Bank’s faults reduce compensation from rogue trader
A bank with inadequate regulatory systems and controls has been compensated only for a fraction of the losses it incurred from the improper trading activities of a former employee. In what appears to be a significant change of approach to compensation claims where a victim is partially at fault, the French Supreme Court (Cour de cassation) ruled that the bank’s own fault had to be taken into account in order to determine its right to compensation. This resulted in the former employee being ordered to pay only EUR 1 million to his former bank, even though the bank had suffered a EUR 4.9 billion loss.1
A new decision has been handed down in the saga between Jérôme Kerviel and his former employer, the Societe Generale.
Mr Kerviel had taken unhedged positions for several billions of euros in high-risk markets, beyond the authorised limit. He had concealed these positions using false emails and fictitious operations. The bank suffered a loss of EUR 4.9 billion when, on discovering the fraud, it had to unlock these positions quickly to comply with banking regulations.
Mr Kerviel was prosecuted for breach of trust, fraudulent introduction of data in an automated processing system, forgery and use of its proceeds (abus de confiance, introduction frauduleuse de données dans un système de traitement automatisé, faux et usage de faux).
On 5 October 20102, the Paris Court of first instance (Tribunal de Grande Instance) found Mr Kerviel guilty of these aforementioned offences and sentenced him to five years imprisonment, including two years of a suspended sentence (deux ans avec sursis). It also prohibited him from exercising any activity related to financial markets. In addition, the Court ordered Mr Kerviel to compensate the bank for the entire loss it had suffered, namely EUR 4.9 billion. The Paris Court of Appeal upheld this decision both on its criminal and civil aspects.3
On appeal, the Cour de cassation, in its decision of 19 March 20144, while confirming Mr Kerviel’s conviction, quashed the civil aspects of the Court of Appeal’s judgment.
Victim’s fault
It is a long-held view of the French Civil Courts that a victim has a limited right to compensation if he/she has contributed to his/her damage.
However, when it came to deciding on compensation, the French Criminal Courts made a distinction: they followed the same rules as civil courts in case of offences against persons5 but refused to do so in instances of intentional offences against goods.6
In the latter case, the victim’s fault was not taken into account in the assessment of compensation.7 The rationale behind this decision was to prevent an offender from benefitting from his/her offence. The offender should be required to compensate the victim for the entire loss suffered: deciding otherwise would allow the offender to somehow benefit from his own wrongdoing.8
In the Kerviel case, the Court of Appeal had noted that the bank was partially at fault but, in accordance with the well-established Criminal Court’s case law for intentional offences against goods, the Court of Appeal did not take these faults into account when assessing the level of compensation that Mr Kerviel should have to pay. However, the Cour de cassation held that the bank’s faults should be taken into account in determining the amount of compensation due.
Following this decision, the Versailles Court of Appeal had to decide the amount owed by Mr Kerviel to Societe Generale. It largely based its decision on two previous reports that had noted the shortcomings in Societe Generale’s systems and controls – an internal report and a report of the Banking Commission, which was the competent regulatory authority at the time (it had sentenced Societe Generale to a EUR 4 million fine). In its decision, the Versailles Court of Appeal explained that “the multiple faults committed by the bank have had a major and determining role in the causal process at the origin of the very important loss suffered by it” and highlighted the deficiencies of the bank’s control systems.9 As a result, it ordered Mr Kerviel to pay EUR 1 million to the bank.
The impact of this decision
This ruling is significant because the French Supreme Court appears to have changed its position regarding compensation of the victim of an intentional offence against goods. In the Cour de cassation press release about the Kerviel case10 the Court states that “whatever the nature of the offence committed, criminal courts have to take into account the victim’s fault in the assessment of the amount of the compensation due to him/her by the accused when this fault has contributed to the damage”. The Criminal Division of the Cour de cassation has confirmed this change in two subsequent decisions.11
Thus, if a bank employee acts fraudulently and the bank suffers a loss, the bank may only have a limited right to compensation if the bank itself was partially at fault. As a result, the compensation can be significantly affected: in this case, the bank had lost EUR 4.9 billion but yet was awarded only EUR 1 million in compensation. In reality, Mr Kerviel was probably unable to pay either of these two amounts but the rule set out in this case could apply in other situations where ability to pay is not an issue and may significantly influence the compensation actually paid to a bank.
In addition, the ruling highlights how, even though the bank is the “victim” of an offence, its failings are highlighted in court, thus presenting a reputational risk.
Further information
This article is part of the European Finance Litigation Review, a quarterly publication on recent developments in the finance litigation and regulatory sector in key European jurisdictions. For more information please contact Amy Edwards amy.edwards@allenovery.com.
Footnotes
1. In such a criminal case, French Courts have to rule both on the criminal aspect (conviction of the accused) and the civil aspect (compensation of the victim) of the case. Yet, importantly, the French Supreme Court only rules on the law (not on the facts). Thus, it can overturn a Court of Appeal decision (completely or partially) and refer the case back to another Court of Appeal to decide on the facts.
2. Paris Court of first instance, 5 October 2010, n°0802492011.
3. Paris Court of Appeal, 24 October 2012, n°11/00404
4. Cour de cassation, Criminal Division, 19 March 2014, n°12-87.416.
5. For example, Cour de cassation, Chambre mixte, 28 January 1972, n°70-90.072: “when several faults have contributed to the occurrence of a damage resulting from an offence, their authors’ liability is incurred to an extent that the trial judges freely determine”.
6. “Offences against goods” are offences affecting property rights such as theft or fraud, whereas “offences against persons” are offences affecting other persons’ integrity, such as murder or rape.
7. Cour de cassation, Criminal Division, 27 March 1973, n°72-91.435.
8. For example, a burglar could keep a part of his theft because the victim had been negligent by letting his/her door open.
9. Versailles Court of Appeal, 23 September 2016, n°14/01570.
10. Press release: “The so-called Société Générale case” (19 March 2014).
11. Cour de cassation, Criminal Division, 25 June 2014, n°13-84.450; Cour de cassation, Criminal Division, 23 September 2014, n°13-83.357. Still, it must be noted that, in the second decision, the Court found that the bank was not at fault because it had no possibility to discover the fraud.
