France's Societe Generale Loses $7.1B To Fraud

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France's Societe Generale Loses $7.1B To Fraud



Societe Generale, France's second largest bank, said Thursday that fraudulent trades worth $7.1 billion were committed by a trader in the last two years.

SocGen, in a statement, said the fraudulent trades were made in 2007 and 2008. The unidentified trader, whose role at the bank was to make "plain vanilla" hedges on European stock-market indexes, used his knowledge of the bank's control procedures "to conceal these positions through a scheme of elaborate fictitious transactions."

SocGen, whose trading of shares was halted early Thursday, said there's no enduring exposure to the positions, which were discovered and investigated on January 19. The $7.1 billion cost of the fraud is before tax and includes losses from its decision to close the positions quickly.

SocGen said it will dismiss the trader and his direct supervisor will also leave the group. SocGen CEO Daniel Bouton offered to resign but this was rejected by the board.

According to Marketwatch.com, the size of the fraud dwarfs that of famous rogue trader Nick Leeson, who racked up losses of around $1.4 billion at Barings Bank in 1995. Leeson's actions led to the collapse of Barings. He was convicted of fraud and sentenced to jail for six and a half years.

French rival Credit Agricole also recently revealed losses from unauthorized trades, although on a much smaller scale. The bank said in September that it would cost around 250 million euros to undo trades in credit market indices made at the New York offices of its Calyon unit, Marketwatch.com added.

After the fraud, Bloomberg reported that SocGen plans to raise $8.1 billion selling shares and will also take 2.05 billion euros in writedowns related to credit market turbulence following the collapse of the U.S. subprime mortgage market.

The company said it plans to raise the capital by selling shares in a rights offer underwritten by JPMorgan Chase & Co. and Morgan Stanley. The sale is needed to maintain the bank's capital ratios, it said.

The bank is expected to profit between 600 million to 800 million euros for 2007 and pay a dividend equal to 45 percent of its earnings.

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Societe Generale fraud - how could it happen?



As more details have emerged about the world's worst rogue trading scandal, tough questions are being asked on how five billion euros could be lost through fraud at one of Europe's leading banks - Societe Generale. In Paris, staff arriving for work took it in their stride. One said: "The bank is in a good state, this was just an accident that happened."

The bank said 31-year-old trader Jerome Kerviel used his knowledge of the system to circumvent its sophisticated anti-fraud measures. Economics professor Andre Tiran said: "It's like a locksmith becoming a burglar; if he was well trained as a locksmith its much easier for him to carry out burglaries."

Comparisons have been made with rogue trader Nick Leeson, who caused the collapse of Britain's Barings Bank in 1995. Similar actions by a currency trader at Allfirst bank of Baltimore cost its parent company Allied Irish Bank 475 million euros.

When Nick Leeson's fraud was discovered he went on the run. Jerome Kerviel's whereabouts are unknown, but a lawyer claiming to act for him said he has not disappeared and is available to co-operate with investigators.

One Societe Generale customer said it seemed strange that the trader was able to do what he did: "Their security seems to be insufficient, because when I want to do something they demand lots of things, like a ton of paperwork and ask me so many questions. Given that, it doesn't seem possible to me that one person could lose so much money. I don't know if we're being told the truth, but maybe one day we'll know."

Commenting for first time, President Nicolas Sarkozy said the scandal does "not affect the solidity and reliability of the French system" but it has dealt a new blow to the image of the banking industry already reeling from the subprime crisis.

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French bank details $7.2 billion loss

French bank Societe Generale described Sunday how one of its traders allegedly carried out a $7.2 billion (€4.9 billion) fraud, how the loss came to light and what it is doing to ensure such a case does not recur.

he 31-year-old trader, Jerome Kerviel, started working at the bank in 2000 and spent his first five years there overseeing traders, the bank said in a five-page summary of events.

"Consequently, he had a very good understanding of all of Societe Generale's processing and control procedures," it said.

Kerviel apparently put that knowledge to use after he became a trader for the bank involved in arbitrage -- the practice of buying a portfolio of financial instruments in one market and selling a similar offsetting portfolio at the same time that had a slightly different value. The idea is that, in such trades, the risk of major loss would be minimized.

In fact, Kerviel's first portfolio of financial instruments -- in his case futures -- included genuine operations -- but the offsetting portfolio proved to be "fictitious," the bank said.

"As a result, the trader was able to hide a very sizable speculative position, which was neither consistent with nor related to his normal business activity for the bank," Societe Generale said.

French police questioned Kerviel on Friday and searched his apartment in a Paris suburb Friday night. Efforts to reach his attorneys for comment have been unsuccessful.

Finance Minister Christine Lagarde said Friday that she would meet with banking regulators Monday to establish a timeline of events that led to the massive trading loss.

According to Societe Generale, Kerviel used his early banking experience "to successfully circumvent all the controls which allow the bank to check the characteristics of the operations carried out by its traders, and consequently their real existence," it said.

For example, it said, Kerviel chose operations that had no cash movements or margin call and that did not require immediate confirmation and he canceled certain operations by using access codes assigned to other bank employees.

In addition, it said, he falsified documents and made sure that his fictitious operations involved different instruments from the ones he had just canceled, thereby reducing his chances of being controlled.

But about mid-January, bank officials detected "abnormal counterparty risk," and Kerviel's explanations led to additional controls being placed on his activities, the bank said.

Then, on Friday, January 18, Kerviel's bosses were informed and an investigation had begun.

The next day, after a large bank told Societe Generale that it did not recognize an operation, the trader "acknowledges committing unauthorized acts and, in particular, creating fictitious operations," his employer said.

By early afternoon on Sunday, January 20, the bank's fraudulent position had been calculated at approximately 50 billion euros ($73.6 billion), and "the unwinding of the fraudulent position begins in particularly unfavorable market conditions."

In fact, the timing was terrible. On Jan. 18, European markets had swooned and two days later, the Asian markets tumbled, too. By January 23, "the unwinding" was completed and the total loss calculated at 4.9 billion euros ($7.2 billion).

Since then, the bank said, it has tightened its controls to ensure such an operation cannot recur.