January 24, 2008
Société Générale hit by €5bn trading fraud
The French bank disclosed today that a rogue trader had defrauded it of almost €5 billion, prompting it to seek emergency funding
Patrick Hosking, Banking and Finance Editor
The French bank Société Générale stunned financial markets today by revealing that it had been the victim of one of the largest frauds by a rogue trader — losing four times as much as Nick Leeson, the man who sank Barings.
The second-biggest French bank said that it had lost €4.9 billion (£3.7 billion) as a result of the rogue trades by a Paris-based trader who concealed his positions through "a scheme of elaborate fictitious transactions".
SocGen was forced today into an emergency €5.5 billion capital-raising to shore up its ravaged balance sheet.
It said that it was in the process of dismissing the unnamed trader, who had "confessed to the fraud".
Daniel Bouton, SocGen's chairman said today that "four or five" of his managers and supervisors had resigned and a legal investigation was now taking place.
An offer from Mr Bouton to resign was rejected by the board.
Mr Bouton apologised to shareholders and said, “This was a lone man who built a concealed enterprise within the company, using the tools of Societe Generale, and who had the intelligence to escape all control procedures."
The fraud appears to be one of the biggest in history, dwarfing the £827 million lost by Mr Leeson, whose rogue trading led to the collapse of Barings in 1995.The trader had been with the bank for about six years and was a relatively junior employee. According to Mr Bouton, he was paid less than €100,000 including bonus, a small wage for anyone in investment banking.
"He was trading relatively small positions," said Mr Bouton. "He was at the lower end of the scale."
SocGen said the rogue trades - effectively huge bets on European stock markets going up - were placed in 2007 and 2008 but hidden from managers. They were first discovered on Friday evening after a "fishy" trade made in December was investigated.
The bank took the first three days of this week desperately attempting to unwind the positions in what proved to be hostile conditions as markets plunged. If they had gone up, the positions might have made gains for the bank, Mr Bouton said.
As it was, they turned into "gigantic and collossal" losses.
Analysts said SocGen's unwinding of the massive rogue positions on Monday would have contributed to the violent slump in share prices and may therefore have played a part in the shock decision by the US Federal Reserve to slash American interest rates.
"There's a very strong link between the equity futures market and the cash equities market," said one equity strategist at a major bank. "It may have influenced Fed thinking."
The trader managed to conceal his positions through his knowledge of the administrative side of the bank, "the middle office", where he worked for three years until 2005.
The bank said: "Aided by his in-depth knowledge of the control procedures resulting from his former employment in the middle office, he managed to conceal these positions through a scheme of elaborate fictitious transactions."
SocGen described the fraud today as "exceptional in its size and nature".
