Societe Generale says single trader responsible for 4.9 billion fraud
"I have the duty to inform you that the management of Societe Generale has discovered an internal fraud of a considerable scope."
PARIS, January 24, 2008 - Societe Generale said Thursday that a single
rogue trader carried out a massive 4.9-billion-euro (7.15-billion-dollar)
fraud at the French banking giant.
Trading in the bank's shares was suspended on the Paris stock exchange
after the revelation of the fraud along with a two-billion-euro loss stemming
from the crisis in US subprime mortgage market.
The bank said the losses cut its 2007 profit to 600-800 million euros from
5.2 billion in 2006 and that it had carried out a 5.5 billion dollar capital
increase because of the fraud "and in order to strengthen its capital base."
"I have the duty to inform you that the management of Societe Generale has
discovered an internal fraud of a considerable scope, carried out by a member
of staff in its financing and investment division," chairman Daniel Bouton
said in a statement released on the bank's web site.
The bank announced separately that the fraud was worth 4.9 billion euros
and that it had also lost about two billion euros because of the US subprime
The new rogue trader has not been named but brings immediate comparisons to
Nick Leeson, the British futures trader who lost 1.5 billion dollars at
Barings, causing the failure of the venerable British bank in 1995.
Boutin said the Societe Generale trader had been suspended and that legal
action would be taken against him.
He said the bank had also fired "executives, including leaders, responsible
for the supervision and controls on the operations concerned."
"The transactions which involved the fraud were simple -- taking a position
on shares rising -- but hidden using extremely sophisticated and varied
techniques," Boutin said.
He added that he only found out about the fraud on Sunday and that the
governor of the Bank of France had been informed.
"The loss suffered is very big. All measures were taken on the spot to
contain this. The failure of control procedures has been identified and
corrected to avoid any new risk of a comparable nature."
Boutin sought to reassure investors despite the crisis, which he described
as "sad and regretable."
"In effect, most of its areas, in France and abroad, have continued to give
good and sometimes excellent operating results."
Boutin said the capital increase would more than compensate any losses from
the fraud and the subprime damage and that it had been fully underwritten on
The chairman insisted that the bank could rebound from the crisis and
resume the long years of profits it has known. "I see there, with the support
of our shareholders and the engagement of our staff, a profound reason for
The bank said in a separate statement that its rogue trader had been
carrying out what it called "vanilla futures hedging" on European equity
It said the trader took out "massive fraudulent directional positions in
2007 and 2008 beyond his limited authority."
"Aided by his in-depth knowledge of the control procedures resulting from
his former employment in the middle office, he managed to conceal these
positions through a scheme of elaborate fictitious transactions."
It said these were discovered and investigated on January 19 and 20.
"The employee who has confessed to the fraud has been suspended and a
dismissal procedure has been initiated. The individuals in charge of his
supervision will leav the group."
The statement said that Societe Generale had also ordered a write-down of
2.05 billion euros because of the subprime crisis. It said 1.1 billion euros
was because of US residential mortgage risk, 550 million euros because of
exposure to "US monoline insurers" and 400 million euros in additional
provisions because of the problems.