Prosecutor seeks appropriate charges against trader

By JAMEY KEATEN, Associated Press Writer

A Paris prosecutor on Monday asked for preliminary charges of forgery, breach of trust and fraud against a low-level trader accused by Societe Generale bank of orchestrating the largest securities fraud ever by single person.

Prosecutor Jean-Claude Marin said Jerome Kerviel, 31, did not attempt to steal money from the bank or its customers, but was motivated by a desire to be "an exceptional trader" and that he sought performance bonuses.

Kerviel appears to have acted alone, Marin said.

"It's always a bit for money, I'm not sure that was his prime motive," said the prosecutor. "It functions a bit like a drug, it's an addiction ... there's a sort of spiral you can't get out of."

Kerviel told investigators, who just wrapped up 48 hours of questioning, that he expected a bonus of 300,000 euros ($441,150) for 2007.

Societe Generale said it lost 4.82 billion euros ($7.09 billion) after unwinding Kerviel's trades.

Kerviel was set to appear before a judge who will decide whether to proceed with preliminary charges.

Under French law, filing preliminary charges means the judge has determined there is strong evidence to suggest involvement in a crime and gives investigators time to ask for a trial.

The bank's offices were searched Friday and "masses of documents" including computer records were seized, Marin said.

CEO Daniel Bouton said Societe Generale, thought by some experts to be vulnerable to a takeover, has not been approached.

Bank shares fell nearly 4 percent to 70.94 euros ($104.32) Monday.

Meanwhile, questions about how the bank handled the fraud are mounting. A lawyer for a group of Societe Generale shareholders, Frederik Canoy, said a legal complaint had been filed Monday asking investigators to look into possible insider trading.

The complaint was filed after France's market watchdog said in a routine disclosure that a member of Societe Generale's board, Robert A. Day, sold 85.75 million euros ($126.1 million) worth of shares in the bank on Jan. 9 — two weeks before the fraud announcement and well before bank management says it knew about the problem. Day is an investment manager with U.S.-based Trust Company of the West, or TCW, who Forbes magazine says has a net worth is $1.6 billion.

Two foundations linked to Day, the Robert A. Day Foundation and the Kelly Day Foundation, also sold a total of 9.59 million euros ($14.1 million) worth of shares a day later, on Jan. 10, the market watchdog reported. Regulators have made no allegations of wrongdoing.

Telephone calls to both Day foundations and TCW were not immediately returned Monday.

Bouton rejected suggestions from Kerviel's lawyers that Societe Generale was using their client to hide big losses linked to the U.S. subprime mortgage crisis.

"How could you want to imagine that we would have been able to hide a hole by another hole? It's completely stupid," Bouton told Europe-1 radio. He called Kerviel a "remarkable concealer" who had managed to outwit the bank's risk control systems by toggling between real and fictitious positions.

"That's what created this gigantic fraud," he said.

Elisabeth Meyer, one of Kerviel's defense lawyers, said he was "bearing up to the shock."

She disputed Societe Generale claims that Kerviel had committed fraud, saying he was in the black with his trades as of Dec. 31.

"In my view, he was thrown to the lions before being able to explain himself," said Meyer. "It's a lynching."

Another lawyer, Christian Charriere-Bournazel, said on Europe-1 radio that Kerviel made a profit of 1.5 billion euros ($2.2 billion) before his bets went sour.

The prosecutor, however, said the trader only "virtually" made a profit for the bank.

Kerviel could face a maximum seven years imprisonment if convicted under the current charges, the prosecutor said.

A day after the bank sent out a five-page explanation of how the fraud unfolded, analysts still had many questions.

Societe Generale alleges that Kerviel used other people's computer access codes, falsified documents and used other methods to cover his tracks — helped by his previous experience in other offices at the bank that monitor traders. It says he bet some 50 billion euros ($73.53 billion) — more that the bank's market worth — on European markets.

Societe Generale Bank Uncovers $7 billion Fraud by Futures Trader

By Emma Vandore, Associated Press Writer

French bank Societe Generale said Thursday it has uncovered a 4.9 billion euro ($7.14 billion) fraud -- one of history's biggest -- by a single futures trader whose scheme of fictitious transactions was discovered as stock markets began to stumble in recent days.

CEO Daniel Bouton said the trader's motivations were "irrational," netting the trader no personal financial gains. Still, the bank is seeking to have him prosecuted in court.

A person familiar with the case named the trader as Jerome Kerviel. Bank officials said the trader was a Frenchman in his 30s who probably acted alone. The person spoke on condition of anonymity because of the sensitivity of the case.

