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Massive Fraud Costs French Bank $7.2 Billion

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The Associated Press

Published: January 25, 2008

PARIS - In what appears to be the largest trading fraud ever carried out by a single person, a young trader at French bank Societe Generale is accused of making unauthorized bets on stock markets that cost the bank nearly $7.2 billion but may not have netted him a cent.

The bank called the fraud "exceptional in its size and nature," and said it apparently went undetected for more than a year by its own multilayered security systems.

It would place the trader, identified as 31-year-old Jerome Kerviel, atop the pantheon of rogue traders for a scheme from which bank executives said he apparently did not make a personal profit.
Societe Generale chief executive Daniel Bouon said Kerviel's motivations were "totally irrational" but gave no further clues to his motive.

The bank, France's second-largest, said Thursday that it had learned of the fraud last weekend. The timing also could not have been worse: The bank was forced to sell Kerviel's contracts just as stock markets were plunging worldwide. It took the bank three days to unload them.
Societe Generale said the losses amounted to 4.9 billion euros, or about $7.18 billion, one of history's biggest banking frauds. It led to immediate calls for tighter regulation.

The fraud also raised comparisons to Nick Leeson, the trader who bankrupted British bank Barings in 1995 after he lost 860 million pounds, then worth $1.38 billion, on Asian futures markets, wiping out the bank's cash reserves.

Leeson told the British Broadcasting Corp. on Thursday that he was not shocked such a fraud had happened again, but "the thing that really shocked me was the size of it."

Bouton insisted Societe Generale is still financially sound. But the bank said it would need to raise about $8 billion in new capital, partly by selling shares in a rights offer underwritten by JPMorgan Chase & Co. and Morgan Stanley. The company said it expects to post a net profit $874 million to $1.16 billion for all of 2007, even after the fraud and $2.99 billion lost in the subprime mortgage crisis.

Kerviel, employed by the bank since 2000, had worked his way up from a supporting role in an office that monitors trades to a job on the more glamorous futures desk, where he invested the bank's own money by hedging on European equity market indexes - making bets on the future performance of the markets.

Described as a "brilliant" student by one of his former university teachers, Kerviel shocked executives with the complexity and scale of his trades. Bouton called the fraud "extraordinarily sophisticated."

Kerviel was involved in what the bank calls "plain vanilla," or the more basic forms of hedging, with limited authority. He took home a salary and bonus of less than 100,000 euros, or about $145,700 - relatively modest in the financial world.

The bank said he went far beyond his role, taking "massive fraudulent directional positions" in various futures contracts, betting at the start of this year that stock markets would rise.

He apparently escaped detection by using knowledge of the bank's control systems gleaned in his earlier monitoring job.

Most of his positions went unnoticed by colleagues and superiors as Kerviel covered his tracks with what the bank described as a "scheme of elaborate fictitious transactions."

He got caught when markets dropped, exposing him in contracts where he had bet on a rise.

Jean-Pierre Mustier, chief executive of the bank's corporate and investment banking, said he is convinced Kerviel acted alone. Three union officials representing Societe Generale employees said managers at the bank told them Kerviel was having "family problems."
Societe Generale said Kerviel had admitted to the fraud and had been dismissed along with some of his bosses.

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