SocGen in disarray as judges throw out fraud charge against trader

· Bank admits it was warned on more than one occasion
· Shareholders go to court over alleged insider dealing

• David Gow and Emilie Boyer King in Paris
• The Guardian,
• Tuesday January 29 2008

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This article appeared in the Guardian on Tuesday January 29 2008 on p24 of the Financial section. It was last updated at 08:08 on January 29 2008.

The Société Générale affair descended deeper into the mire last night as investigating judges threw out the most serious accusation, attempted fraud, put forward by prosecutors against the trader behind the €4.9bn losses, Jérôme Kerviel.

They released him under judicial supervision, or bail, after two days of police questioning, leading his lawyers to claim a substantial victory. The surprise threatened to undermine the bank's increasingly fragile defence that he had used ingeniously fraudulent devices, including hacking into colleagues' internet codes, to hide his gambling on equity derivatives trading markets.

Kerviel ran up an exposure of €50bn, costing France's second-largest bank a record loss in banking history as it unwound his positions last week. The prosecutor's office, which wanted to charge him with fraud, said it would appeal against the release. He has been placed under formal investigation for lesser allegations of breach of trust, computer abuse, and falsification. "There is no fraud," said Christian Charriere-Bournazel, one of Kerviel's two lawyers, accusing Daniel Bouton, SocGen's chief executive, of "throwing him to the dogs" and "holding him up for public vilification."

Earlier, a lawyer acting for 100 small shareholders sued the bank over insider trading and market manipulation, and minority investors accused it of issuing misleading information.

And Kerviel, depicted by the bank as a "lone" rogue trader, also increased SocGen's woes by accusing his colleagues of having similarly traded beyond their limits. Prosecutors said the bank had been alerted by the Eurex derivatives market to the scale of his positions as long ago as November last year.

Prosecutor Jean-Claude Marin said Kerviel had been able to fool his employer by producing a fake document to justify the risk cover - a comment seized upon by SocGen as it struggled to defend itself against charges its controls were so extraordinarily lax that Kerviel acted unapprehended for 15 months.

Eurex said its controls "functioned correctly at all levels, also in this case", while Socgen admitted it had been warned by the Deutsche Boerse subsidiary more than once. "There were false trades picked up but he [Kerviel] explained them away, justified them, or fabricated covers."

An enraged Colette Neuville, head of Adam, a minority shareholders' lobby, disclosed she had asked the AMF, the French financial services authority, for a formal inquiry into alleged insider trading by a director and/or others at the bank. She also wants the AMF to investigate whether the bank deliberately misled investors over its sub-prime losses in November when it put them at €230m, only to announce a €2.05bn hit two months later. She told the Guardian. "There are strong possibilities that the information given to shareholders was incorrect - misleading."

The lawyer, Frederik-Karel Canoy, said he had begun legal action against SocGen over how it unwound billions of euros in allegedly fraudulent share deals last week. The bank said on Sunday it unwound Kerviel's positions, €50bn, "in particularly unfavourable market conditions" between Monday and Wednesday last week after discovering them on January 18.

Canoy, a thorn in the flesh of French companies, told Reuters the bank should have told markets about its pending losses before its huge three-day selling spree.

SocGen says it unwound these positions in a controlled manner and within a volume limited to less than 10% to "respect the integrity of markets". It won support from Bank of France governor Christian Noyer: "The way Société Générale has handled its affairs to unwind positions in a very short space of time, and without moving the markets, contrary to what has been said, because they remained within normal trading limits ... was very professional."

Canoy also filed a complaint about the sale of 1m shares by SocGen director Robert Day on January 9 and 10, disclosed in AMF filings, shares worth €85.7m in his own name, and €8.63m and €959,066 from two foundations "linked" to him.

The bank said the sale had come "well before" it knew of any fraud, while sources, dismissing Canoy's move as a stunt, insisted that only a few senior officials, excluding Day, could have known of pending losses when he sold his shares.

But Neuville, in a letter to the AMF, insisted that share sales had taken place just before Socgen shares started to slide on January 14 - or four days before Kerviel's fictitious and fraudulent dealings were first detected inside the bank on January 18. "There are people who had access to information that was not publicly known; there's a suspicion of insider trading, and there must be a formal inquiry."

