Rogue trader's account raises new questions about bank oversight

  • France
  • 01/30/2008
  • International Herald Tribune

New questions emerged Monday about Société Générale’s management after a former trader at the bank, Jérôme Kerviel, told French prosecutors that his fictitious trading had started as far back as 2005 – a year earlier than the bank had acknowledged – and that other employees had also routinely exceeded their authorized trading risk limits.

Kerviel also claimed, according to the Paris prosecutor, that at least one of his trades raised a red flag about two months ago at Eurex, the pan-European derivatives market. But Kerviel said that he had headed off concerns at the bank by producing a fake document.

Kerviel’s account is almost certain to raise fresh questions about the credibility of Société Générale’s version of events and why it did not notice anything amiss sooner. It also could put additional pressure on the bank’s chief executive, Daniel Bouton, to step down.

“When there is an event of this nature, it cannot remain without consequences, as far as responsibilities are concerned,” the French president, Nicolas Sarkozy, said while on a visit to a University of Paris campus, Reuters reported.

The former trader’s claims emerged after two days of intense questioning by the police. Prosecutors said Monday that Kerviel, 31, had confessed that he alone had constructed the elaborate fraud that ultimately led to €4.9 billion, or $7.2 billion, in losses for one of the largest banks in Europe. Prosecutors recommended that he be charged with four counts – including breach of trust, the most serious, which carries a maximum seven-year prison sentence and a fine of €750,000. The judges ultimately reduced the counts to three, rejecting an accusation of fraud, Kerviel’s lawyers said, without elaborating. In France, being placed under formal investigation does not necessarily lead to a trial and does not imply guilt.

Late Monday, Kerviel’s lawyer, Christian Charrière-Bournazel, said that Kerviel had been released from custody while the investigation continued. He did not disclose Kerviel’s whereabouts.

The Paris prosecutor, Jean-Claude Marin, said during a news conference earlier that a formal investigation had been opened and that he had requested that Kerviel be placed in temporary detention, partly out of concern for his mental state.

But Isabelle Montagne, a spokeswoman for Marin’s office, said later that defense lawyers had persuaded the two investigating judges to release Kerviel under judicial supervision, provided that he surrendered his passport. Kerviel was also forbidden from leaving French territory, associating with any of his former bank colleagues, or accepting another trading job for the duration of the investigation and any eventual trial, Montagne said.

In a detailed, hour-long briefing, Marin portrayed Kerviel as an earnest, if somewhat naïve “boy” who had told the police that he concealed his trades because he wanted to enhance his reputation as a trader and earn bonuses – not out of any desire to hurt the bank.

He said Kerviel had claimed to have made his first fictitious transactions at Société Générale in late 2005, shortly after moving to the bank’s trading desk from a previous job in the risk management department.

These initial fake trades “were certainly not of the same size of those at the start of 2008,” Marin said. “But through the end 2005 and over the course of 2006 and 2007, he little by little took positions that were purely speculative.”

“This was not a new activity for him,” Marin said.

Kerviel’s account to prosecutors differs from a timeline provided Sunday by the chief executive of Société Générale’s investment banking division, Jean-Pierre Mustier. Mustier said a review of the trader’s records had indicated that the fraud dated to late 2006 or early 2007.

Meanwhile, Marin said Kerviel also had claimed that it was not uncommon for other colleagues in his department to exceed their relatively low trading limits, though he stopped short of saying others had engaged in fictitious dealings.

Laura Schalk, a Société Générale spokeswoman, declined to comment on Kerviel’s claims which, if true, raise additional questions about the quality of the bank’s risk-management controls.

Mustier, the head of investment banking, did not return telephone messages seeking comment. But during a telephone briefing with reporters Sunday, he said that the bank had already made “extensive checks” of other traders’ portfolios and that the checks had not turned up any activity resembling Kerviel’s trading.

According to Marin, Kerviel said that it had been “not exceptional” for traders at the bank to exceed their authorized trading limits. Marin was careful to point out that this did not necessarily mean that the other bank employees had engaged in fake trading.