The motivations for the behavior of rogue traders

Thesis

By

Zuzana Dančová

Submitted in Partial fulfillment

Of the Requirements for the degree of

Bachelor of Science

In

Business Administration

State University of New York

Empire State College

2020

Reader: Tanweer Ali

Statutory Declaration / Čestné prohlášení

I, Zuzana Dančová, declare that the paper entitled:

What are the motivations for the behavior of rogue traders?

was written by myself independently, using the sources and information listed in the list of references. I am aware that my work will be published in accordance with § 47b of Act No.

111/1998 Coll., On Higher Education Institutions, as amended, and in accordance with the valid publication guidelines for university graduate theses.

Prohlašuji, že jsem tuto práci vypracoval/a samostatně s použitím uvedené literatury a zdrojů informací. Jsem si vědom/a, že moje práce bude zveřejněna v souladu s § 47b zákona č.

111/1998 Sb., o vysokých školách ve znění pozdějších předpisů, a v souladu s platnou

Směrnicí o zveřejňování vysokoškolských závěrečných prací.

In Prague, 23.4.2020 Zuzana Dančová

Acknowledgement

I wish to thank all the people whose assistance was a milestone in the completion of this project. I wish to express my sincere appreciation to my mentor, Tanweer Ali, who convincingly guided and encouraged me through the process of completing this project. I also wish to acknowledge my family – my caring parents, great brothers, and my patient partner. They kept me going on and this work would not have been possible without their support. I would like to recognize the invaluable assistance that you all mentioned provided during my study.

Contents

I. What are the motivations for the behavior of rogue traders? ...... 6

A. Rogue traders can be a threat ...... 7 B. Is there a definition of a rogue ? ...... 8 C. Can theory predict rogue deviant behavior? ...... 11 D. Rogue behavior ...... 12 E. Does rogue trading appear only occasionally? ...... 15

II. Possible explanations/motives ...... 17

A. Social Behavior ...... 18 1. Age ...... 18 2. Isolation and attention seeking...... 19 3. Disappearance of self-control ...... 19 B. Control balance theory (CBT)...... 20

III. Overview of ’s cases ...... 24

A. Société Générale and Jérome Kerviel ...... 24 B. UBS and ...... 26 C. and Nicholas “Nick” Leeson...... 27

IV. Case analyses...... 31

A. Predisposition towards deviance ...... 32 B. Constraint ...... 33 C. Control ratio ...... 34 D. Opportunity...... 35 E. Self-control...... 36

V. Conclusion ...... 41

Bibliography ...... 45

Abstract

In the financial industry, there have been several situations of huge losses in banks and the responsible person was the one in charge of the money operations, thus rogue trading is a big topic. If we compare some of the scandals, some may seem quite similar. Usually, the people behind the money breaches are men, in their early thirties and with a successful trading pattern behind them. They do not need money and they do not have any psychological problems. Or at least, there was nothing found during investigations. This may lead to the conclusion, that there are visible some patterns that can trigger illegal rogue behavior. This project focuses on the question about what are the motivations for the behavior of rogue traders. The foundation of the theoretical background in this project is the control balance theory. Secondary sources were used to research three of the main rogue trader’s cases. Then the analyses follow from the perspective of the main variables of control balance theory – predisposition towards deviance, constraint, control ratio, opportunity, self- control. The results have shown that several warning signs appear and can be classified as a predisposition towards rogue behavior. Nevertheless, even though behavioral patterns were found, each rogue trader’s case has to be examined individually. Moreover, recommendations for financial institutions are also part of the outcomes of this project.

Key words: rogue, trader, behavior, Control Balance Theory, white-collar crime

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I. What are the motivations for the behavior of rogue traders?

An ordinary person who is living a normal life as a trader is one day accused of covering his large losses at the financial institution he works for with fake trades. Even though this may sound strange, there are many stories in history, as well as in recent years, that uncover tremendous losses caused by internal workers who took part in such operations for a certain period of time.

Back in 1995, the news was full of headlines informing the public that a young man in his twenties set up a secret to cover up the huge losses of a branch in Singapore. Nick

Leeson was responsible for large operations in this new branch of Barings Bank and suddenly faced an allegation of committing of USD 1.3 billion. Market traders around the world were shocked (Jennings, 2011).

Several years later, more cases of such losses appeared. In 2008, Jerome Kerviel faced the consequences of suspicious future trading, resulting in a loss of USD 6.7 billion in

Societe Generale Bank. In 2011, Kweku Adoboli was arrested for losing USD 2.3 billion at

UBS Corporation (Meek, 2013). How is it possible that such big positions are uncovered?

Who are these so-called rogue traders?

In my Senior Project Thesis, I will deal with the behavior of rogue traders and I will try to explain possible motives that lead to such behavior. Rogue trading is a popular topic since there have been several situations where banks faced large losses and the person responsible was the one who was responsible for the money operations. If we compare some of the scandals, some may seem quite similar. Usually, the person behind the money breaches are men in their early thirties that have a successful trading pattern. They are not in need of

7 money and they do not have any psychological problems. Or at least, there was nothing found during the investigations. This can lead to the premise that there are some visible patterns that can trigger illegal rogue behavior.

In this project, I focus on the motivational factors behind rogue traders’ behavior from an individual’s perspective. I mostly use different secondary sources to research the theoretical framework of this topic as well as several possible points of view on the possible explanations. The control balance theory is briefly applied at the beginning to explain the behavior and it is explained in individual section as it serves as the framework for future analysis. Later, several cases are described with a focus on the unethical methods and signs that could be seen as warning signs to prevent this behavior. Based on the theoretical background described in the first part, mostly done by applying the control balance theory, cases are analyzed with, again, help of secondary sources and the conclusion is drawn from this investigation.

A. Rogue traders can be a threat

There are sensible reasons for why operational managers fear rogue traders. They often operate alone and have an unrecognizable pattern of behavioral reactions. As a result, they are almost impossible to detect. In recent years, several cases of fraud that were caused by traders were brought to light. Operational managers often have to ask themselves what adds up to make a rogue trader who can cause a fraudulent scandal worth billions of dollars.

The word fraud is now related to the so-called fraud diamond. This involves having opportunity, motivation, rationalization, and the skills needed to actually commit fraud.

However, why would anyone put themselves at high risk for being caught? The prerequisites for rogue behavior are uncertain, too (Meek, 2013).

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Nevertheless, despite this rare but persistent operational risk in the financial world, these rogue traders have been analyzed very little in recent history. As Schenk (2017) describes, instead of scientific examination, operational managers have relied more on newspapers and other media sources for information. A proper examination would shed light on this anomaly in financial institutions (Schenk, 2017). Rogue trading seems to make very little sense as most of the people involved gain very little to nothing from their fraudulent behavior.

However, this is certainly not enough to compensate for all of the consequences they have to face for years to come. This raises a question: why do traders go rogue?