Kerviel has admitted hiding his activities but accused colleagues of trading beyond their limits, Marin said earlier.

Prosecutors had sought charges against Kerviel for offences of forgery and fraud, with a sentence of up to seven years.

Marin said the 31-year-old, who gave himself up on Saturday, had told investigators that his and other irregular deals had taken place since the end of 2005, a dagger at the heart of Socgen's defence that he was a one-off fraudster of genius.

Marin said the investigation had shown Kerviel did indeed act alone - to prove himself a star trader and earn a bonus of €300,000, rather than to harm the bank.

The bank has so far dismissed two managers over the scandal: Luc François, head of equity derivatives trading, and Jean-Pierre Lessage, Kerviel's direct manager.

Kerviel: ‘I will not be made a scapegoat’

By Ben Hall in Paris

Published: February 5 2008 14:33 | Last updated: February 5 2008 14:33

Jérôme Kerviel, the trader accused of fake transactions costing Société Générale billions of euros, insisted on Tuesday he would not be used as a “scapegoat” by the bank.

In his first public comments since the scandal broke, Mr Kerviel told Agence France Presse he recognised his “share of the responsibility”, but he would not take all the blame.

”I was designated [as being solely responsible] by Société Générale. I accept my share of responsibility but I will not be made a scapegoat for Société Générale,” the 31-year-old former bank employee said in an interview at his lawyer’s office in Paris.

Mr Kerviel’s first public intervention came a day after he was questioned by two investigating magistrates who are examining the case. Judges Renaud van Ruymbeke and Françoise Desset grilled Mr Kerviel for eight hours on Monday, AFP reported.

Mr Kerviel was charged last month with ”breach of trust”, ”falsifying and using falsified documents” and ”breaching IT controls access codes” during his time as a trader on SocGen’s equity derivatives desk in Paris.

The bank said it incurred net losses of €4.9bn as a result of an unhedged futures exposure worth close to €50bn ($74bn) built up by its former trader.

Master fraud or fall guy?

27 January 2008

A top French economist warns that Societe Generale could use the debacle to cover up bad investments, writes Thomas Hubert in Paris.

Stand back John Rusnak and Nick Leeson, enter Jerome Kerviel. According to Societe Generale, the 31year-old French trader is the sole culprit in the €4.9 billion fraud that will wipe out the equivalent of one year’s profit at France’s number three bank.

Societe Generale announced last Thursday that a single employee, which it later named as Kerviel, had run up losses worth nearly €5 billion. On the same day, the bank announced another €2 billion loss linked to the sub-prime crisis.


He had previously held a middle-office position at the bank, working on the safety procedures used to control traders. According to the bank, he used his knowledge of the procedures and the schedule of routine checks to avoid them.

Kerviel’s job only involved limited futures trading to counterbalance some of the risks taken by his colleagues working on the shares market - so-called plain vanilla trading. Yet the bank admitted that he managed to go far beyond his remit in late 2007 and early 2008,hiding the volume of money involved behind fake transactions.

An embarrassed SocGen executive chairman Daniel Bouton said at a press conference at his group’s headquarters in Paris last Thursday: ‘‘In the official Societe Generale book he registered transactions that went unnoticed, because at the same time he carried out other transactions that nullified earlier ones.

‘‘The transactions used for dissimulation purposes were fictitious, and he had the extraordinary talent of moving them along as checks happened because he knew the controls’ schedule.”

The bank said in a statement that it caught the trader when he made an error that appeared in a routine verification.

‘‘His motivation is totally incomprehensible. He does not seem to have benefited personally from the fraud,” Bouton said.

Since it discovered the scam last Sunday, Societe Generale has been busy cleaning up the mess. It started by secretly dumping the futures contracted by the trader during the first half of the week. Dreadful market conditions at the time explain the staggering volume of the losses incurred. The bank was nursing losses of more than €1 billion when it discovered the fraud, but lost a multiple of this by selling tens of billions of euros of contracts into a falling market.

Bouton handed in his resignation, but the bank’s board refused to accept it. However he said the trader and his chain of command, up to and including the group’s head of share dealing, Luc Francois, had been fired.

