French Bank Links Lone Futures Trader To $7 Billion Fraud

Jerome Kerviel knew how to evade controls at Societe Generale.
Jerome Kerviel knew how to evade controls at Societe Generale. (Via Bloomberg News)
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By Molly Moore
Washington Post Foreign Service
Friday, January 25, 2008

PARIS, Jan. 24 -- For five years, Jérôme Kerviel toiled in the back offices of Societe Generale, learning the intricacies of the six-layer security system that France's second-largest bank used to protect its money, investors and customers from fraud, according to bank officials here.

Kerviel then made an unusual career move. He was promoted to trader -- becoming one of the very employees the security systems are designed to oversee and keep honest.

Over the next several months, his chagrined employer alleged Thursday, Kerviel used his inside knowledge of the security system and his brazenness as a futures trader to pull off one of the largest banking frauds in history, ringing up losses of more than $7 billion for Societe Generale.

The trader hid the massive fraud "using extremely sophisticated and varied techniques," Societe Generale Chairman Daniel Bouton told reporters Thursday. Bouton and other bank officials had little explanation for Kerviel's motivation, except to say he appeared to have acted alone and to have made no personal profit, instead creating losses through successive transactions of buying dear and selling cheap.

There was no comment Thursday from Kerviel, whom the bank said it had fired along with several of his supervisors. The man described as a 31-year-old computer genius dropped out of sight, but Elisabeth Meyer, his lawyer, said on French television that he "is not fleeing" and is "available for judicial authorities." She did not specify where he was; calls to a telephone number listed under his name went unanswered.

The disclosure of the losses was the latest shock to world financial markets as they struggle to recover from a massive sell-off earlier in the week linked to problems in the U.S. subprime mortgage market. Some analysts suggested that high-volume sales by Societe General on Monday as it secretly liquidated Kerviel's tainted investments contributed to the global market drops that led the U.S. Federal Reserve to counter Tuesday with an interest rate cut of three-quarters of a percentage point.

The Fed was unaware Monday that the bank was making its sales, according to a Fed source who spoke on condition of anonymity, leading some analysts to charge that the central bank overreacted in its rate cut. Investors in futures markets are now betting there is less likelihood that the Fed will make another steep rate cut at its regularly scheduled meeting next week.

The case highlighted global distrust of the financial institutions that hold personal nest eggs and corporate wealth, and the regulators charged with keeping them honest. The Bank of France, the country's banking regulator, conducted 17 investigations at Societe Generale during 2006 and 2007, but spotted no evidence of fraudulent activity, its chief reported Thursday.

"I don't consider this a failure of our controls," Christian Noyer, governor of the Bank of France, told reporters. "We can't have a controller behind every trader at every bank in the country at every moment. Even the best laws and the best police can't always stop someone who is determined to defraud the system."

But analysts and banking experts said the statements by both institutions revealed troubling failures in oversight. "What guarantees do we have that this cannot happen again tomorrow with another trader?" asked Xavier Timbeau, director of analysis and forecasting at the French Economic Observatory. "None."

If confirmed, the losses at the bank would be the largest ever caused by an individual trader. They are far higher than the $1.4 billion run up by trader Nick Leeson in the mid-1990s in Singapore. His fraud caused the collapse of the institution where he worked, Britain's 233-year-old Barings Bank.

Leeson, now living in Ireland after serving a prison sentence in Singapore, told the BBC that he was not shocked such a fraud had happened again, but that "the thing that really shocked me was the size of it."

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