Rogue trader blamed for 4.9 billion euro fraud at Societe Generale

Rogue trader blamed for 4.9 billion euro fraud at Societe Generale
AFP
By Eve Szeftel AFP - 20 minutes ago

PARIS (AFP) - French banking giant Societe Generale said Thursday a single trader who fooled his bosses carried out a massive 4.9 billion euro (7.15 billion dollar) fraud -- one of the biggest in financial history.
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Trading in the shell-shocked bank's shares was temporarily suspended but they fell five percent after they resumed because of the fraud and a 2.05 billion euro loss in the 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 needed a 5.5 billion euros capital increase to restore its balance sheet.

Chairman Daniel Bouton said the unnamed rogue trader had used "extremely sophisticated and varied techniques" to carry out "fraud of a considerable scope."

The trader, based in Paris, is believed to have built up the huge losses gambling on share futures.

The bank said the trader took out "massive fraudulent directional positions in 2007 and 2008 beyond his limited authority."

The case dwarfs that of Nick Leeson, the original British "rogue trader" who lost 1.5 billion dollars at Barings, causing the failure of the venerable British bank in 1995.

Bouton said the Societe Generale trader had been suspended and legal action would be taken against him.

He said the bank was also firing top executives "responsible for the supervision and controls on the operations concerned." Bouton offered his own resignation at an emergency board meeting on Wednesday but the bank said this was rejected.

"The transactions which involved the fraud were simple -- taking a position on shares rising -- but hidden using extremely sophisticated and varied techniques," Bouton said in his statement.

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 French central bank said it is carrying out its own inquiry into the fraud.

"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," Bouton said.

The Fitch credit ratings agency lowered its ranking for Societe Generale debt to AA- from AA and some analysts said the bank risked becoming a takeover target but Bouton sought to reassure investors over the crisis, which he called "sad and regrettable."

He highlighted that the bank was still producing "good and sometimes excellent operating results" from its operations around the world and that the capital increase would more than offset any losses from the fraud and the subprime damage.

French Prime Minister Francois Fillon said the fraud was "a serious business but at the same time, it has nothing to do with the current situation on the global financial markets."

The chairman apologised to shareholders at a press conference but some 100 shareholders lodged a suit for fraud and misconduct.

"This was a lone man who built a concealed enterprise within the company, using the tools of Societe Generale, and who had the intelligence to escape all control procedures," Bouton said.

The bank said in a separate statement that the rogue trader had been carrying out what it called "vanilla futures hedging" on European equity markets.

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 leave the group."

A Societe Generale union source said after a meeting with bank managers that it appeared that the trader had not acted for personal profit.

"The trader in question was experienced, knew how the bank worked. It seems he was playing the markets, but not for his own profit, and caused enormous losses," the source told AFP.

The bank 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.

Societe Generale's stock has lost 20 percent of its value since the start of the year and 50 percent since last May.