In what appears to be the largest trading fraud ever carried out by a single person, a young trader at French bank Société G&...
PARIS — In what appears to be the largest trading fraud ever carried out by a single person, a young trader at French bank Société Géneralé is accused of making unauthorized bets on stock markets that cost the bank nearly $7.2 billion but may not have netted him a cent.
The bank called the fraud “exceptional in its size and nature” and said it apparently went undetected for more than a year by its own multilayered security systems.
It would place the trader, identified as Jérôme Kerviel, 31, atop the pantheon of rogue traders for a scheme from which bank executives said he apparently made no personal profit.
Société Géneralé Chief Executive Daniel Bouton said Kerviel’s motivations were “totally irrational” but gave no further clues to his motive.
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France’s second-largest bank said Thursday it had learned of the fraud last weekend.
The timing could not have been worse because the bank was forced to sell Kerviel’s contracts just as stock markets were plunging worldwide. It took the bank three days to unload them.
Société Géneralé said the losses amounted to about $7.2 billion — one of history’s biggest banking frauds. It led to calls for tighter regulation.
The fraud also raised comparisons to Nick Leeson, the trader who bankrupted British bank Barings in 1995 after he lost $1.38 billion on Asian futures markets, wiping out the bank’s cash reserves.
Leeson himself told the British Broadcasting Corp. on Thursday that he was not shocked such a fraud had happened again, but “the thing that really shocked me was the size of it.”
Bouton insisted Société Géneralé is still financially sound. But the bank said it would need to raise about $8 billion in new capital, partly by selling shares in a rights offer underwritten by JPMorgan Chase and Morgan Stanley.
Kerviel, a bank employee since 2000, had worked his way up from a supporting role in an office that monitors trades to a job on the more glamorous futures desk.
He invested the bank’s own money by hedging on European equity-market indexes, making bets on the future performance of the markets.
Described as a “brilliant” student by one of his former university teachers, he shocked executives with the complexity and scale of his trades. Bouton called the fraud “extraordinarily sophisticated.”
Kerviel worked on what the bank calls “plain vanilla,” or the more basic forms of hedging, with limited authority. He took home a salary and bonus of about $145,700, relatively modest in the financial world.
The bank said he went far beyond his role, taking “massive fraudulent directional positions” in futures contracts, betting at the start of this year that stock markets would rise.
He apparently escaped detection by using knowledge of the bank’s control systems gleaned in his earlier monitoring job.
Most of his positions went unnoticed as Kerviel covered his tracks with what the bank described as a “scheme of elaborate fictitious transactions.”
He got caught when markets dropped, exposing him in contracts where he had bet on a rise, the bank said.
Jean-Pierre Mustier, chief executive of the bank’s corporate and investment banking, said he is convinced Kerviel acted alone.
Three union officials representing Société Géneralé employees said managers at the bank told them Kerviel was having “family problems.”
Analysts were stunned that such a huge fraud could have occurred more than a decade after the one at Barings.
It shows banks “are still under the threat that an employee with a good understanding of the risk-management processes can [get around] them to hide his losses,” said Axel Pierron, with Celent.
Société Géneralé’s shares, which have lost nearly half their value over the past six months, were suspended in Paris on Thursday morning and closed down 4.1 percent.
Associated Press reporters Matt Moore in Davos, Switzerland, Thomas Wagner in London, and John Leicester, Angela Charlton, Angela Doland, Jamey Keaten
and Elaine Ganley in Paris contributed to this report.