One can become a rogue trader for various reasons. A majority of them do not even believe that their behavior resulted in high losses and that they committed a crime. In retrospect, these people cannot recall exactly what happened and how they ended up with such big risk- taking decisions. However, for a person that is only a trader at a financial institution, it is a very big step away from their ordinary work to undergo such big decisions that result in tremendous losses (Meek, 2013). However, maybe the trading position is not so ordinary.

According to Shefrin (2000), traders may work for companies but their motivations exceed the firm’s risk. Many traders involve themselves in this risky business because of their “love of the game”. This means that if traders take higher risks, their heightened excitement drives them more than the “ordinary” nature of “ordinary” work (Shefrin, 2000). Moreover, traders are encouraged to take risks to be effective for their company. Thus, it is very difficult to be aware of how much risk is acceptable and where the limit is.

B. Is there a definition of a rogue trader?

Before exploring the exact details of the rogue world, one should know who a “rogue trader” is. The literature has different points of view on this topic. According to Paine (1994),

9 the rogue is an isolated and antisocial person who operates outside of social, as well as corporate, rules and norms. Usually, this person is driven by a vision of high personal gain.

The picture of an amoral figure rises in everyone's mind. However, is a person who is classified as a “rogue”, really an ethical egoist (Paine, 1994)?

Land, Loren, and Metelmann (2014) defines the rogue as a rather cultural phenomenon.

They prefer this point of view over a scientific explanation that the rogue is an outcome of the failure of the organizational culture or due to executives misbehaving towards an individual person. If an individual is marked as a rogue, this cultural phenomenon is spread as all mistakes the rogue trader made would be classified as systemic rogue practice (Land,

Loren, & Metelmann, 2014).

To understand the world from which a vast majority of rogues come from, the definition from Krawiec (2000) should also be mentioned. Firstly, he defines the traders as “people

“dying to make money”. That is all they care about. Most traders do not care about diplomacy that you see in the corporate environment” (Krawiec, 200, p. 1121). Thus, a rogue trader is an unethical professional who turns to unethical sales or purchases of different kinds of financial . Usually, these trades are done towards a specific financial institution's account (Krawiec, 2000).

As seen in previous definitions, it is not possible to precisely define the exact type of people that the term refers to. When brought down the Barings Bank, he unintentionally popularized the term “rogue trader, which refers to a trader who acts independently of others, typically recklessly, usually to the detriment of both the clients and the institution that employs him or her” (Gilligan, 2011, p. 335). Even though we cannot

10 define the exact type of person, if other examples are considered, a behavior pattern can be seen. The term rogue trader is usually used in retrospect because, at the time of occurrence, the rogue trading activities are almost indistinguishable from other traders, especially from those seen as “star” traders. Once this “star” trader becomes “the one responsible for huge losses”, the product of regulatory and institutional investigation is called rogue trader. This designation is mostly done to stabilize the system as the responsibility shifts from the institutional system onto an individual and away from the systemic risk that is present in trading in general (Land et al., 2014).

Nevertheless, Land et al. (2014) offer another point of view that states that rogue trading is common and it is an integral part of the working process of financial capitalism. A rogue trader is then part of the normal organizational system whose logic is based on growth and ever-increasing profitability. However, to maximize profit, traders have to constantly push the risk limits in order to satisfy the market. Business trading is a risk of its own and traders are stuck in some boundaries, often called the “trading limit” and the “loss limit”. These boundaries are often exceeded, usually with approval from a supervisor. Both limits are often mostly exceeded by start traders. The risk boundaries are examined and the trader finds themselves in the “danger zone”. Operating in this zone can potentially bring above-average industry profits as well as huge losses. From this point of view, a rogue trader is someone who pushes the limits with the approval of their supervisor and is not an anomaly in the system (Land et al., 2014).

To focus more on the behavioral side, the definition by Schenk (2017) should be mentioned.

She sees rogue traders as “charismatic heroes in an otherwise well-functioning system of markets. They are products of systemic biases that promote their actions” (Schenk, 2017, p.

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106). Internal supervisory and compliance mechanisms are the core of legal and economic perspectives on this phenomenon. Social and psychosocial literature focuses more on personal incentives to achieve high profits (Schenk, 2017).

All in all, a rogue trader is a person who partakes in unethical and unauthorized trading. This is an individual who found a loophole in the system and used the existing opportunity to his own advantage. Individual’s ego plays a big role. In most fraudulent cases, the central protagonist is similar to those involved in previous financial trading fraud cases as they are all an individual person who taking action to overthrow the system (Greener, 2006).

The most famous rogue trader defines himself as having “such a large and growing position that the entire trading floor was beginning to look to me as the barometer” (Leeson, 1996, p.

146). Leeson expected the internal team to notice the fraud but it never happened.

Could this trigger motivation when there was no control?

C. Can theory predict rogue deviant behavior?

This leads us to the control balance theory, which proposes that individuals who are bound by rules and are controlled are more likely to not get involved in deviant behavior.

Meanwhile, the individuals who are not controlled are more likely to become involved in deviant behavior. The author of the theory later refined his statement and agreed that a lack of control, the control deficit, may lead to repressive deviance types and that being overly controlling may be also the cause of more autonomous forms of deviance (Tittle, 2004).

The key hypothesis of this theory states that a predisposition towards deviance is done by an individual’s control balance ratio (Piquero & Hickman, 1999). According to this theory, it is not only individual factors that play a role in white-collar crime but also the organizational ones, which can be seen in previous investigations of rogue cases. The lack of risk control

12 mechanisms did not work well and this pushed the deviance (Leeson, 1996). Nevertheless, financial institutions have a culture of making money so even though the individuals are controlled, risk management does not pay so much attention to the practices once they are successful and this changes the control ratio again (Tittle, 2004). To fit this theory in the analyses of the cases, the theoretical framework will be defined later.

As shown in the examples above, there is a long line of so-called rogue traders that one would expect. They are these individual managers or traders who take their employers to red numbers and everything is done around the regulators and audit controls. However, from various analyses, it seems that systems tend to overlook the core element in every work – the human factor. The task is performed by a human and the executive observations are done by humans. Thus, even though internal may have strict rules, the human factor is still present (Jennings, 2008). To stay within the human factor, the rogue trader’s behavior is presented below to give insight into the actual performance of these people.

D. Rogue behavior

As we saw in section “Is there a definition of rogue trader”, rogue trading is usually defined as a certain type of operational failure that arises when a trader hides large losses from supervisors. This is done by illegal usage of risk assets. There are some characteristics by which rogue trading can be distinguished from other types of illegal trading and fraud. Firstly, the rogue trading losses are revealed only when the number of losses cannot be covered any longer. Moreover, the incentive behind this behavior is not always primarily to gain personal profits. Traders try to secure their reputation of being good traders. This raises questions about the norms of financial markets (Schenk, 2017).

