Monday, January 28, 2008

SocGen's Kerviel Charged With Attempted Fraud

(Bloomberg) -- Jerome Kerviel, the trader accused by Societe Generale SA of unauthorized dealing that led to 4.9 billion euros ($7.2 billion) in losses, was charged with attempted fraud by the French financial police today.

The 31-year-old trader hacked into computers and faked e- mails and documents to hide trades that amounted to 50 billion euros before they were discovered, France's third-largest bank by market value said yesterday.

Kerviel was charged on four counts, including abuse of trust and attempted fraud, Paris prosecutor Jean-Claude Marin said at a press conference today. The charges came after Kerviel admitted to setting up fictitious trades and creating false documents to back up the positions. The charges will now be handed over to a judge who will investigate the case.

Kerviel's goal ``was to be a stand-out trader,'' Marin said. ``He considered that for a long time he'd taken winning positions and had the benefit of the doubt.''

The bank handed investigators information about Kerviel on the evening of Jan. 25 as part of the probe into the losses, the biggest in banking history, that occurred when Kerviel set up positions in futures linked to European stock indexes and then hedged them with fake trades.

Marin said Kerviel told him it wasn't unusual for traders on the desk to exceed limits and that he had acted alone.

Kerviel's Motives

Kerviel expected a bonus of 300,000 euros for 2007, Marin said. Societe Generale has started proceedings to fire him.

The most serious of the charges he faces is abuse of trust, which carries a seven-year prison sentence and a fine of 750,000 euros. The police are seeking a mandate to keep him in custody for his own protection and to prevent him fleeing or tampering with evidence, Marin said, adding that the trader ``cooperated fully.''

Messages left for comment at the offices of Christian Charriere-Bournazel, one of Kerviel's lawyers, were not immediately returned. There was no answer at the office of Elisabeth Meyer, another lawyer working on his case.

Kerviel had ``committed no dishonest act, did not siphon off a single cent, and did not profit in any way,'' Agence France-Presse cited the lawyers as saying yesterday. Societe Generale was creating a ``smokescreen'' to hide losses it had made elsewhere, the news agency quoted the lawyers as saying.

``That's laughable,'' said Societe Generale Chairman Daniel Bouton in an interview on Europe1 radio today. ``How can you imagine that we'd hide a hole with another hole? If we had a hole somewhere else, there's no way we could hide it.''

More Controls

Kervial's trading shortfall, more than four times the $1.4 billion of losses by Nick Leeson that brought down Barings Plc in 1995, has raised fresh doubts about risk management at the world's biggest financial institutions and prompted calls for improvement from French President Nicolas Sarkozy.

``It's time to introduce transparency and new rules in the international and French financial systems,'' Sarkozy said from India on Jan. 26.

Societe Generale fell 3.86 euros, or 5.2 percent, to 70.01 euros at 1:45 p.m. in Paris trading, bringing losses this year to 29 percent. Positions Kerviel amassed were larger than the company's market value, which now stands at 33 billion euros.

``There was clearly a fault in the bank's control systems,'' said Jean Peyrelevade, a former CEO of Credit Lyonnais and a member of the board of Barings when Leeson's losses brought down the bank.

Delta One

Kerviel worked on the Delta One trading desk, specializing in European stock market index futures. His job was to arbitrage small price differences between contracts, not to take bets on the markets' direction, Jean-Pierre Mustier, chief executive officer of the Paris-based lender's corporate and investment bank, said on a conference call yesterday.

His positions, mostly on Germany's DAX Index and the pan-European Euro Stoxx 50, had losses of 1.4 billion euros when Societe Generale discovered the fraud on Jan. 18. The bank said it lost 3.5 billion euros more liquidating the positions as European markets fell.

He was caught when he exceeded the recently changed counterparty risk limits on a trade, and the counterparty's e- mail confirming the transaction ``appeared suspect.''

He was questioned on Jan. 19, and after first trying to explain his way out he admitted the fake trades later that day, the bank said. It wasn't until the following afternoon that the extent of his positions was uncovered.

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