Bank tells how French rogue trader duped bosses

Societe Generale told how its rogue trader evaded controls to bet €50bn – more than the French bank’s market worth – on European markets.

The bank said Jerome Kerviel hacked computers and “combined several fraudulent methods” to cover his tracks, causing billions in losses.

But SocGen said Kerviel did not appear to have profited personally from the transactions and seemingly worked alone – a version repeated yesterday by Jean-Pierre Mustier, chief executive of the bank’s corporate and investment banking arm.

However, in a conference call with reporters, Mr Mustier added: “I cannot guarantee to you 100% that there was no complicity.”

Officials said Kerviel was co-operating with police, who held him for a second day of questioning, seeking answers to what, if confirmed, would be the biggest trading fraud by a single person.

The questioning was “going very well and the investigation led by the specialists of the financial police is extremely fruitful”, said Jean-Michel Aldebert, head of the financial section of the Paris prosecutor’s office.

Kerviel was giving “very interesting” explanations, Mr Aldebert added. “From what he told me, he was fine psychologically.” He refused to say whether Kerviel might face preliminary charges.

Kerviel, 31, was taken into custody on Saturday. He has not been seen in public since the bank’s bombshell revelation last Thursday that his unauthorised trades lost it more than €4.9bn.

One of his lawyers said yesterday that the accusations of wrongdoing against Kerviel were being used to hide bad US mortgage investments by the bank.

“He didn’t steal anything, take anything, he didn’t take any profit for himself,” Christian Charriere-Bournazel said.

“The suspicion on Kerviel allows the considerable losses that the bank made on sub-primes to be hidden.”

The lawyer said Kerviel had made money for the bank through 2007 and he protested that the young trader had since been “thrown to the wolves of public opinion”.

“He made profits for the bank until December 31. From January 1, he took risky positions like all traders,” said the lawyer, who is also president of the Paris bar.

Even before his allegedly massive fraud came to light, Kerviel had apparently triggered occasional alarms at Societe Generale – France’s second-largest bank - with his trading, but not to a degree that led managers to investigate further.

“Our controls basically identified from time to time problems with this trader’s portfolio,” said Mr Mustier. But Kerviel had explained away the red flags as trading mistakes, he added.

“The trade was cancelled, there was no specific follow-up to do,” he said. “From our understanding today, the number of mistakes was not higher than (for) any other trader, so from our understanding that was not a reason to ring a bell.”

In a five-page statement, the bank said Kerviel used its money to build massive positions in futures contracts tied to the performance of baskets of stocks traded on exchanges in London, Paris, Frankfurt and other European markets.

Since those bets greatly exceeded the amount of capital he was allowed to put at risk, Kerviel entered fictitious and offsetting trades in Societe Generale’s computer system that appeared to minimise the odds of big losses, the bank said.

The trades were purposely chosen to avoid detection because they did not require cash contributions or be subject to margin calls, which would require putting up more money if the fictitious bet soured, it said.

Societe Generale said Kerviel misappropriated other people’s computer access codes, falsified documents and employed other methods to cover his tracks - helped by his previous years of experience when he worked in other offices at the bank that monitor traders.

Acquaintances described Kerviel as reserved and considerate, a young man who once taught children judo and held open the door for elderly neighbours.

Kerviel’s downfall started in the days before Friday, January 18, when Societe Generale tightened lending restrictions on one of its customers, an unnamed large bank. He had apparently used that bank’s name for one or more of his fictitious trades and it led to what Societe Generale described as having “additional controls” put in place.

Kerviel’s superiors in Societe Generale’s equity trading division reviewed that day an email from the large bank supposedly confirming trades he had booked. But they were suspicious about where the email came from and launched an emergency investigation.

A day later, Kerviel was called to Societe Generale to explain; in the meantime bank investigators confirmed that the large bank did not know about the trades.

After first not providing a clear explanation, Kerviel eventually confirmed that he had entered fictitious trades, the bank said. It then took a bank team throughout the night and into Sunday January 20 to identify all the exposure.

Societe Generale’s chief executive, Daniel Bouton, notified the governor of the Bank of France that day, and a decision was made to unwind the trades as quickly and as quietly as possible.

Societe Generale traders began unwinding Kerviel’s losing bets at the beginning of European trading last Monday, just as Asian markets were in a free-fall and European shares were poised to plummet after a big drop in US markets on the previous Friday. It took until Wednesday to finally close the books on Kerviel’s adventures, the bank said.