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Gapper (2011) explains that, at first, rogue traders start with small losses. They hide them without much effort and continue their rogue practices. This often continues for a year or two before their losses are impossible to cover anymore. When traders start to think about cancelling the unauthorized practices, they are usually thrown to an increasing pattern of risk-taking and multiplying, which results in accumulating huge losses shortly before they are caught. Basically, rogue traders' behavior does not make sense in a financial language.

They are trained in setting the risk limits, rather than doubling the losses, and to pull away from any risky positions when they sense possible danger (Gapper, 2011).

However, biologically speaking, multiplying, and gambling make sense even though one would say it is not rational. Starving animals gamble to survive even though there is a risk of dying. It seems doubtful that rogue traders would behave according to Darwinian survival instincts since humans use their emotional, as well as instinctive, brain regions in order to face gambling. Nevertheless, when facing a life-threatening situation, rational behavior is usually suppressed and the instinctual reactions take the lead. From this perspective, an evolutionary one, financial markets are neither irrational nor efficient. They are simply adaptive (Gapper, 2011).

It is also important to consider the supervisors in the cases of rogue traders. It is almost impossible that no one would be aware of such big losses. It is likely that they are in a state of willful blindness. While the traders are profitable for the institution, no one would mark their behavior as rogue even though it is illegal. It is even possible that these traders are encouraged to continue their trading in order to exercise the risk limits, even when the internal trading limits are breached. However, as long as they are generating profit, their behavior is rewarded. This rogue logic defines that in most cases where traders examine

14 the edge of the risk, they return with profit. In these cases, they will be marked as “star” traders who generate large profits for a certain institution. It is only when the trades go really wrong when the term “rogue trader” is used to rationalize such behavior (Land et al., 2014).

The label of a “rogue trader” is a twofold process. On one side, with this label, the limit to exercise the known trading envelope is broken, but this limit is only visible after large profits turn into large losses. On the other side, once the “rogue” becomes the scapegoat, the stability of the financial system is reestablished. The responsibility for the failure is placed on one individual even though the trading is risky in its foundation. Consequently, the rogue is produced by the system. This system relies on risk-taking to maximize every possible profit and the successful trader, within safe risk limits, is distinguished from unethical behavior. With this in mind, the “rogue” drives profit and productivity as well as establishes boundaries across the acceptable risk. In such cases, the rogue trader is not the one who “went wrong”. They are a kind of internal capitalist embodiment explained in a logical manner. However, to not misunderstand, the rogue trader is not supposed to be seen as a victim of the systemic failure. Traders are aware of their actions is and are completely rational from the beginning since they are simultaneously part of a bigger system, the trade market. Their behavior is not purposely contradictory to the system limitations and boundaries (Land et al., 2014). So, what are their intentions for this rogue behavior?

Even though the rare behavior of rogue traders happens, as described above, there are also corporate circumstances that should be taken into consideration. This thesis focuses on the analysis of the rogue traders' minds. Nevertheless, before the analysis is done, the time frame and the actual frequency of rogue appearance must be clarified.

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E. Does rogue trading appear only occasionally?

Rogue trading is an integral problem in the banking system. It can be compared to the cycles of financial speculations and financial crashes that have occurred throughout history. Rogue traders are also present throughout history, and even in current days (Gapper, 2011).

Krawiec (2000) emphasizes that all people have probably already come across a publicized example of a rogue trader's scandal. However, these medialized incidents are not new, nor are they isolated events. There are records of an 1884 rogue trading event when two partners at Grant and Ward issued mortgages on risky securities. Since then, numerous rogue trading incidents have transpired, some without publicity, resulting in attention from regulatory pillars that are proposing continuous changes in firms internal compliance programs

(Krawiec, 2000).

When we examine all of the best-known cases of rogue traders, all of them resulted in large losses. However, it is statistically impossible, as well as improbable, that there is no gain among all rogue traders. There had to have been winning traders because it is highly improbable to have only one outcome. However, how these cases are not known? It is possible that successful rogue traders are tolerated and maybe even supported (Meek, 2013).

Nevertheless, from the operational managers' perspective, it seems that the only experience taken from various rogue traders is that these situations simply occur. Moreover, with more cases, it is harder to persuade shareholders in the market to trust the existing regulations.

One rogue scandal can happen but several of them in a row requires additional supervision and technological upgrades in internal levels of operation. It is true that the banking sphere is a risky and dangerous field; however, such big dark trading should have been detected.

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Even if someone acts in a criminal manner and one can do nothing to prevent or stop it, there should be some red flags when the losses are bigger and bigger from year to year (Jennings,

2011).

One thing is certain. Rogue traders have to occur if the world is willing to acknowledge how is it possible to undermine the capitalist system. As is seen in several case analyses, common traits exist in each rogue situation. The strong desire for success should be seen as the first thing since everyone wants to be successful. However, these traders are surrounded by other traders of the same age, with the same desires, and the possibility of becoming the best are big. There is a big difference between being a good trader and being a bad trader. They will strive to become successful even if they are not committed to the firm’s values. At a very young age and after several profitable trades, traders usually aim for higher risks. Their behavior becomes less prone to losses, which they try to cover up. Nevertheless, internal executive controllers should be aware of possible warning signs among their employees if they want to prevent such behavior in their corporations (Jennings, 2011).

At first sight, traders involved in rogue behavior have nothing in common. Rogue traders are from different backgrounds, different countries, have different mindsets, and work in a variety of different institutions under very various control systems. None of the rogue traders have had previous criminal records. Moreover, some of them were average traders and some of them were already successful traders within their field (Meek, 2013).

However, according to current research, there are several personal and behavioral traits that lie behind the rogue trader's performance. Below, several behavioral theories are presented to show why this strange behavior can possibly occur.

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II. Possible explanations/motives

At first glance, it is very hard to rationally justify the behavior that allows the rogue traders

to invent profits or hide losses. Nevertheless, after diving into research, judgement bias

could provide some insight into this phenomenon. The illogical growth of commitment

derives from the escalation theory, which states that groups of individuals are more prone

to a particular bias. Here the propensity to intensify commitment, especially when they face

a series of decisions, not one out-of-the-way decision. All people struggle on a daily basis

with the issue of when and if they should escalate their commitment and if the better

decision would not be to quit (Bazerman, 1998). For example, there is a dilemma after hiring

a new employee when he does not perform well. Are we going to fire him or are we going

to invest more time and resources to train him?

Many psychologists add to the escalatory behavior while identifying several causes of it,

including judgement bias or impression management. It is also important to take

the perception bias into consideration, which states that people would rather notice

information that would support their decision than the information and circumstances that

ignore it (Bazerman, 1998).

