Rogue Trader costs Soc Gen €4.9 billion

Soc Gen fraud down to operational risk failures

PARIS – French bank Société Générale (SG) has uncovered a €4.9 billion fraud by a rogue trader in its Paris offices, prompting it to issue a €5.5 billion emergency rights issue.

The fraud – described by SG as “isolated and exceptional” – is perhaps the largest of its type ever committed. It dwarfs Nick Leeson’s $1.4 billion theft from Barings Bank in 1995.

The equity index trader, identified as 31-year-old Jérome Kerviel, took "massive fraudulent directional positions" in European equity market index futures in 2007 and 2008, "beyond his limited authority", and had then concealed the positions by logging non-existent transactions, according to SG. As a former middle-office employee, he was able conceal his positions easily and avoid detection for some time. He and his supervisors have been dismissed.

SG chairman Daniel Bouton first learned about the trades on Saturday January 19, he said in a letter to the bank’s customers. "We have suffered a very significant loss," he wrote. "Control procedures have been revised and reinforced to avoid any reoccurrence of further similar risk."

The bank has also announced writedowns of €2.05 billion for the fourth quarter of the year, including €1.1 billion related to US mortgage risk exposure and €550 million in exposure to US monoline insurers.

SG shares have been suspended from trading on the Paris stock exchange and Fitch Ratings has downgraded the bank from AA to AA-. The rating agency stated that the extent of the fraud raises serious questions about the effectiveness of the bank’s processing systems and creates reputational risk for the group. Even with the rights issue, the bank is now at risk of a takeover.