The Paris stock exchange suspended trading on Societe Generale shares all Thursday morning, while the bank’s management was holding a press conference.

Bouton and Citerne seemed to convince investors that they could deal with the crisis, as the group’s share fell by only 4.14per cent in the afternoon. However, this comes after 10months of near-continuous fall. After hitting an all-time high of €162.79 last April, Societe Generale shares were worth just €75.81Thursday evening.

The lone fraudster theory did not convince all commentators. Top French economist and equity expert Marc Touati said: ‘‘You can imagine fraud over a few hundred millions, but not €5 billion. If someone could run such a scam, it would mean that there are serious governance problems at Societe Generale, which I do not believe. There have been heavy losses on sub-primes or somewhere else, and the impact of the fraud might have been exaggerated.”

In other words, the bank could be tempted to saddle Kerviel with the burden of some of the bad investments it made in recent months.

The fraud scandal could not have come at a worse time for Societe Generale, France’s second-biggest bank. The company had to announce further write-downs of €2billion linked to the global credit crunch and said it would raise €5.5 billion through a shares issue to strengthen its balance sheet.

The losses cut its 2007 profit to between €600 million and €800 million from €5.2billion in 2006. The bank’s shares have fallen by 50 per cent in the last six months.

There is speculation that it could now be the subject of a takeover bid, having received a number of approaches in the last few years. The most recent came last April when it was linked to a bid from banking giant Unicredit.

Societe Generale is one of France’s biggest companies and is a household name, with a significant retail bank branch network. Founded in 1864, it has €467 billion in assets under management and 22.5 million customers worldwide. It employs 120,000 staff in 77 countries.

Its Irish operations through Societe Generale Finance (Ireland) had retained profits of €22 million at the end of 2006.

Le scapegoat: what the French papers say

The French press has reacted with shock at the massive fraud uncovered at Société Générale, but a number of commentators are sceptical about the bank's version of events.

Le Figaro suggests rogue trader Jerome Kerviel could be a scapegoat. The paper has interviewed Elie Cohen, an economics professor at the famous Sciences Politiques university who says SocGen's explanation is "hard to believe".

It all "seems a bit far fetched that during a whole year, one can hide such a huge loss," he told the paper.

"The feeling in the trading rooms is that it is not possible that just one individual was able to do this. The Société Générale could have emphasised the theme of fraud to help digest several bad trading operations."

Liberation, the leftwing French daily, says senior management at SocGen must be brought to account.

It describes Kerviel as a "fragile man with an extraordinary talent for deceit". He is the French version of a "crazy trader" following in the steps of Nick Leeson, and has blown the equivalent of the annual budget for the minimum wage.

"Apart from that, no need to worry," the paper says in a hard-hitting editorial.

"That's what minister Christine Lagarde said, and also Christian Noyer, the governor of the Bank of France.

"It is an isolated incident, with no relation to the current financial turmoil. As for Daniel Bouton, the chief executive of the Société Générale, he has kept his position, but has made the symbolic move of giving up six months of salary – apparently to calm down his shareholders and employees."

The paper continues: "With this new massive blow in the midst of the sub-prime crisis, it is hard not to ask a few delicate questions.

"Who is responsible for the craze for risk that has spread in the markets, if it is not the banks and their chiefs? Who is responsible for the failure to control a French trader, if it is not the banking commission, presided over by Christian Noyer?

"Of course, calls for new finance regulation by Christine Lagarde are welcome, but they will be of no use if no sanctions will be considered at the top."

Les Echos, the daily financial newspaper, says that "if the numerous questions that have not yet been answered about the fraud are not rapidly answered, it could undermine the credibility of the entire banking system".

The press conference held yesterday by the Bank of France's Noyer, was unprecedented, the paper said, and designed to avoid a Northern Rock-style panic among SocGen's 9 million retail customers.

The paper quotes Noyer telling customers they can be reassured. They have in front of them, he says, "a bank that is even more solid than it was last week".

He added: "There is therefore no problem of confidence, let us not exaggerate this story. One must not mix this up with the sub-prime crisis."