Krawiec (2000) also adds to the perception bias by emphasizing the importance of noticing

that most people, especially while under pressure, suffer from judgement bias. He highlights

that the likely response to these situations are strongly linked to the previously selected

actions in the escalation of commitment – the decision we make is made based on

the previous set of decisions in order to fulfill the first initial decision. As shown

the example above, the people who made the initial decision of hiring the new employee

would rather spend more resources on training them than quitting the decision and firing

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them as the escalation of commitment is very high. The judgement bias works in a similar

way. Any loss from any investment is likely to shape the judgement of future decisions

resulting in continuous loss. Evidence shows that people are loss averse, which means that

they are risk averse in positively framed situations but are risk seeking towards negatively

framed problems. This mean that individuals will invest more into hiding losses and

continue to take higher risk positions in order to prevent others from recognizing that any

loss has occurred. Here, it is seen that when facing a series of decisions that resulted into

losing the investment, people tend to not assess the next decision in a neutral way but rather

from a negative frame, resulting in dangerous risk seeking (Bazerman, 1998; Krawiec 2000).

A. Social Behavior

When we speak about decision making, the social circumstances have to be mention.

Decision making changes throughout one’s life as it is based on age, social status, and other circumstances that drive the possible choices.

1. Age

The known cases of rouge traders are typically males in their late twenties. According to

Jennings (2008), the average age of rogue traders is between 28 years and 35 years. Maybe

this is the age where frustration emerges. Most of them have had enough of insufficient

recognition and they are tired of only intangible success. They reached the point in their

lives when they would like to attain financial assets finally in their professional lives

(Jennings, 2008; Jennings, 2011). Meek (2013) also points out that if a company wants to

look for a potential future rogue trader, they have to focus on the male employees in their

late twenties and mid-thirties. Here, more psychological factors can be investigated, such as

whether gender and hormones play a role in the engagement in unethical behavior (Meek,

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2013). Nevertheless, this assumption would make for a deeper analysis, which is not the purpose of this project.

2. Isolation and attention seeking

A lack of self-confidence and engagement can trigger the deviant side of the person. Not being in the spotlight for most of the life makes it easier to incorporate into fraud or other financial unethical situation. Internal control disappears more easily when there is no one who would notice these “lonely” people. Furthermore, this occurs when the opportunity is spotted and the drive for recognition becomes the actual need, not the money itself

(Jennings, 2008).

3. Disappearance of self-control

However, the trigger for recognition can result into so-called “covered arrogance”. When an individual or a company has benefitted in some way, self-control vanishes as the desire for repeated success increases. An idea takes over that if they have done so well so far, they could continue. Once the urge for success is the primary driver, the resulting behavior is that nothing else matters. The disappearance of self-control is a result of a longer path of success and these individuals have no problem with engaging themselves in unordinary methods that are unethical, illegal, and even destructive to both themselves and the company, if they work for one. Moreover, when these methods are uncovered for months, the person spirals out of control when they think they are unstoppable. This may seem like an unscientific aspect, especially in the trading sphere, but rogue traders are not a scientifically researched phenomena (Jennings, 2008; Jennings, 2011).

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Self-control is an important variable when it comes to behavior so is should be extended and taken into consideration in a larger context. Below, the control balance theory engaged self- control as a crucial ration when explaining the deviant behavior, which is also linked to rogue traders.

B. Control balance theory (CBT)

The Control Balance Theory was designed by Tittle (1995), and it accounts for all forms of deviance. It states that the probability that deviance will occur is defined by the quantity of control to which one is subject is relative to the quantity of control one can exercise.

Conformity occurs when one's control ratio is balanced. Being under control is a continuous variable. It shows to which extent one is able to show their desires and to which extent these desires and abilities are limited by other people to help, regulate, or punish in order to meet social norms. If there is an imbalance in the balance ratio, a person leans towards a certain kind of deviance. On the deficit side of the control balance ratio, a person turns towards deviant acts, such as submission or defiance. On the surplus side of the control balance ratio, a person seeks more control and they turn towards deviant behavior, such as exploitation or decadence (Piquero & Hickman, 1999).

According to Tittle (1995), control is the total capability to limit the behavioral choices of others along with the time to resist limitations on one’s own behavioral choices. He understands deviant behavior as a maneuver that assists the individual in escaping from deficits. Motivation and a favorable alliance with the variables control ratio; however, in an imbalanced status, occasion, restriction, and self-discipline may lead to deviance (Tittle,

1995; Tittle, 2004).

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The main point for Tittle (1995; 2004) is that the control ratio is exercised in relation to the individual’s social structure. A predisposition towards deviant behavior is due to an imbalance in the control ratio but a balanced control ratio leads to a predisposition for non- deviant behavior. The previously mentioned imbalance in the control ratio can later result in a control surplus or a control deficit. The control ratio depends on the context of situation and is influenced by other individual elements – role/status, intelligence/interpersonal skills, family/relationships. These elements are static or dynamic depending on the foundation of the individual’s predisposition. Nevertheless, the basic needs – psychical or physical, also play a huge role in the predisposition towards deviant behavior as they add to the imbalance of the control ratio (Tittle, 1995).

However, it is not only predispositions that lie behind the deviant behavior but also the presence or absence of situational stimuli that triggers the motivation for deviant behavior. This stimulus is called provocation. These provocation limits can be from a wide range of different types, like challenges, displays of weakness, or verbal insults. To state provocation as a prerequisite, the individual engaged in the deviant behavior must be conscious of the control ratio and simultaneously conscious of the potential to change this ratio (Tittle, 1995; Tittle, 2004). Here, Tittle (1995; 2004) points to provocation being a kind of emotional or sensual stimuli that can lead to the already mentioned control imbalance, which increases the potential of an individual’s motivation towards deviant behavior.

Even though there could be great situational stimuli that triggers the rogue behavior, the individual cognitive and psychological processes should be taken into consideration.

Rafeld, Fritz-Morgenthal, and Posch (2017a) highlight that in order to discount the impact

22 of provocation in situational stimuli, cognitive factors have to be considered. Opportunity, constraint, and self-control are the main ones (Tittle, 1995; Rafeld et al., 2017a).

In terms of opportunity, the situation and other circumstances around it make the opportunity the key variable of CBT. The range may vary. Constraint is a serious variable and its potential varies from restraining responses to weighing situational risk. The control balance theory presumes that every acting individual is conscious of every potential consequence of each action he involves himself in. The constraint variable assumes the acting individual judiciously weights the potential gain as well as the potential loss from the deviant act.

Another important variable is self-control. Again, this assumes that individuals are not impulsive and are self-regulated, meaning they do not turn towards deviant behavior, even when factors like emotions come into the situation. However, not every individual can completely separate themselves from any desire for deviant behavior and behave in a controlled manner. This has consequences. The prevocational element triggers motivation and the cycle of control balance theory calls for an immediate reaction to the stimuli with prevented self-control or not (Tittle, 1995; Rafeld et al., 2017a).

