Rogue trader in $7.2B bank fraud

Rogue trader in $7.2B bank fraud

PARIS, France (CNN) -- French banking giant Societe Generale said Thursday it had uncovered an "exceptional" fraud case that cost it a staggering €4.9 billion ($7.2 billion).

A woman withdraws money from a cash machine at French bank Societe Generale.

The bank said one of its traders, a French man in his 30s, had made "fraudulent" transactions involving European index futures that were beyond his permitted trading limits, then created false transactions to cover his tracks.

Adding to the pain, the bank said it has taken a financial hit as a result of exposure to the subprime mortgage market in the United States.

Several Paris newspapers, citing sources inside Societe Generale, identified the trader as Jerome Kerviel, 31. Contacted by CNN, the bank would neither confirm nor deny that name as the identity of the trader.

The bank said it discovered the fraud over the weekend and confirmed it was an isolated case. It said the employee, who had worked for Societe Generale since 2000, had confessed and would be dismissed, and that his supervisors would also leave the company.

"This activity, concealed and hidden, was of an enormous size and was running considerable risks to the bank and to a lot of operators," chief executive Daniel Bouton told a news conference shortly after the bank announced the fraud.

The bank said the trader, a mid-level employee who earned about €100,000 ($146,000) a year, was responsible for "plain vanilla" basic stock futures in European markets.

Bouton said he had set up a ficticious company and used that to trade futures. His risky trades then racked up losses.

The trader used his knowledge of the company's control procedures to elude detection, Bouton said. The man knew the times he was likely to be checked and avoided fraudulent activity during those times, he said.

Bouton said it did not appear that the trader made money from his transactions, and that he may have been trying to cover up losses.

Had world markets not been so volatile this week, the man's activity might not have been discovered, Bouton said.

"It was through an extraordinary stroke of bad luck that this activity was uncovered quickly in context of the markets' fall initiated by the Asian markets' fall," Bouton said.

The chief executive said the bank's profits were substantially reduced, but that it remained solid and had no solvency problems.

Still, as a result of the fraud, Societe Generale announced it was selling €5.5 billion ($8 billion) to raise capital.

Societe Generale said it would post additional writedowns of €2.05 billion ($2.99 billion) because of exposure to the U.S. subprime mortgage crisis. It means the bank would devalue its assets because it had bought U.S. subprime mortgages which might not be repaid.

The fraud at Societe General is the largest-ever fraud by an individual in the securities business. It eclipses the case of British trader Nick Leeson, whose losses of more than $1.6 billion led to the collapse of Barings Bank.

It is also bigger than the case of Yasuo Hamanako, a Japanese copper trader whose risky bets on copper futures in the late 80s and early 90s cost the Sumitomo Copper company $2.6 billion. He was nicknamed "Mr. Five Percent" because at one time he was said to have controlled five percent of the world copper market.

Shares of Societe General were suspended from trading at the start of the morning, and when trading resumed they immediately dropped by 5 percent before improving slightly to close at 4.1 percent down.

Bouton said he offered his resignation but the board decided not to accept it.

After discovering the fraud, Societe Generale immediately notified the Bank of France, the central bank.

But Bouton faced questions about why the bank did not immediately notify police, and whether that delay allowed the trader, whose whereabouts are now unknown, to flee.

 

Commenting on the scandal, CNN International's Financial Editor Todd Benjamin asked: "Could the fraud have been prevented? I'm sure there has already been and will be a lot finger-pointing in the coming days.

"But the bottom line is if this guy had inside knowledge of the control procedures and used it to his own advantage, then it's tough to see how the bank could have prevented it outside of not hiring him as a trader to begin with."