PARIS, 25 January 2008 — French bank Societe Generale yesterday sought charges against a futures trader, who it said had committed a 4.9 billion euros ($7.14 billion) fraud — one of history’s biggest — involving a scheme of fictitious transactions. CEO Daniel Bouton said that the trader’s motivations were “irrational,” netting the trader no personal financial gains.
A person familiar with the case named the trader as Jerome Kerviel. Bank officials said the trader was a Frenchman in his 30s who probably acted alone. The person spoke on condition of anonymity because of the sensitivity of the case.
The bombshell announcement destabilized a major bank already exposed to the subprime crisis. France’s second largest bank by market value said it would be forced to seek 5.5 billion euros ($8.02 billion) in new capital.
Societe Generale filed a complaint yesterday with a court in Nanterre west of Paris accusing the trader of fraudulent falsification of banking records, use of such records, and computer fraud, the bank said in a statement. If an investigating judge takes on the case, the trader could face charges and possible prison time or fines.
The Paris prosecutor opened a preliminary investigation yesterday based on a complaint filed by a small shareholder concerned about losses incurred because of the fraud, a judicial official said.
Trading in Societe Generale’s shares, which have lost nearly half their value over the past six months, was suspended on the Paris bourse yesterday morning. Trading resumed midday, with shares dropping 5.5 percent to 74.77 euros ($108.97). Societe Generale said it detected the fraud — comparable to a full year of the bank’s profits in stable times — at its French markets division the weekend of Jan. 19-20. Once uncovered, Bouton said the bank alerted market regulators and moved immediately to close the trader’s positions, incurring heavy losses amid sharp declines on world markets.
“This is a bad time for banks and the industry in general. But detecting the fraud over the weekend was problematic because world stock markets on Monday and Tuesday fell hugely around the world. When the positions had to be unwound, the bank did that in a terrible market of falling equities,” said Janine Dow, senior director at Fitch Ratings financial institution group in Paris “In hindsight, it was this guy’s superior knowledge of the control system of every aspect of trading at the bank that allowed him to build up fraudulent positions and hide them,” she said. The bank said the trader had misled investors in 2007 and 2008 through a “scheme of elaborate fictitious transactions.”
The trader, who was not named, used his knowledge of the group’s security systems to conceal his fraudulent positions, the statement said.
The man admitted to the fraud, the bank said, and was being dismissed. Four or five of his supervisors were to leave the group. Bouton offered his resignation but it was rejected by the board. The trader had worked for the bank since 2000 and earned a salary and bonus of less than 100,000 euros ($145,700), executives said.
“I’m convinced he acted alone,” said Jean-Pierre Mustier, chief executive of the bank’s corporate and investment banking, who interviewed the trader when the fraud was uncovered. The trader was responsible for basic futures hedging on European equity market indexes, the company said. That means he made bets on how the markets would perform at a future date.