Rafeld et al. (2017a) subsequently adds that a reasonable level of self-control is essential to apply the control balance theory to the actions of an individual with the probability of deviant behavior occurring. It is very difficult to predict; thus, the problem of detecting rogue traders arises once more (Rafeld et al., 2017a).

Since the control balance theory highlights the predispositions for deviant behavior, it will be applied to try to explain the special form of while-collar corporate crime in this paper.

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Later, three cases of rogue trader collapses will be analyzed from the perspective of this theory.

Piquero and Piquero (2006) conclude that control surpluses, not control deficits, relate more to manipulative acts in corporate crimes. They confirm the point from Tittle (1995) that control surpluses are linked to autonomous deviant behavior while the control deficits are rather linked to repressive forms of crime .

Nevertheless, Tittle (1995; 2004) highlights the fact that even though the control balance theory can be used to measure all deviant behavior, challenges in the exact measurements can occur. It is important to count on changing the variables individually based on life circumstances and according to the situation itself (Tittle, 1995; Tittle 2004).

As the theoretical framework of rogue traders is analyzed above, the three well known cases of such behavior are presented in detail below in order to apply the theories and to outline the possible patterns of choices of individuals incorporated in such occurrences.

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III. Overview of rogue trader’s cases

A. Société Générale and Jérome Kerviel

One of the banks in France with the longest history, Société Générale, made a huge announcement on 24th January 2008 that it was facing a loss of approximately 4.9bn EUR.

The fact that this loss was caused by fraudulent activities of only one trader made matters worse. He reduced the bank’s for 2007 and the bank lost even more on market capitalization during January 2008 due to large impact on their reputation. An explanatory note was published but due to large net income shortening – from 5.9bn EUR to 1bn EUR – the Minister of Economy, Finance, and Employment addressed a fraud report mentioning

Jérome Kerviel to the French Prime Minister (Canac & Dykman, 2011).

Early in the investigations, this young 31-year-old was defined as a rogue trader and it was claimed that he was executing his trades without the bank’s authorization during this time.

However, it is very hard to believe that not a single employee in the bank had noticed any suspicious actions that would break the global internal control system in Société Générale

(Land et al., 2014). Kerviel later argued that his trading performance was well-known around the firm. Moreover, the supervisors turned their backs on this practices because they supported any type of practice that resulted in income. Nevertheless, at that time, Kerviel became a rogue trader that was responsible for the biggest fraud in the history of rogue traders (Canac & Dykman, 2011).

Jérome Kerviel gained experience in various back office positions at the bank for more than eight years. This is when he got a great understanding of Société Générale’s processing moves and control procedures of employees as well as of market operations. After joining the front team of traders, he was responsible for arbitrage trading in order to compress

25 the delta risk that arises in European markets. While he was on this team, he managed huge unauthorized maneuvering positions on equities, over the counter options, future, and forwards. These trades were hidden under daily operations and potential risks were not counted into firms risks with potential losses. To hide any unauthorized positions, he created fictious transactions that had postponed start dates or he changed counterparties in the transaction. On 5th October 2010, Jérome Kerviel was found guilty and sentenced to five years along with full restitution of the 4.9bn EUR losses (Canac & Dykman, 2011).

After further investigations, several types of hidden transactions were found. False transactions were entered into the trading system in order to take their risk value into account in the calculations and their parameters were defined in a way that the fraudulent foundation of these positions were covered. All transactions consisted of two parameters – the value date was later than the transaction date along with the cancellation before this date; and small external companies or parties within Société Générale were used as counterparties. Moreover, false reverse transactions – purchases and sales – were made with the same quantities of the same underlying assets to conceal the released earnings without actually creating the direct position (Société Générale, 2008).

Even though this may sound bizarre, the transactions were never placed under further investigations even though there were some signs of unclear and not so ordinary circumstances. One of them was that irregularities were found due to the lack of a detailed analysis in monitoring flow and at the end of 2007. The excess cash flows were not reported. Moreover, Kerviel generated a total of 6.2m EUR in brokerage commissions by his unauthorized activities and he almost never took any vacation. Could this be because of

26 the fact that he did not want his fraudulent position to be discovered (Société Générale,

2008)?

B. UBS and Kweku Adoboli

No more than four year after Société Générale announced its fraudulent losses due to already known rogue phenomenon, UBS, an investment bank, reported similarly big losses of USD

2.3bn in September 2011. The case of 31-year-old Kweku Adoboli quickly became the main figure in the public eye and the term “rogue trader” filled the newspaper once more (Rafeld et al., 2017a).

Kweku Adoboli started his career as a trainee in UBS in 2003. In 2011, he accepted a senior trader role at the Exchange-Traded Fund Desk in UBS’s London office. The responsibility of this desk was to limit the delta limits. These limits were the maximum level of risk that the desk could enter. The only exception to overcome the level of risk was to authorize the position separately. Adoboli was described as a computer genius nobody could stop.

Similarly, Kerviel was seen as a genius, too (Canac & Dykman, 2011; Rafeld et al., 2017a).

In terms of modus operandi, this rogue trader used several practices. He operated with fictious one-sided internal future trades when trades were matched against a different counterparty so that this trade did not require higher confirmation. Trades with zero price and quantity were also established and used to book cash-settled and other trades along with the late booking of genuine external futures, which was used to misreport the risk exposure of the controlling desk. Moreover, Adoboli developed the so-called “umbrella” mechanism, a profit smoothing apparatus when he combined several of his methods to conceal the trade outcomes (Rafeld et al., 2017a).

27

Even though he tried to cover his trades, there were some warning signs that could alert supervisors. He received a verbal warning in from a supervisor because he failed to follow instructions when he was told to not take high risks. However, the net delta limits were breached several times in 2011 and on one occasion, when Adoboli made a profit of USD

6m, the supervisor even congratulated him. There were no clear policies at UBS on how far the responsibility for canceled, amended, or late booked trades go. Thus, alerts with excess of USD 0.5bn were approved and not furtherly investigated. Also, the trading mandate and risk limits were not officially documented and warnings for future trades were sent directly to traders, not to supervisors (Rafeld et al., 2017a).

Nevertheless, Kweku Adoboli was sentenced to prison for seven years in November 2012 and he was given no additional financial fine. He was found guilty of fraud by abusing his position during his role as senior trader and was released after half of the given sentence

(Rafeld et al., 2017a).

C. Barings Bank and Nicholas “Nick” Leeson

The most famous case of a rogue trader does not greatly differ from the previous ones.

A young and successful trader gained experience in Morgan Stanley Corporation while working with futures and options positions. Later, he joined Barings Banks in London to become a bookkeeper. Nick Leeson proved to be a reliable member of the office as he was recognized as a clever trader who could clean up any transaction with his knowledge of derivatives. He was sent to the Jakarta office to help with stock exchanges. Nevertheless,

Nick Leeson wanted more and changed positions to become a trader (Skyrm, 2014).

