Societe General Uncovers Massive Rogue Trader Fraud

by Phillip Morton, Investors Offshore.com

25 January 2008

Societe Generale, France's second-largest bank, has confirmed that a rogue futures trader has racked up losses of almost EUR5 billion on stock index bets that went spectacularly wrong.

In a case with echoes of the Nick Leeson affair in 1995, Societe General has revealed that a single trader in his thirties used his "in-depth knowledge" of trade accounting systems and controls procedures from previous employment in the bank's middle office to hide huge positions in European stock index futures markets that massively exceeded his permitted limits as a relatively junior trader.

"The transactions which involved the fraud [sic] were simple - taking a position on shares rising - but hidden using extremely sophisticated and varied techniques," chief executive Daniel Bouton explained in a letter to the bank's customers, quoted by the BBC.

The bank said that the trader, believed to be 31-year-old Frenchman Jerome Kerviel, had misled investors since 2007 through a "scheme of elaborate fictitious transactions". He has reportedly been interviewed by Jean-Pierre Mustier, the Chief Executive of the banks's Corporate and Investment Banking division, who is of the view that he acted alone, and not for personal gain.

Societe Generale revealed that it was alerted to the fraud last weekend at its French markets division, but it was unable to begin closing the positions until the markets opened on Monday, when stock markets around the world began tumbling, exacerbating the already huge losses.

It is understood that Kerviel had taken positions on stock markets falling in 2007, but in 2008 reversed his position, using the bank's money to bet that markets would rise this year.

The discovery of the fraud comes at a bad time for the French bank, which has already announced writedowns of EUR2.05 billion linked to the crisis in financial markets prompted by the US subprime debacle, and it has been forced into raising fresh capital trough a proposed EUR5.5 billion share sale.

Despite this most recent blow however, the bank is expecting to announce a profit of between EUR600 million to EUR800 million euros when it reveals its results for 2007 next month.

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