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Behavioural patterns in rogue trading: Applying control balance theory to the rogue traders Nick Leeson, Jérôme Kerviel and Kweku Adoboli — Part 2
When analysing great financial disasters of our time, rogue trading and related protagonists immediately emerge as factors. Rogue trading is a reoccurring phenomenon, gaining immense public attention due to the perceived mismatch between large-scale organisations on the one hand and individual employees bringing these organisations into enormous trouble on the other. It furthermore links to the understanding of fraudsters like rogue traders, embedded in (un)ethical organisational corporate corpuses. This paper employs Tittle’s control balance theory (CBT) to explain rogue trading as a special form/subset of white-collar and corporate crime. We use CBT to analyse the anatomy—including modus operandi, risk management failures and control weaknesses, as well as early warning signals— of three major rogue trading losses from recent investment banking history, that is Nicholas (‘Nick’) Leeson at Barings Bank, Jérôme Kerviel at Société Générale and Kweku Adoboli at UBS, totalling a loss exceeding US$10.5 bn. We draw conclusions regarding the explanatory power of CBT in light of rogue trading, as well as behaviour risk management and control in order to prevent rogue trading, and outline future areas of research.
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Hagen Rafeld is Vice President at the Divisional Control Office of the Global Markets Division at a Frankfurt based financial institution. He has more than 12 years of risk and project management experience with specialisation in operational/ non-financial risk (NFR) including fraud risk in multinational corporations, advising senior management up to supervisory board level. He is a frequent lecturer, with consecutive teaching assignments on corporate governance, risk and compliance topics at, for example, Frankfurt School of Finance & Management and most recently on rogue trading and organisational misbehaviour at WHU Otto Beisheim School of Management in Vallendar, conference speaker (House of Finance/Goethe University Frankfurt, Bundesbank), and author. Hagen holds a master’s degree in business and engineering from Steinbeis University Berlin and a bachelor of arts in banking and finance.
Sebastian G. Fritz-Morgenthal is an expert principal and member of the Risk, Finance & Regulation Practice at Bain & Company. He has 20 years of experience in top management risk and consulting functions at Deutsche Bank, West LB, HSH Nordbank, Booz & Co and the Frankfurt School of Finance & Management. The focus of his work is risk management (credit, market, operational, liquidity/treasury, reputational, enterprise wide), risk strategy, risk appetite, target operating model, client profitability, restructuring and crisis management, regulation implementation, quantitative methodologies and data analysis. Sebastian holds a diploma in physics from University of Hamburg and a PhD in physics from Goethe University Frankfurt. Sebastian served at the Board of Trustees of Global Association of Risk Professionals (GARP) from 2005 until 2012, was member of Institute of International Finance (IIIF), International Swaps and Derivatives Association (ISDA), Bundesverband deutscher Banken (BdB) and Bundesverband Öffentlicher Banken Deutschlands, (VoeB) working groups/ committees and has been a member of the Frankfurt Institute of Risk Management and Regulation (FIRM) since 2011. He is a frequent lecturer (Frankfurt School of Finance & Management, Cambridge University, London School of Economics, WHU Otto Beisheim School of Management, Goethe University), conference speaker (Risk Minds, Bundesbank, House of Finance, Frankfurt Institute for Risk Management and Regulation [FIRM], etc.) and author.
Peter N. Posch holds the chair in finance at the TU Dortmund University, Germany and is director of the Centre of Finance, Risk and Resource Management (FiRRM). Previously, he served as co-head of credit treasury at a German top-five bank where he traded for the proprietary book and was responsible for the active management of the group’s credit risk. His research focuses on financial innovation and data analysis. He publishes in internationally recognised journals and has co-authored a bestselling book on credit risk published in second edition by Wiley Finance. He holds a PhD in finance on the dynamics of credit risk, a work recognised with the Reuters Innovation award. He studied quantitative economics, philosophy and law at the University of Bonn. Peter is a frequent speaker on international conferences, a trainer for several companies and conducts consultancy projects for financial institutions and corporates.