January 25, 2008 in Nation/World

Trader’s fraud costs bank billions

Emma Vandore Associated Press
 
The Spokesman-Review photo

Kerviel
(Full-size photo)

PARIS – In what appears to be the largest trading fraud ever carried out by a single person, a young trader at French bank Societe Generale is accused of making unauthorized bets on stock markets that cost the bank nearly $7.2 billion but may not have netted him a cent.

The bank called the fraud “exceptional in its size and nature,” and said it apparently went undetected for more than a year by its own multilayered security systems.

It would place the young trader, identified as 31-year-old Jerome Kerviel, atop the pantheon of rogue traders for a scheme from which bank executives said he apparently did not make a personal profit.

The bank, France’s second-largest, said Thursday it had learned of the fraud last weekend. And the timing could not have been worse: The bank was forced to sell Kerviel’s contracts just as stock markets were plunging worldwide. It took the bank three days to unload them.

Societe Generale said the losses amounted to 4.9 billion euros, or about $7.18 billion – one of history’s biggest banking frauds. It led to immediate calls for tighter regulation.

Societe Generale chief executive Daniel Bouton insisted Societe Generale is still financially sound. But the bank said it would need to raise about $8 billion in new capital, partly by selling shares in a rights offer underwritten by JPMorgan Chase & Co. and Morgan Stanley.

Kerviel, employed by the bank since 2000, had worked his way up from a supporting role in an office that monitors trades to a job on the more glamorous futures desk, where he invested the bank’s own money by hedging on European equity market indices – making bets on the future performance of the markets.

Described as a “brilliant” student by one of his former university teachers, he shocked executives with the complexity and scale of his trades. Bouton called the fraud “extraordinarily sophisticated.”

Kerviel was involved in what the bank calls “plain vanilla,” or the more basic forms of hedging, with limited authority. He took home a salary and bonus of less than 100,000 euros, or about $145,700 – relatively modest in the financial world.

The bank said he went far beyond his role – taking “massive fraudulent directional positions” in various futures contracts, betting at the start of this year that stock markets would rise.

He apparently escaped detection by using knowledge of the bank’s control systems gleaned in his earlier monitoring job.

Most of his positions went unnoticed by colleagues and superiors as Kerviel covered his tracks with what the bank described as a “scheme of elaborate fictitious transactions.”

He got caught when markets dropped, exposing him in contracts where he had bet on a rise.

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