The bombshell destabilized a major bank already exposed to the subprime crisis. France's second-largest bank by market value said it would be forced to seek euro5.5 billion (US$8.02 billion) in new capital.

Societe Generale filed a complaint Thursday with a court in Nanterre, west of Paris, accusing the trader of fraudulent falsification of banking records, use of such records and computer fraud, the bank said in a statement.

The Paris prosecutor opened a preliminary investigation Thursday based on a complaint filed by a small shareholder concerned about losses incurred because of the fraud, a judicial official said. The Bank of France, the country's central bank, said it was immediately informed of the fraud and was investigating.

Societe Generale's shares, which have lost nearly half their value over the past six months, were suspended in Paris on Thursday morning, then dropped 5.5 percent to 74.77 euros ($108.97) when they resumed trading.

The bank said it detected the fraud -- comparable to a full year of its profits in stable times -- at its French markets division the weekend of Jan. 19-20.

Once uncovered, Bouton said the bank alerted market regulators and moved immediately to close the trader's positions, incurring heavy losses amid sharp declines on world markets.

"This is a bad time for banks and the industry in general. But detecting the fraud over the weekend was problematic because world stock markets on Monday and Tuesday fell hugely around the world. When the positions had to be unwound, the bank did that in a terrible market of falling equities," said Janine Dow, senior director at Fitch Ratings financial institution group in Paris

"In hindsight, it was this guy's superior knowledge of the control system of every aspect of trading at the bank that allowed him to build up fraudulent positions and hide them," she said.

The bank said the trader had misled investors in 2007 and 2008 through a "scheme of elaborate fictitious transactions." The trader, who was not named, used his knowledge of the group's security systems to conceal his fraudulent positions, the statement said.

The man admitted to the fraud, the bank said, and was being dismissed. Four or five of his supervisors were to leave the group. Bouton offered to resign but the board rejected that.

The trader had worked for the bank since 2000 and earned a salary and bonus of less than euro100,000 (US$145,700), executives said.

"I'm convinced he acted alone," said Jean-Pierre Mustier, chief executive of the bank's corporate and investment banking, who interviewed the trader when the fraud was uncovered.

The trader was responsible for basic futures hedging on European equity market indexes, the company said. That means he made bets on how the markets would perform at a future date.

Until last year, the trader had been betting that markets would fall, but then changed his position at the start of this year to bet they would rise, said Kinner Lakhani, an analyst at ABN Amro in London who specializes in Societe Generale shares, citing the bank's management.

He said there had been "daily rumors" this week that something was afoot at Societe Generale. "The market was sniffing something," he said.

Because the trader previously had worked in trading accounting offices, "he would have known how the risk management worked," Lakhani added. In a conference call with analysts on Thursday, bank officials "talked about this guy bypassing systems and setting up false counter-trades."

Societe Generale said the trader was involved in "plain vanilla" forms of hedging. Futures trading began with selling commodities like sugar or oil to be delivered at a future date, but has expanded enormously to many kinds of extremely complex financial instruments.

The fraud appeared to be the largest ever by a single trader. If confirmed, it would far outstrip the Nick Leeson trading scandal in 1995 that forced the collapse of British bank Barings. Leeson, the bank's Singapore general manager of futures trading, lost 860 million pounds -- then worth US$1.38 billion -- on Asian futures markets, wiping out the bank's cash reserves. The company had been in business for more than 230 years.

The fraud was not as big as the 1991 scandal that led to the demise of the Bank of Credit and Commerce International. Claims by depositors and creditors there exceeded US$10 billion at the time. International bank regulators seized BCCI, which had headquarters in Luxembourg, London and the Cayman Islands, acting on auditors' reports that described huge losses from illegal loans to corporate insiders and from trading transactions.

Axel Pierron, senior analyst at Celent, an international financial research and consulting firm, was stunned that 13 years after the Barings collapse, something similar has happened.

"The situation reveals that banks, despite the implementation of sophisticated risk management solutions, are still under the threat that an employee with a good understanding of the risk management processes can getting round them to hide his losses," he said.

At Societe Generale, the announcement came on the back of 2.05 billion euros ($2.99 billion) in write-downs linked to subprime-related difficulties and the crisis in financial markets.

The bank is now planning a capital hike in the "following weeks" by selling shares in a rights offer underwritten by JPMorgan Chase & Co. and Morgan Stanley.

The write-down and losses will lead the company to post a net profit of 600 million euros to 800 million euros ($874 million to $1.16 billion) for all of 2007, the Paris-based bank said. Full-year results will be announced Feb. 21. In 2006, net profit was euro5.2 billion.

Associated Press writers Matt Moore in Davos, Switzerland, Thomas Wagner in London and John Leicester in Paris contributed to this report.