Societe Generale Posts 2007 Profit Despite Loss From Illicit Trades

PARIS, Feb. 21 -- Societe Generale, the French bank that racked up $7.2 billion in losses last month because of unauthorized and allegedly fraudulent trades, nonetheless posted a profit of about $1.39 billion in 2007, the bank reported Thursday.

The earnings report followed a preliminary audit released late Wednesday that generally endorsed the bank's conclusion that a lone junior trader was responsible for the "exceptional fraud" that was discovered in January and led to the largest bank-trading loss in history.

"At this stage of the investigations, there is no evidence of embezzlement or internal or external complicity (i.e., the existence of a third party who knowingly assisted the fraudster to conceal his positions)," the audit said.

The trader, 31-year-old J¿r¿me Kerviel, has told investigators that his deals were so big that his superiors had to have known what he was doing but that they turned a blind eye as long as he was making money. Kerviel's attorneys have accused the bank of making him a scapegoat.

Before becoming a trader, Kerviel was employed by Societe Generale in back-office positions, where he learned about procedures used to monitor transactions. He allegedly used that knowledge to hide risky trading bets from the bank's internal watchdogs and his superiors.

The audit said Kerviel's activities were not discovered sooner because of "the efficiency and variety of the concealment techniques" he used, "the fact that operating staff did not systematically carry out more detailed checks" on Kerviel's activities, and "the absence of certain controls that were not provided for and which might have identified the fraud." The audit did not specify those controls.

The report cited 75 "alerts" generated by Kerviel's activities from June 2006 to January 2008 but said they were insufficient to expose him. In some cases supervisors did not follow up on the warnings; in others, Kerviel lied or produced false documents to cover himself, the audit said.

"Controls in place were conducted without triggering a strong or persistent enough alert to enable the identification of the fraud," the report said.

Kerviel is in police custody pending completion of a criminal investigation. He has been charged with breach of trust, falsifying documents and illegally accessing computers.

He has told investigators that he hacked into colleagues' computers, wrote fake e-mails and used other techniques to disguise about $73 billion in risky positions he took on European stock futures. By the time the bank discovered his positions and unwound them, it had lost $7.2 billion.

Although the loss was incurred in January 2008, because it was "an exceptional event" that happened before the 2007 books were closed, French law allowed the losses to be charged to the fourth quarter of 2007, a Societe Generale spokeswoman said. The bank, the second-largest in France, posted a $4.9 billion loss for that quarter but still managed a profit for the year.

That annual profit was also affected by the U.S. subprime financial crisis, which dragged on revenue, and was down from 2006, when the bank had a profit of $7.67 billion. Its stock is down almost 30 percent since the beginning of the year, making it a potential target for a takeover, bank experts say.