In 1987's Wall Street, experienced trader Marvin says to rookie Bud Fox, "We're all just one trade away from humility."
Jerome jailed
How true this must ring for 33-year-old Jerome Kerviel, who was sentenced to three years in prison (with two more years suspended) by a Paris court Tuesday.
In January 2008, the ex-trader's unauthorized trading blew a €4.9 billion hole in the accounts of his employer, Societe Generale. Offloading Kerviel's huge €50-billion position caused European equity markets to fall steeply.
However, like many latter-day "rogue traders," Kerviel initially made his employer considerable profits from futures trading -- as much as €1.4 billion, according to the BBC. In addition, Kerviel claimed that his superiors were aware of the size of his trading book and turned a blind eye until his losses mounted -- a common refrain trotted out by failed traders.
The Trading Hall Of Shame
As veteran investors and financial historians know, Kerviel is just one in a long line of rogue traders. Despite their best efforts to beef up their compliance and computer security, investment banks (and, sometimes, commercial and retail banks) seem unable to stamp out illicit trading.
Here are a few of the most infamous rogue traders and trading disasters of recent times:
Bernard "Bernie" Madoff
Although not strictly speaking a trader, Bernie Madoff's deception was so great that he merits inclusion in my list.
In December 2008, Madoff (pronounced, ahem, "made off") admitted that his highly regarded investment fund was nothing more than a giant Ponzi scheme. The exact loss for his investors remains unclear, but has been put as high as $65 billion (£41 billion).
Steve Perkins
After returning to his office from a bibulous golfing weekend in June 2009, "fully refreshed" oil trader Steve Perkins bought 7 million barrels of oil. Perkins built up a $520 million position, accounting for 69% of that day's oil trading worldwide. This bizarre move caused an unexpected $1.50 spike in the price of a barrel of oil in the early hours of the morning.
Unwinding his positions generated a $10 million (£6.3 million) loss for Perkins' employer, PVM Oil Associates. Banned by City regulator FSA from trading for five years, 34-year-old Perkins now works in Geneva for Swiss commodity broker Starsupply Renewables.
David Redmond
Perkins was closely following in the footsteps of ex-Morgan Stanley (NYSE: MS) trader David Connor Redmond. On Feb. 6, 2008, Redmond returned from a boozy 3.5-hour lunch and opened a large short position in oil futures. After concealing his trades overnight, Redmond closed the position the next day.
Morgan Stanley fired Redmond for unauthorized trading and he was later banned from financial markets by the FSA for two years. Clearly, well-oiled traders don't make good oil traders.
Brian Hunter
Hunter successfully identified a seasonal anomaly in natural-gas prices, which enabled him to rack up big profits for his employer, hedge fund Amaranth Advisors.
However, Hunter got overconfident, buying up more than half of all natural-gas contracts in some months. In effect, Hunter went from trading the market to being the market.
When prices crashed and Hunter lost more than $6 billion, Amaranth -- once worth $9 billion -- bit the dust in September 2007. In a final irony, Amaranth is Greek for "unfading."
John Rusnak
Rusnak was a currency trader at Allfirst, a U.S. bank owned by Allied Irish Banks. His is a familiar tale: by trying to cover up small losses and trade his way back to profit, Rusnak got out of his depth.
By the time his deception came to light in February 2002, Rusnak's losses amounted to $691 million. He served six years of a 7.5-year jail sentence before being released in January 2009.
(Frankly, Rusnak's loss seems trivial when compared with AIB's vast losses since 2008 and its subsequent bailout and nationalization by the Irish government!)
Long-Term Capital Management (LTCM)
Today, failed hedge fund Long-Term Capital Management is a byword for the dangers of leverage, liquidity, and losses. However, from its formation in 1994 until its collapse in September 1998, LTCM made annual profits approaching 40% for its investors.
Despite having two Nobel Prize-winning economists on its board and being crammed with top traders, LTCM's complex, highly levered trading strategies were blown up in the aftermath of the Russian bond default and ruble devaluation of August 1998.
LTCM's vast positions in a range of financial markets made it too big to fail, leading to a Federal Reserve-sponsored bailout of $3.6 billion from its major creditors.
Orlando Joseph "Jo" Jett
Jo Jett was a bond trader at Kidder, Peabody -- a subsidiary of giant U.S. conglomerate General Electric (NYSE: GE). In 1993, Jett's trading earned him a $9.3 million bonus and the title of Kidder Man of the Year, according to Jett's own words in a France24 interview. Alas, in April 1994, it emerged that, by exploiting flaws in Kidder, Peabody's computer systems, Jett had inflated his trading profits by $340 million.
As a result, GE jettisoned Kidder, Peabody, selling the securities firm to rival PaineWebber in 1994. Jett's actions hurt me personally because, as an employee of GE Capital at the time, my bonus was reduced to offset Jett's losses. Grrr!
Yasuo Hamanaka
In the '90s, Hamanaka was such a big player in copper trading that he earned the nickname "Mr. 5%," as he personally controlled around one-twentieth of world supply of that metal.
Despite his moniker, Hamanaka's aggressive trading strategy was flawed and unprofitable. In June 1996, his employer, Japanese giant Sumitomo Corporation, disclosed that its chief copper trader had run up unauthorized losses over a decade of $1.8 billion (increased to $2.6 billion in September 1996).
Hamanaka got eight years in prison, but was released a year early in July 2005.
Nicholas "Nick" Leeson
Leeson is surely the most famous British rogue trader of all. A derivatives broker in the Singapore office of Barings Bank, the U.K.'s oldest merchant bank, Leeson traded equity futures in Singapore and Tokyo.
Leeson hid his bad trades in an error account numbered "88888," as eight is considered a lucky number in China. Alas, the Kobe earthquake of January 1995 created massive losses for Leeson that eventually totaled $1.4 billion. As a result, Barings was sold to Dutch banking giant ING for £1.
After fleeing Singapore and being arrested in Germany, Leeson served less than four years in prison in Singapore before his release in 1999. He now runs Irish football club Galway United.
In summary
As you can see, rogue traders are not a new phenomenon -- they've been around as long as financial markets have.
Indeed, as long as incentives exist to trade illicitly, dishonest financial traders will cover up their losses in order to bank big bonuses. After all, if their trades blow up, it's their employers who suffer most!
More from Cliff D'Arcy:
This article has been adapted from our sister site across the pond, Fool UK. Brian Richards, who prepared this article for publication on Fool.com, does not own shares of any companies mentioned. Neither does Cliff D'Arcy. The Motley Fool has a disclosure policy.
