Trader Defrauds French Bank Of $7.14B

One Of Largest Frauds Ever Wallops Institution Already Reeling From Subprime Crisis

(CBS/AP)  French bank Societe Generale said Thursday it has uncovered a $7.14 billion fraud - one of history's biggest - by a single futures trader whose scheme of fictitious transactions was discovered as stock markets began to stumble in recent days.

The stunning swindle was in a series of unauthorized transations no one noticed for more than a year. But by the time his rogue trades were discovered and his bosses began undoing them it was Monday, when world markets were in a meltdown, CBS News correspondent Richard Roth reports.

CEO Daniel Bouton said 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, 31. Bank officials said earlier the trader was a Frenchman 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 heavily exposed to the subprime crisis and rattled the global banking sector. France's second largest bank said it will seek $8.02 billion in new capital.

But while the rogue trading didn't break the French bank, it's now costing shareholders a fortune in lost profits, Roth reports.

Societe Generale says it has filed complaint with French prosecutor against the trader. Prosecutors opened a preliminary investigation into the case earlier Thursday based on a complaint filed by a small shareholder, a judicial official said.

Trading in Societe Generale's shares, which have lost nearly half their value over the past six months, was suspended Thursday morning. When trading resumed midday, the bank's shares dropped 5.5 percent to $108.97.

Societe Generale said it detected the fraud over the weekend at its French markets division.

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.

"Detecting the fraud over the weekend was problematic because world stock markets on Monday and Tuesday fell hugely around the world," said Janine Dow, senior director at Fitch Ratings financial institution group in Paris. "When the positions had to be unwound, the bank did that in a terrible market of falling equities."

The bank said the trader has misled investors since 2007 through a "scheme of elaborate fictitious transactions." The trader, who was not named, used his knowledge of the group's security systems to conceal fraudulent positions, the bank said.

"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," Dow said.

The man acknowledged 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 $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 bank says the trader won't profit: He never recieved last year's bonus, and they don't expect him to try to claim it now - even if he comes out of hiding, Roth reports.

The trader was responsible for basic futures hedging on European equity market indices, the company said, betting on how the markets would perform at a future date.

The Bank of France, the country's central bank, said it was informed of the fraud and was investigating.

The trader had until last year been betting that markets would fall, but then changed his position at the start of this year to bet they would rise, said Kinner Lakhani, an analyst at ABN Amro in London who specializes in Societe Generale shares, citing the bank's management.

There had been "daily rumors" this week that something had gone wrong at Societe Generale, he said.

"The market was sniffing something," Lakhani said.

Because the trader previously had worked in trading accounting offices, "he would have known how the risk management worked," Lakhani said. In an extended conference call with analysts Thursday morning, bank officials "talked about this guy bypassing systems and setting up false counter-trades."

"Everyone clearly is very surprised, to say the least," he said.

The fraud appears to be the largest ever by a single trader. If confirmed, it would far outstrip the Nick Leeson trading scandal in 1995 that bankrupted British bank Barings. Barings collapsed after Leeson, the bank's Singapore general manager of futures trading, lost 860 million pounds - then worth $1.38 billion - on Asian futures markets, wiping out the bank's cash reserves. The company had been in business for more than 230 years.

The fraud was not as big as the 1991 scandal that led to the demise of the Bank of Credit and Commerce International. Claims by depositors and creditors there exceeded $10 billion at the time.

The Bank of Credit and Commerce International failed after a 1991 scandal that led to claims by depositors and creditors exceeding $10 billion at the time.

Gilles Glicenstein, president of asset management at rival French bank BNP Paribas - France's largest - said, "It shows that we are in a very troubled period for banks, and I think that it's in such troubled periods that difficult things happen."

"This is not good news for Societe Generale, but also for banks in general. It can create doubt, but at the same time in this period, we are making efforts to be transparent in order to give confidence back," he said at the World Economic Forum in Davos, Switzerland.

Axel Pierron, senior analyst at Celent, an international financial research and consulting firm, was stunned that a trader could be involved in such a massive fraud 13 years after the Barings Bank collapse.

"The situation reveals that banks, despite the implementation of sophisticated risk management solutions, are still under the threat that an employee with a good understanding of the risk management processes can getting round them to hide his losses," he said.

At Societe Generale, the fraud announcement came on the back of subprime-related difficulties. Subprime writedowns linked to the crisis in financial markets amounted to $2.99 billion, Societe Generale said.

As a result, the bank is planning a capital hike in the "following weeks" by selling shares in a rights offer underwritten by JPMorgan Chase & Co. and Morgan Stanley. Following the transaction, the bank's Tier 1 ratio, a measure of its financial strength, will rise to 8 percent from 6.7 percent.

The write-down and losses will lead the company to post a net profit of $874 million to $1.16 billion for all of 2007, the Paris-based bank said.

Full-year results will be announced Feb. 21. In 2006, net profit was 5.2 billion euros.

[ahrats]

May they should make this guy the president of the bank. He will be able to spot others who are probablly doing the same thing. Even better I''m sure some financial institution in the U.S. can use his services or even the Bush administration they are always looking for a few good people who can get around obsticales without public knowledge.

[brianbwb-2009]

"But while the rogue trading didn''t break the French bank, it''s now costing shareholders a fortune in lost profits,"

Since when is failure to realize a profit considered a cost(expense)? Using this logic, I could easily claim that someone cost me billions because I didn''t make a profit, that is ridiculous.