28

Later, when opening a new branch in Singapore, Leeson was identified as the ideal candidate to manage the office. Soon after his successful operations, he was appointed chief trader.

Thus, he was the head of trades in the Singapore branch of Barings Bank. As his new role allowed him to do, he incorporated himself into arbitrage trading activities for Nikkei index.

The “switching” of activities with low rates of return were made between Singapore

International Monetary Exchange and Osaka’s Securities Exchange. After an incident in July

1992, when a member of his team made a mistake and sold Nikkei futures instead of buying them, Nick Leeson discovered loopholes in the system that could later lead to unethical situations. With an “error” account – later called 88888 – he could easily hide the loss since the accounts were poorly supervised (Canac & Dykman, 2011). This mistake was quickly hidden by the “star” carrier of the young trader with the highest volumes of trading in the history of Singapore. With the client’s name only known by Leeson himself, he could easily process a large number of orders with high commission fees. Moreover, with the higher trading volume, the probability of execution error also increased. These errors needed to be hidden by the secret account that was previously mentioned (Skyrm, 2014).

However, small losses and lack of trading experience did not stop the young trader from partaking in unauthorized unhedged trading, which increased the riskiness even more.

Nevertheless, the market did not turn in his favor and the long future positions on the Nikkei did not go well, which was one of several bets he made on market. In the summer of 1994,

Leeson became an outright risk-taker with hidden losses consisting of GBP 208m. All of these losses were concealed by his error account. With an earthquake in January of 1995 causing the Nikkei positions to drop rapidly, the losses doubled if we take into

29 the fact that Nikkei future positions took half of the entire market (Brown & Steenbeck,

2001; Wexler, 2010).

The 28-year-old trader made a loss of up to GBP 827m and this sum caused the Barings

Bank to collapse after 233 years. After he lost control of the situation, Leeson tried to escape but was caught in Germany in March of 1995. He was accused of large fraudulent activity in the bank and he was given a sentence of six and a half years (Skyrm, 2014).

These fraudulent activities consisted of the aforementioned “error” account and the switching trading strategy. Leeson also tended to adjust the pricing level of the trades to maintain a profit. However, some signs found that that not all of the trading positions are authorized. Firstly, Leeson’s application for trading license in London was rejected because he had some debts. Also, external warnings from other banks that claimed that he was making a dangerous volume of trades, as well as concerns, were disregarded.

Moreover, his unusually high arbitrage profits were not questioned as his “star trader” role became the number one topic in the branch (Rafeld et al., 2017a). Nevertheless, the losses accumulated and the collapse revealed all of the hidden problems.

Soon after the detection of the unauthorized activities, Nick Leeson became a popular celebrity and the first modern example of a rogue trader (Land et al., 2014). He wrote a biography about himself and still draws public attention (Leeson, 1996).

It is clear that rogue trading is a special category in white-collar and corporate crime. In all three cases, the internal mechanisms of control failed but the individuals were not forced to become rogue. The culture of the corporations drives this nature. Leeson (1996) describes that if an employee is making money, literally nobody is taking care of what is lying behind

30 it. Even when the profit is only fictious, profits are the number one priority in financial institutions. To see these motivations in detail, the presented case should be analyzed from the perspective of the control balance theory variables.

“I drew a circle on a pad of paper, and then added some spokes radiating out of it. I jotted down the names of the people I spoke to every day . . . For various reasons they all wanted my profits to be real. They all benefit from me, and in different ways they all put me under pressure to create these profits” (Leeson, 1996, p. 258).

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IV. Case analyses

Culture, values, and beliefs build the entrepreneurial nature of investment banking. Financial institutions function naturally by taking higher risks to enlarge the potential profit but to enable huge loss opportunities, too. To work in this environment a strong will and a competitive character are needed as well as entrepreneurial skills (Fenton-O’Creevy,

Nicholson, Soane, & Willman, 2003).

Traders usually possess a relatively high sense of materialism, greed, and risk-taking.

Traders are seen and it is also known that they are opportunistic, uncooperative, individualistic, and self-reliant. It is quite necessary to have these characteristics as they are forced to maximize their trading accounts. Even though some of the already mentioned personalities, like greed can be seen as negative, within some limits they can be positive and can even drive people to better outcomes. If coupled with the independence principle, the craving for autonomy should be followed, especially in the market environment

(Krawiec, 2000; Krawiec, 2009).

The autonomous characteristic and its necessity are also mentioned by Drummond (2003).

It is true that the nature of the work, traders have to handle requires acting within the limits set by the organization. However, handling such uncertain choices requires also the nature of exploring and testing boundaries to achieve the highest possible goals. From the organizational perspective, it is almost impossible to accomplish the perfect control over their employees, as the management relies on them as agents who mediate the company's needs and drive the firm's profit. It is not surprising that this drive for autonomous high results in the company can lead to extremes, even to aggressive competitiveness. Pushing the limits along with pushing the rules is then commonly seen in the investment world.

32

However, all this behavior is covered under the reason of “just” maximizing the profitability

(Drummond, 2003). Can this ability to survive in a tournament-like environment be some kind of predisposition to deviance? Below, the main variables from Tittle's control balance theory are discussed in the context of the three main rogue traders’ cases.

A. Predisposition towards deviance

The zone of risk in financial institutions can be also widened by the nature of financial institutions. Throughout history, the trust bubble has been built around those institutions so that the wrongdoers could escape from justice because they would never be caught. Usually, very few investigations were held when a financial institution was involved. The late modern society shaped the financial industry by wide information systems and anonymous commercial networks and made the financial industry an even bigger competitive environment (Gilligan, 2011).

Even though from the trader's characteristic it may seem they are extroverted people, it is not a rule. Usually, it is the opposite, rogue traders are more introverted people. Kerviel was more of an outsider than a star team leader. He could be described as quiet, very reserved but hard-working. As he did not graduate from a prestigious university, he was not a member of elite traders when he joined Société Générale (Canac & Dykman, 2011). He had to show he was worthy of being part of such a large company and the entrepreneurial environment could be a big driver for challenging the regulations and rules (Krawiec, 2000).

If we have a look at Leeson's case, the potential predisposition could be found in the organizational rules. Leeson was granted a very high bonus – an average of GBP 100,000 per year – which heightened respectively between the years 1992 and 1994. Nevertheless,

33 according to the investigation, these bonuses were never paid to him (Bank of England,

1995). This remuneration possibility served as a high provocation for Leeson, along with the inability to accept losses and the creation of his “error” account, to incorporate into unethical trading activities. He could be characterized as a control freak. His maneuvers to falsify the trading records were unbelievable (Canac & Dykman, 2011).

However, Adoboli’s case was a little bit different. He did graduate from a privileged university, so the provocation towards proving worthiness was not so high. Nevertheless, he could be characterized as a gambler, a risk-seeker who was incorporated into high-risk trades even before his unauthorized behavior started (Gapper, 2011).

