billion, state prosecutors had estimated the size of the fraud to be $64.8 billion, based on the amounts lying in the accounts of Madoff’s 4,800 clients. It is pertinent to note that the US Securities and Exchange Commission had come under fire for not investigating Madoff thoroughly, despite the fact that questions about his firm had been raised as early as 1999. Madoff’s business, in the process of liquidation, was one of the top market makers on Wall Street. It was estimated to be the sixth largest in this context.

The scheme had begun to unravel in December 2008 as the stock market continued to plunge. Subsequently, as the market downturn accelerated, investors tried to withdraw $7 billion from the firm and in the weeks prior to his arrest, Madoff had struggled to keep the scheme afloat. After the Madoff scandal, the second largest financial sector rip-off in history was the 2008 Societe Generale trading loss incident.

Charles Ponzi

The first-ever known financial sector scam was recorded in 1920, when an investor Charles Ponzi had "taken the Wall Street for a ride"


"Charles Ponzi was one of the biggest swindlers in US history. Orchestrated after the First World War, Ponzi’s fraud centred on international postal reply coupons, designed to allow mail to be sent internationally. By acquiring these coupons abroad and exchanging them for higher value postage stamps in the US (essentially a form of arbitrage), Ponzi was able to make around a 400 per cent profit. Legally, this scheme was not illegal as Ponzi had advertised for investors and paid handsome windfalls to a handful of them initially. People mortgaged their homes and poured their savings into the company, which was accumulating colossal liabilities. Existing investors were paid off with the money of new investors. At the peak of his scheme in 1920, Ponzi was making around $250,000 per day, an enormous sum for the time. He was indicted on 86 counts of mail fraud and was sentenced to five years in prison. In 1920 again, Alves dos Reis perpetrated one of the biggest frauds in history by forging documents to print around 100 million Portuguese escudos (around $150 trillion in today’s money) in official bank notes. While in jail for forging cheques, Alves hatched a plot to convince a London-based printing company to make 0.2 million notes bearing 500 Escudo denominations for use in Portuguese colonies such as Angola. He then laundered the money and profited from 25 per cent of the proceeds. He was jailed for 20 years in 1930."

Though bank frauds kept on surfacing since 1920, here follows a list of the most significant scams during the last 20 years:

In November 1989, a junk bond king Michael Milken at the Wall Street firm Messrs Drexel Burnham Lambert, was sentenced to 10 years in jail for securities fraud. Messrs Drexel filed for bankruptcy after being fined $650m in fines and restitution. Milken had headed the bond operations at this US investment bank.

In February 1995, London’s oldest merchant bank Barings, founded in 1762, had collapsed in 1995 after a “rogue trader” Nick Leeson had lost £827 million in speculative trading, mainly on the futures markets. Leeson was a derivatives trader in Singapore for the bank and was supposed to be arbitraging-profiting from the differences between markets by simultaneously buying on one and selling on another. Instead, it emerged, he had been betting on the future direction of the Japanese markets and his un-hedged losses snowballed as he tried to cover his bad gambles. He was sentenced to six and a half years in a Singapore prison.

In September 1995, Japan’s Daiwa Bank suffered a $1.1 billion loss from unauthorized bond trading by Toshihide Iguchi, one of its executives in the United States. He was imprisoned in 1996. In June 1996, Japan’s trading house Sumitomo Corporation suffered a $2.6 billion loss over 10 years from unauthorized copper trades, primarily by chief copper trader Yasuo Hamanaka. Sumitomo fired Hamanaka, once dubbed ‘Mr Five Per cent’ because his trading team was believed to control five per cent of the world’s copper trading. He was later jailed for eight years.

Sources: Les Echos, The Star, The Washington Post,
The International News
History of financial scandals
Reporter's Notes

✍✍✍ Rabid!

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