Societe Generale reveals depths of rogue trader fiasco

   PARIS, February 22, 2008  – The rogue trader scandal at Societe Generale
led to a 3.35-billion-euro (4.9-billion-dollar) loss in the fourth quarter of
2007, the French bank revealed on Thursday after a damning internal inquiry
into its risk controls.
   The total losses from unauthorised trades blamed on trader Jerome Kerviel,
put at 4.911 billion euros, also led to a collapse in full-year net profit to
947 million euros (1.39 billion dollars) — down 82 percent from 2006.  
   Societe Generale said it suffered an overall loss of 3.35 billion euros
(4.9 billion dollars) in the fourth quarter — in contrast to a profit of 1.18
billion euros in the same quarter in 2006 — which it blamed on "exceptional
fraud" and subprime-related losses.
   Last month, the bank announced the rogue trader losses, the biggest in
investment banking history, and Kerviel has since been charged with breach of
trust, fabricating documents and illegally accessing computers.
   He has not been charged with fraud however and has accused the bank of
making him the "scapegoat" for his trading which he insists managers knew
about.
   There has been widespread criticism that the bank appointed Kerviel, a
former controller, to a trader’s position thereby breaching a so-called
Chinese Wall in investment banks designed to keep the two sides apart.
   An internal bank inquiry published late Wednesday found that Kerviel’s
allegedly unauthorised trading had not been detected because of his
sophisticated techniques, but it also pointed the finger at internal audit and
risk control failures.
   The inquiry, chaired by former Peugeot Citroen chief executive Jean-Martin
Folz, highlighted that controllers did not "systematically deepen their
checks" and pointed to an absence of controls likely to identify fraud.
   The report suggested the strengthening of three areas, namely computer
security, procedures to tip off the management of wrongdoing, and stronger
human resources checks.
   The bank has alleged that Kerviel knew how to circumvent the risk
management systems because of his insider knowledge.
   After discovering Kerviel’s trading, Societe Generale was forced to close
futures contracts — bets on the future movement of European stock markets —
with a total risk exposure of 50 billion euros (73 billion dollars).
   In selling these contracts in haste over three days, the bank incurred a
loss of 4.9 billion euros, almost wiping out the profits for the whole year.
   The full-year profit for 2007 of 947 million euros was better than
expected, however, offering some relief to investors and meaning shares a mild
0.24 percent to 66.44 euros in early afternoon trading.
   In January, the bank had warned that annual net profit would to decline to
600-800 million euros.
   In its statement, Societe Generale expressed confidence that despite the
trading losses and more than two billion euros of losses on the US subprime
mortgage market it would get back to growth in 2008.
   Chairman and chief executive Daniel Bouton, who is under pressure to resign
over the debacle, declined to give a detailed forecast for the year, saying
the fraud meant that the trading activities of the bank would be curtailed in
the short-term.
   The internal enquiry also backed up Societe Generale management claims that
Kerviel acted alone in his trading without accomplices inside or outside the
bank.
   Meanwhile Thursday, French judges questioned for over three hours a second
trader linked to Kerviel, a source close to the investigation said.
   The trader, who worked for Societe Generale subsidiary Fimat, has been
named as an assisted witness in the case involving falsifying documents. An
assisted witness means he can testify in the presence of a lawyer.
   Two judges questioned him on his relationship with Kerviel, focusing on an
exchange of instant messages between the traders.
   Some 1,600 pages of instant messaging texts sent from September 2007 to
January 2008 have been seized by police investigating charges that Kerviel
falsified documents and stole computer codes to cover up his unauthorized
trading.
   The latest developments unsettled investors, who sold Societe Generale
shares down 2.28 percent to 65.08 euros while the overall market rose 0.96
percent.

AFP