In all three cases, there is more than one stimulus that comes into consideration. Extraneous reward schemes in the trading industry along with risk-taking practices worked as one of the primary sources of prioritizing personal short-term gains counter to a longer-term profit of a company. The most influential target for traders is the vision of promotion and the possible huge gain, especially when they can use the money of a big company (Krawiec,

2009). Along with the characteristics of a trader mentioned above, the provocation/predisposition stimuli play a big role, no matter whether it is the personality of a person, the vision of promotion or reward, or the desire to show one deserves a place between traders.

B. Constraint

This variable is defined as the awareness of potential consequences of any behavior, here deviant behavior. It is a variable of seriousness and situational risk (Tittle, 1995).

34

All three rogue traders were aware of control mechanisms even though in every case can be found the lack of following them. The detention risk was then very low, so the awareness of consequences lowered as well. Moreover, the element of individual rationalization of deviant behavior after the crime happened is very important. For example, Kerviel was very persistent in defending himself in court that he did not do anything against industry-standard as his management tolerated his choices and decisions (Rafeld, Fritz-Morgenthal, & Posch,

2017b).

Not only the known prison and money sanctions were not a sufficient reason for traders not to step into illegal trading as they may seem too sufficient and followed enough. Here Rafeld et al. (2017b) propose that further investment into behavior control systems in banks should be made to be enough for traders to consider the potential consequences. The reason is that charges for managers after failing in following their duties are higher than existing ones for traders, for example, the Sarbanes-Oxley Act of 2002 for executives in the US.

C. Control ratio

When the consequences are not enough to stop traders from deviant behavior, control ration is very important. Rogue traders are usually in a control surplus state. This means that the exploitative acts take lead in the individual's reactions. When the behavior is triggered by the craving for independence it results in leakage from regulations or exercising more control over others (Piquero & Piquero, 2006).

To exercise the control surplus is seen as highly advantageous for traders as they are then highly motivated to extend their possibilities over escaping from rules with their irresponsible behavior. This free of control state happened in all three cases as the control

35 system did not work properly. Moreover, as Tittle (1995) confirms, the farther are individuals from control mechanisms, the less they seek any appreciation in the conditions of others.

The investing industry provides large possibilities to escape from control when good results are then presented. Along with many opportunities available, the control ratio surplus is the main definition of rogue behavior.

D. Opportunity

When speaking about the opportunity, it is understandable that existing opportunity triggers deviant acts. Opportunity is usually related to situational conditions. All the three mentioned rogue traders had previous experience from back-office roles and other trading roles so that their knowledge about specific processes was very wide. This experience could also contribute to the existence of opportunity, as they knew about the lack of controls. If we compare the risk management failures along with control weaknesses, there were huge shortcomings in the control systems of all three banks infected. That is why unauthorized trading activities could happen. It took the bank almost three years in Adoboli's case to detect any suspicious activities and finally brought them to light, which can be at least surprising because it was UBS who reviewed the potential risk of rogue traders in 2008 and warn other institutions against this risk (Rafeld et al., 2017b). In cases of Leeson and Kerviel, it took

Barings Bank and Société Générale not much less time. It was not earlier than two and a half years until any problems vanished to the public eye.

More astonishing is that the opportunity widened, even more, when early warning signs were not taken into consideration. For example, in the case of Kerviel, there were in total of 74 alerts brought by the system but detected after the brokerage of the case. 39 of these cases showed a direct link to fraudulent activities (Société Générale, 2008). Nevertheless, all these

36 alerts, along with other warning signs described earlier, were ignored by all the mentioned financial institutions.

The blind eye was not a problem just from the management perspective. For example, in

Adoboli’s case, several other colleagues of him knew about the unauthorized trading activities and the profit he was generating with his “umbrella” accounts (Rafeld et al., 2017b).

This fatal problem in the structural mechanism put the opportunity to even bigger challenge with the control ratio of the individual. Adoboli could continuously engage in unauthorized activities with a “clear” mind that if someone knew and did not stop him.

To add to other possible opportunities, another weakness has to be mentioned, the problem of informational technologies. Technology is a big advantage in today's world, but still, there can be some shortcuts with it. Especially in white-collar crime, it can easily increase the number of possible opportunities. For example, in Nick Leeson's case, it took him only a few clicks to set a pattern of high-risk trading patterns that ruin Barings Bank after some time (Drummond, 2003).

E. Self-control

For traders, it is very difficult to process such stressful and difficult tasks that cover high potential risks, for rogue traders it requires even stronger self-control so that the fraudulent activities remain covered. In the three cases, rogue traders remain covered for more than two and a half years even though they were surrounded by other professionals along which a high number of supervisors operated (Rafeld et al., 2017b). The extremely high levels of self- control are needed to withstand the stress and keep the unauthorized activities ongoing, even though at the beginning the self-control of each rogue trader could be very low. Before rogue

37 traders were involved in fraudulent activities, they did not need such high self-control as they were following the path of exemplar young trader.

However, typical rogue traders are described as overconfident and armed with extreme self- confidence that could be contradictory towards self-control. Overconfidence influences self- control and this is supported also by the perception bias that rogue traders are seen, by others or by themselves, as star traders (Krawiec, 2000). This happened also in the cases of Adoboli

Krawiec and Leeson. From shy traders, they raised to star traders as their profits overcame any other trader's outcomes. Self-control went slightly down, and they started to make small mistakes, or their already achieved goals were not enough for them. Specifically, Leeson was lost in his perception of being untouchable as he was rarely questioned about his success in

Barings. Everyone rather spoke about the collapse of Barings. However, he was proud to be called a rogue trader (Leeson, 1996).

Self-control is the last variable in assessing any deviant behavior under the control balance theory. It covers individual behavioral principles like self-regulation and non-impulsiveness.

Some traders may suffer from illusions of control that result in already mentioned overconfidence. Poor risk management comes into consideration again even in this variable as there is proof that it is in link with illusions of control and thus lower self-control outcomes

(Fenton-O’Creevy et al., 2003).

Below, table 1, table 2, and table 3 show the summary of cases. Both sides of the control ratio are presented – the control that and individual has to weight and the control that institution should pay attention to. It is seen that both sides had to reflect on many aspects

38 that resulted in the rogue outcome. Moreover, signs that could warn the companies are listed along with practices used by each rogue trader analyzed.

