PARIS, 29 January 2008 — French trader Jerome Kerviel admitted to concealing multibillion-dollar deals at Societe Generale, a prosecutor said yesterday, as the bank was hit by insider trading allegations and a plunging share price.
The 31-year-old junior trader was brought before a Paris investigating judge who was expected to formally charge him as a group of shareholders took legal action over a sale by an American member of the bank’s supervisory board.
Kerviel admitted during two days of questioning that “he carried out a certain number of acts to conceal reckless positions on the markets,” said prosecutor Jean-Claude Marin.
The bank said this led to a loss of 4.9 billion euros ($7.15 billion) — and the biggest fraud case in investment banking history. But the trader did not try to profit personally from the financial deals, the prosecutor said.
“He wanted to be seen as an exceptional trader, an astute market player,” said Marin, adding that he was attracted by the prospect of a 300,000-euro bonus. “He went beyond what he was authorized to do on the market, it is true, but he wasn’t trying to plunder the bank.” Kerviel could face a seven-year jail term and a 750,000-euro fine if found guilty of fraud. The prosecutor said he wanted Kerviel to remain in custody.
Societe Generale shares plunged seven percent to 68.67 euros, its lowest level since mid-2004, amid renewed doubts about its future.
Bank chairman Daniel Bouton went to London in a bid to shore up investor support for a proposed 5.5 billion euro capital increase to cover the trading losses and two billion euros of losses in the US subprime market.
But about hundred Societe Generale shareholders filed suit for insider trading and manipulating share prices after the market regulator AMF revealed that a supervisory board member had sold shares worth 85.7 million euros ($126 million) on Jan. 9.
Societe Generale’s stock has now lost about 50 percent of its value since May last year and 22 percent since the close on Jan. 9.
The suit by members of the Association of Small Shareholders (APPAC) targets American Robert A. Day and two foundations linked to him, said lawyer Frederik-Karel Canoy.
Day has been a member of the Societe Generale board since 2002. He founded the Trust Company of the West (TCW) investment group in 1971 which he sold to Societe Generale Asset Management in 2001 for 3.3 percent of the parent bank’s capital.
Forbes magazine puts Day in 754th place in the world’s richest people.
As questions mounted over the scandal, Finance Minister Christine Lagarde backed Societe Generale’s handling of the case and ruled out the need for the bank to find a merger partner.
“There is no reason to doubt that the bank did everything that it had to do in terms of regulations,” Lagarde told France 2 television.
According to the prosecutor, Kerviel started his unauthorized high-risk trading in share futures in late 2005, carrying out “a certain number of profitable operations for his employer.” During questioning, Kerviel claimed that other traders had resorted to the same manoeuvres, although not on the same scale.
The trader turned himself in to police on Saturday to answer accusations from the bank that he falsified documents and gained unauthorized computer access to circumvent risk-management controls.
Kerviel’s lawyers have accused the bank of turning him into a scapegoat and trying to “create a smokescreen” to cover up wider losses from the US subprime mortgage crisis.
They argue Societe Generale brought the losses on itself by hastily selling off Kerviel’s positions last week after discovering his trades and hedges on share futures.
Kerviel had held positions worth about 50 billion euros ($73 billion) when he was caught - well in excess of the bank’s market value of 35.9 billion euros and its shareholder funds.
Within days, Societe Generale moved to unwind his deals, incurring losses of 4.9 billion euros.
According to Marin, Societe Generale challenged Kerviel several times about risky operations, but each time he produced fictitious documents to justify himself.
The trader had bought futures in three European indices — the Eurostoxx, the DAX in Frankfurt and the FTSE in London — effectively betting on the future direction of the stock market.