SocGen Under Fire from Prosecutor and Investors

By Reuters -  |  Posted 2008-01-28 Email Print this article Print
 
 
 
 
 
 
 

Pressure mounted on Societe Generale as a prosecutor said rogue trader Jerome Kerviel was questioned about his trades in November, and as investors sued the French bank for insider trading.

PARIS (Reuters) - Pressure mounted on Societe Generale on Monday as a prosecutor said rogue trader Jerome Kerviel was questioned about his trades in November, and as investors sued the French bank for insider trading.

The bank has accused 31-year-old Kerviel of a massive fraud after suffering the biggest trading loss in banking history.

SocGen, France's second-biggest bank, was forced to unwind a 50 billion euro ($73 billion) bet the junior trader had managed to make into a falling market at a cost of 4.9 billion euros.

It has said it discovered the fraud on the weekend of January 19 and 20, but the Paris prosecutor said that derivatives exchange Eurex alerted the bank to Kerviel's activities in November.

"Eurex alerted Societe Generale in November 2007 about the positions taken by Jerome Kerviel. Questioned by the bank, he produced a fake document to justify the risk cover," prosecutor Jean-Claude Marin said.

Many analysts and traders believe SocGen's massive position-squaring action contributed to the market slide of Monday January 21, which was followed on January 22 by an emergency interest rate cut by the U.S. Federal Reserve.

In a separate development on Monday, a French lawyer acting for 100 small shareholders said he had sued SocGen.

Frederik-Karel Canoy said the bank should have informed markets about its pending losses before embarking on a massive selling spree between Monday to Wednesday to unwind the 50 billion euros of uncovered futures positions built up Kerviel.

OTHER ROGUES? 

Paris prosecutor Marin cited Kerviel as saying that other traders also broke bank rules.

Kerviel told police he concealed his trades because he wanted to enhance his reputation as a trader, not out of any desire to hurt the bank, Marin told a news conference.

The prosecutor said he had requested that Kerviel, who turned himself in for questioning on Saturday, be held in temporary detention.

SocGen's shares tumbled on Monday after Citigroup said the French bank's franchise was "severely impaired". The shares fell by 9 percent in early trading and by 1320 GMT were trading 4.8 percent lower at 70.30 euros.

Citigroup analysts speculated that British-based bank HSBC, which already has a big retail and commercial banking presence in France, might be interested in buying SocGen.

French Economy Minister Christine Lagarde said on Monday that Societe Generale was under no pressure to merge with another bank as its shares plunged.

"Societe Generale is under no constraint to merge with another financial company," Lagarde told France 2 television.

Lagarde's statement was the latest sign that France's establishment is rallying round to SocGen's defense in an attempt to stave off talk that a foreign rival might launch a takeover bid for the company as its market value sinks.

A top adviser to President Nicolas Sarkozy warned on Sunday the government would probably intervene if raiders made a move. 

"I don't think the state would remain with its arms crossed if someone, whoever the predator, tried to take advantage of the situation," Henri Guaino told French television.

However SocGen and the Bank of France are facing political flak from France's leaders, furious at being left in the dark while SocGen sought a capital boost and unbundled its massive loss-making positions with only central bankers in the loop.

SocGen's chairman, Daniel Bouton, who last week offered to leave but was asked to stay on by the board, said on Monday his resignation remained on the table, suggesting he may feel he has to go as criticism mounts of his handling of the crisis.

Bouton went to London on Monday to drum up support for the bank's 5.5 billion euro emergency share issue, which has already been underwritten by two U.S. investment banks. 

"LYNCHING"

After lying low for several days, Kerviel hired a new lawyer who hit back at SocGen's suggestions that he alone had masterminded the world's biggest trading scam from his desk.

"He has not embezzled anyone, he hasn't taken a cent for himself and he was just doing his job as best he could," Christian Charriere-Bournazel told Reuters.

He said Kerviel had been doing a trader's job by taking on risk, and accused the bank of setting him up for a "lynching".

Four days after stunning world finance with news that a lone, lowly trader had punched a hole in its compliance systems and forced the bank to seek a lifeline of new capital, SocGen set out in detail how it says he took dizzying risks undetected. 

Like rogue trader Nick Leeson, who sank Britain's Barings bank in 1995, the picture that emerged from Kerviel's employer on Sunday was of a young man trained by his own bank to detect fraud and then using these skills to work around controls.

The bank says it remains baffled as to why one of its more junior trading staff put his career and the bank at risk.

Additional reporting by Tim Hepher, Brian Rohan, Lucien Libert, Crispian Balmer, Francois Murphy, Olesya Dmitracova and Tom Miles; Editing by Quentin Bryar and Andrew Callus)

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