Individual control Institutional control Control warning weaknesses weaknesses signs

▪ Intention to prove his ▪ Control system ▪ Excess of cash flows place in the firm ineffective (large detected lately (about ▪ Provocation of using manual processes were EUR 1.3bn) the company's money to not reliable; several ▪ Management contacted benefit himself units were responsible twice because of ▪ Detention risk very low for control – lack of anomalies uncovered in – management oversaw communication) Kerviel’s team practices ▪ Inexperienced staff ▪ Very high brokerage ▪ Management did not (management not earnings – 28% of pay attention to system knowledgeable of linked annual earnings control alerts – he could the trading system) ▪ No vacations are taken, continue even after questions by ▪ Self-confidence raised – manager seen as “star trader” Processes used

▪ Fictitious trades recorded (several fake transactions were entered to take the risk spread) ▪ Pairs of fictitious transactions recorded (reverse transactions entered with equal quantities; the zero balance concealed the released earnings)

Table 1: Jérome Kerviel's rogue trading

39

Individual control Institutional control Control warning weaknesses weaknesses signs

▪ Characterized as risk- ▪ Middle management did ▪ Verbal warning because seeker and preferred not understand of not following gambling practices the position of traders – instructions to flatten ▪ Provocation of using did not see the necessity risk exposure the company's money to of supervising them ▪ Huge increase in trading benefit himself ▪ Trade mandates were in a relatively ▪ Detention risk very low communicated only short time (from USD – management oversaw verbally not formally 11.7m for the full year practices documented 2010 to USD 47.8m in ▪ For almost three years, ▪ System alerts were set to Q2 2011) no investigations inform traders not ▪ Other disciplinary happened, even though supervisors warnings because of management and reconciliation breakage colleagues had known about his fraud activities Processes used

▪ Fictitious internal future trades without counterparty ▪ “Umbrella” profit smoothing mechanism – a combination of fictitious one-sided future trades, late booking of external futures, booking of fictitious cash trades on the price of zero and trades with deferred settlement dates

Table 2: Kweku Adoboli's rogue trading

40

Individual control Institutional control Control warning weaknesses weaknesses signs

▪ The vision of high ▪ Insufficient ▪ External investors and reward in case of high understanding of trading banks warned about profits by supervisors the volume of his trades ▪ Provocation of using ▪ Internal controls not ▪ No follow-up the company's money to updated due to the rapid investigations after benefit himself growth of the institution internal audit findings of ▪ Detention risk very low ▪ The Financial reporting missing reporting duties – management oversaw system of ▪ Strangely high arbitrage practices the institutions not able profits ▪ Very easy, in case of to deal with ▪ No challengers or any technology knowledge, the complexity of questions about to set up a high-risk margins if trades made practices even though trading pattern unethical behavior was ▪ Rarely questioned about known his practices – overconfidence (called “star trader”) Processes used

▪ “Error” account (88888) created to cover initial small losses because of trading errors ▪ Price levels of trades adjusted intentionally ▪ Usage of clients' margin accounts to cover his funding problems (client's funds as a loan for him

Table 3: Nicholas Leeson's rogue trading

41

V. Conclusion

As the analyses above have shown, control balance theory can be applied to explain parts of rogue behavior that fall into deviant behavior, even though the framework of this special type of white-collar corporate crime is individual. Control balance theory combines several aspects – situational or personal – and this is the most important factor that should be taken into consideration.

Rogue trader case does not happen without any predispositions. As described above, several warning signs appeared, and companies should pay attention to them in the future. Otherwise, the trigger for unethical behavior can result in higher opportunity possibilities and lower self- control ratio. Nevertheless, control balance theory has limitations as it is not possible to assign exact numbers without primary data from the subject to measure the exact control surplus (Piquero & Piquero, 2006; Krawiec, 2000). Thus, there is still a big challenge remaining in predicting deviant behavior, especially in such a taught environment like the financial industry. The foundation in this industry lies in surviving and one survives only by generating profits. Even if the profits are generated by unauthorized processes. However, it is necessary to control the risk limits as it is very easy to slip into the opposite side – losses are generated also easily.

Another outcome is the fact that even though some patterns can be found in the analyses of rogue trader cases, it is important to consider each situation individually. Control surplus can be a big presupposition towards deviant behavior, but it has to be interpreted in line with a coexisting control deficit on the side of the organization as examples above show.

Institutions need to know what the optimal level of control is. However, as human and

42 situational factors come into consideration, there will seldom be the right amount of control assigned so that it fits every person working for a certain company.

Financial institutions should take into consideration the control balance theory variables.

Broader explanation to higher managers is recommended so that hiring managers would be prepared to more detailly examine potential candidates. Even though the predisposition towards unethical behavior can change with time, further education, and deeper testing when hiring on more responsible positions can help the institutions.

Moreover, a deeper understanding of potential unauthorized trades that could happen will be very beneficial for managers. This understanding will help in assessing the existing control measurements and procedures. Thus, potential changes in supervision laws can be made to not leave any record out even though the trader is seen as the best in the company.

This points out the necessity of a strong ethical culture in corporations. Company values have to be established and the right manner should be highlighted along with inspirational figures in the firm. The right stories could inspire others in behaving according to firm values.

Nevertheless, any unethical behavior should be pointed out. Not in a public way but all employees should be informed about what they could expect in case of breaking the rules.

These rules have to be transparent and have to fit the specification of the industry the company operates in.

How deep these changes in the company's control laws should be and what additional restrictions should be newly assigned can be developed by further research. Due to the lack of primary sources and time limitations, this project only outlines the foundation of the problem of rogue traders.

43

One of the limitations could be the lack of quantitative analysis of the cases. However, the data in this rogue trader phenomena depend more on situational and individual circumstances that quantification would not provide an effective answer to this white-collar problem. Nobel Prize recipient, economist Fridrich August von Hayek (1974) describes the quantitative evidence in most times fundamentally false and defines “…the crucial issue.

Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones” (Hayek, 1974, p. 180). Not only because of behavioral patterns are very hard to be turned into ratios but there is also a limitation concerning control balance theory itself. As Bohm and Vogel (2015) describe, the crucial part of the control balance theory, the control ration, is very difficult to be set as it varies on the number of relationships an individual possesses and on the type of these relationships, too. The net control ration is seen as almost impossible to be determined as the number of the relationships one person can have is almost limitless, some may be more influential than other and control ration in each relationship can vary depending on time and situation (Bohm & Vogel, 2015). Thus, the qualitative analysis presented earlier seems like the best presentation of the goal of this project as the found behavioral patterns would be almost impossible to quantify.

Like any other behavioral problem, also this one needs primary sources to be analyzed to objectively measure the control ratio. For example, qualitative interviews with people involved in the incidents would be very beneficial as well as the analysis of more such cases as described above. Also, a broader time frame would provide enough space to calculate the control ratio properly and apply the control balance theory in the right frame. Further

44 research could help not only to quantify the deviant behavior but also to answer the question about how big the role of institutions in rogue trader cases is.

Traders are under high pressure daily, so it is necessary to think about the stressful environment they have to face. However, it is not necessary to build on unethical profits or try to cover losses. Every trader makes a loss trade at some point of his carrier, but if there are opportunity and desire, one can easily become a rogue as they are “…those that are not limited by the limits under which they are supposed to operate” (Kashyap, 2019, p. 5).

45

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