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French Trader Single-Handedly Orchestrated $7.14 Billion Fraud

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PARIS — In what appears to be the largest trading fraud ever carried out by a single person, a young trader at French bank Societe Generale 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 young trader, identified as 31-year-old Jerome Kerviel, atop the pantheon of rogue traders for a scheme from which bank executives said he apparently did not make a personal profit.

Societe Generale Chief Executive Daniel Bouton said Kerviel's motivations were "totally irrational" but gave no further clues to his motive.

The bank, France's second-largest, said Thursday it had learned of the fraud last weekend. And the timing could not have been worse: 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.

Societe Generale said the losses amounted to 4.9 billion euros, or about $7.18 billion _ one of history's biggest banking frauds. It led to immediate calls for tighter regulation.

The fraud also raised comparisons to Nick Leeson, the trader who bankrupted British bank Barings in 1995 after he lost 860 million pounds _ then worth $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 Societe Generale 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 & Co. and Morgan Stanley.

The company said it expects to post a net profit of 600 million to 800 million euros ($874 million to $1.16 billion) for all of 2007 _ even after the fraud and another 2.05 billion euros ($2.99 billion) lost in the subprime mortgage crisis.

Moody's Investors Service late Thursday downgraded Societe Generale's bank financial strength rating to "B-" from "B" and assigned a "negative" outlook to the rating, which means the rating could be cut later. Moody's also downgraded the bank's long-term debt and deposit ratings to "Aa2" from "Aa1" but kept those ratings' outlooks "stable."

The downgrade was primarily driven by the fraud losses but also follows Societe Generale's announcement of the credit-related write-downs, Moody's said.

Kerviel, employed by the bank 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, where he invested the bank's own money by hedging on European equity market indices _ 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 was involved in what the bank calls "plain vanilla," or the more basic forms of hedging, with limited authority. He took home a salary and bonus of less than 100,000 euros, or about $145,700 _ relatively modest in the financial world.

The bank said he went far beyond his role _ taking "massive fraudulent directional positions" in various 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 by colleagues and superiors 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.

Jean-Pierre Mustier, chief executive of the bank's corporate and investment banking, said he is convinced Kerviel acted alone. Three union officials representing Societe Generale 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, a senior analyst with Celent.

Societe Generale said Kerviel had admitted to the fraud and had been dismissed along with some of his bosses. Bouton offered to resign, but the board rejected his offer.

The bank also filed a legal complaint Thursday accusing Kerviel of fraudulent falsification of banking records, use of such records and computer fraud.

Elisabeth Meyer, Kerviel's lawyer, said on French television network BFM that her client "is not fleeing" and is "available for judicial authorities," but did not specify where he was.

The lawyer said Kerviel had been suspended on Sunday, and was awaiting formal written notification of the suspension.

The Bank of France, the country's central bank, said it was immediately informed of the fraud and was investigating. Its governor, Christian Noyer, said the trader had an abnormal knowledge of Societe Generale's trading systems, and measures would have to be taken to prevent this happening again.

Traders are usually kept to tight spending limits, told "you may trade this much and no more," said Robert Kolb, a professor of finance at Loyola University Chicago. Those controls apparently failed in this case.

Kolb said he expected "a lot of soul searching" in the industry, and predicted that one upshot might be new measures to prevent people who have previously monitored traders later becoming traders themselves.

"It shows that we are in a very troubled period for banks, and I think that it's in such troubled periods that difficult things happen," said Gilles Glicenstein, president of asset management at France's largest bank, BNP Paribas.

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 4.1 percent to close at 75.81 euros ($111.16) after they resumed trading.

Founded in 1864 after a decree signed by Napoleon III, Societe Generale employs 120,000 people in 77 countries.

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AP writers 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.