Le Parisien, under an editorial headlined "The Man Who Blew Up The Bank" says that a "monumental computing mess-up" might be behind the fraud and suggests that more employees could be involved.

La Tribune, another financial daily, asks "why was so much time needed to discover the extent of the damages?"

L'Humanité, a leftwing daily newspaper, says there is "something deeply rotten in the realm of global finance".

A number of regional commentators are even more sceptical about the bank's explanation. Le Telegramme noted that "everything has happened as if the six days between the discovery of the internal fraud and Thursday's revelation have been used to put in place a plausible scenario".

Even more direct, Nice-Matin asks if "the bank is not looking to hide its disastrous operations on stock market derivatives which collapsed with the sudden slump of the financial markets in recent months".

L'Alsace asks whether "the bank has found a very convenient minion to hide part of its sub-prime losses".

Others, though, point the finger at politicians. Sud-Ouest describes "politicians that force themselves to look like they are up to the challenge, first by reassuring people, then to call for more transparency, more controls. This fools no-one."

For La Charente Libre, the "tragic thing" is that "our politicians might be explaining that they are closely following the case, but nothing happens".

The Dauphiné Libéré, meanwhile, calls for "the competent authorities to prove that this is just a problem for the Société Générale. And not an overall social phenomenon."

SocGen accused of smokescreen after loss

By Martin Arnold in London and Peggy Hollinger and John O’Doherty in Paris

Published: January 27 2008 22:46 | Last updated: January 28 2008 12:05

Lawyers for Jérôme Kerviel, the French trader accused by Société Générale of massive fraud, hit back at the bank on Sunday, accusing it of creating a “smokescreen” to divert attention from other losses.

Mr Kerviel was charged by French police on Monday with attempted fraud. But earlier his lawyers insisted that Mr Kerviel “did not commit any dishonest act, nor embezzle a single cent, and he in no way benefited from the bank’s funds”.

Elisabeth Meyer and Christian Charrière-Bournazel told Agence France Presse that SocGen wanted to “raise a smokescreen that would distract the public’s attention from far more substantial losses that it had made in recent months, notably in the unbelievable subprime affair”.

They also said that the timing of the bank’s decision to close positions relating to Mr Kerviel’s trading and the manner it executed these trades “itself provoked the losses of €4.5bn”. The lawyers also claimed that Mr Kerviel’s trading was in profit to the tune of €1.5bn ($2.2bn, £1.1bn) at December 31.

SocGen declined to comment on the lawyers’ allegations. However, the bank is standing by its original statement, according to a person close to the bank.

Earlier, SocGen revealed more about how Mr Kerviel concealed trades as it sought to dispel growing scepticism about its initial version of events that the bank said had led to it suffering €4.9bn of losses.

The bank said Mr Kerviel – a 31-year-old junior trader on its European equities arbitrage team who gave himself up to police on Saturday and was still being held for questioning last night – committed an “exceptional fraud”.

It described how the alleged rogue trader created “fictitious operations” that were registered in SocGen’s systems “but did not actually correspond to any economic reality”.

Though he was only supposed to buy futures – bets on the direction of European markets – if they were covered by a hedge, a similar position limiting any loss, he used other people’s access codes and “falsified documents” to create fake hedges, leaving the bank exposed to the full downside.

SocGen said he had evaded detection for almost a year by only choosing “very specific operations with no cash movements or margin call and which did not require immediate confirmation” and by constantly switching between different types of instrument.

By January 18, when he was finally caught, he had positions worth €30bn on the Euro Stoxx, an index of Europe’s biggest companies, €18bn on Germany’s Dax and €2bn on the UK’s FTSE.

SocGen said he seemed to have been acting alone and to not have profited from his actions, but it promised to say more after completing an internal audit.

Nicolas Sarkozy, France’s president, is expected to raise the question of tightening risk controls in the world’s banking system when he meets the UK, German and Italian heads of government in London tomorrow.

The French Banking Commission will this afternoon hold its first meeting to examine the fraud as its own investigation gets under way. The government and the French stock market authority will be present and the discussions will contribute to the contents of a report to be prepared by the finance ministry for François Fillon, prime minister.