This is typical of the current trend to lie by misstatement, it is used by banks, insurers, and other large corporations, and the cumulative effect is a large part of the reason that economies, including America''s are failing.

The guy didn''t make a profit from this, which suggests that he is just a scapegoat for a bank that, as policy, used tricks like this to defraud investors.

[mcv57]

After hearing the news, Vice President Cheney smirked, grimaced, growled and then commented to reporters, "Chump-change"....."This guy is just a Poser",....

Posted by veteran71

Agreed, corporations in the U.S. practice the same thing. Like the U.S. government, CEOs cook the books and prop themselves up for the big take.
VP Cheney (a White Collar crimminal) had his hands in the cookie jar when the dime was dropped. The CEO thought his back was covered, and probably was murdered in Prison (the CIA did not want him writing a book - "How I was Di*c*k*ed by Cheney".)

[realtalk5950]

I don''t know exactly how....but this is Bush''s fault somehow..

[tburzio]

Interesting that one can bash the President about being a sociopath, yet that person is not arrested. Try that with Ruttin'' Tootin'' Putin and see how long you are free! :-)

[stanleyrice]

A terrible hit on these thieves! Just imagine now they only posted a profit of 600-800 million euros, we need to go into mourning! As to Bush, he may not be responsible for this incident at this bank, but he is the single most responsible person for the economic crisis in the U.S., not the poor folk who borrowed high price money offered up by the thieves. Wake up Americans!

[antoniof123]

There had to be at least one Democrat looney in here that would blame a French Bank scandel on George Bush.

Posted by demslie at 03:21 PM : Jan 24, 2008

Please post where I search every comment and couldn''t find it maybe I just missed it or maybe it is you.

[rbburnerjr]

I am not blaming this on Georgieboy! I do believe that Georgie is envious that he did not think of it first. Beware if Georgie hires him to be Sec of Treasury!

[samael2014]

BTW: I don''t think it''s funny at all that a sociopath living in our White House is operating with impunity.

[samael2014]

There had to be at least one Democrat looney in here that would blame a French Bank scandel on George Bush.

Posted by demslie at 03:21 PM : Jan 24, 2008

I have looked through this entire list of comments and haven''t seen anything blaming a French bank scandal on George Bush. Two sociopaths operating with complete impunity over a period of time on either side of the Atlantic with disastorous consequences for the people around them, and one was "dismissed" and the other is still sitting in the White House. I doubt they even knew each other.

I do think it''s funny that the Societe Generale announces that they made discovery just as stock markets are taking a big plunge, all while this trader was apparently hedging in the opposite direction of where the stock market has been going. I would probably base my bets on someone having been aware of this before the recent stock market plunge and saw this as a good time to announce the fraud.

[bobnjersey]

[There had to be at least one Democrat looney in here that would blame a French Bank scandel on George Bush.]
[Posted by demslie at 03:21 PM : Jan 24, 2008]

i''d bet he''s within six degrees of seperation.

[demslie]

There had to be at least one Democrat looney in here that would blame a French Bank scandel on George Bush.

[random_radar]

"CEO Daniel Bouton said the trader''s motivations were "irrational," netting the trader no personal financial gains."

They are overlooking the lucrative career as a security consultant this guy will have in the future. He will be laughing all the way to the bank--albeit a different bank that is still solvent.

[buddhabman]

New Job openings next week for an CITO, IT Security Director, Corporate Risk Manager, Comptroller, Senior Auditor @ French bank Societe Generale. Wow!

[tomanyt]

Does otionwave need to up his medication?

[bobnjersey]

[After the Trader finishes his problems here, I would like to interview him for my small business. Of course, I would continue controlling the funds. This guy is one smart cookie.]
[Posted by ramos937 at 10:16 AM : Jan 24, 2008]

he''s not that smart at all. he had positions for most of 2007 expecting the market to fall ... then he changes the positions in early 2008 to expect the market to rise ... and just at that point where he changes his position ... it does exactly what he HAD been expecting ... except now he doesn''t have that position anymore.

[bobnjersey]

[The write-down and losses will lead the company to post a net profit of 600 million euros to 800 million euros ($874 million to $1.16 billion) for all of 2007, the Paris-based bank said. ]

they''ll never learn. they get beat for $7Billion and after some strategic (and apparently legal) accounting ... they post a profit.

don''t worry ... be happy!

[easeup-2009]

"A parasite in France is as bad as a parasite in America. We''''re just in the final death throws of a massive hemorrhaging of them, and they''''re all retiring and expecting a high standard of living and quality medical care well into their 100''''s.

And you think I need serious help. A$$HOLE.

Posted by samael2014"

Wow. Anyone wanna take a stab at what Sammie here is saying?

[samael2014]

samael

*** does this possibly have to do with Bush??? This happened in Europe.

You need serious help.

Posted by easeup at 10:13 AM : Jan 24, 2008

A parasite in France is as bad as a parasite in America. We''re just in the final death throws of a massive hemorrhaging of them, and they''re all retiring and expecting a high standard of living and quality medical care well into their 100''s.

And you think I need serious help. A$$HOLE.

[pollroller1]

speakinup, I agree. This was a joke. But the sad truth is, that a person using drugs will get more time than a person doing a white collar crime. I wonder how many people lost their life savings because of this guy.