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French Minister Says Controls Failed

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PARIS — Controls at French banking icon Societe Generale missed or ignored suspicious activity by a trader whose dealings led to about $7 billion in losses, the finance minister said Monday.

Meanwhile, repercussions of the affair may have reached the United States: the U.S. Securities and Exchange Commission is examining stock sales by an American board member of the bank in the days before the losses were made public, The Wall Street Journal reported.

French Finance Minister Christine Lagarde largely took the bank's side in a careful 11-page report, submitted Monday to the prime minister, on the trading scandal that has embarrassed and unsettled the banking sector.

The report backs embattled CEO Daniel Bouton and the way he handled the discovery that the trader had overstepped his authority, evaded computer controls and bet more than the bank's worth on futures in European equity markets.

It also seeks to absolve the government by saying the bank took too long to report the suspicious activity to government officials. Amid speculation that the bank could be sold off or broken up, Lagarde insisted Societe Generale didn't need propping up _ but conceded that the government would favor a friendly takeover if the bank can no longer stand on its own.

The loss wiped out the bulk of SocGen's net profit for 2007, and came as it was already suffering from the crisis in U.S. subprime mortgage loans. The bank's shares, which have fluctuated since the announcement, closed down 4.7 percent at 83.61 euros ($123.74) on Monday.

Lagarde's harshest comments concerned the bank's own controls.

"Very clearly, certain mechanisms of internal controls of Societe Generale did not function, and those that functioned were not always followed by appropriate modifications," Lagarde told reporters after submitting her report.

The bank says it lost 4.82 billion euros ($7.09 billion) in cleaning up unauthorized transactions by trader Jerome Kerviel.

Lagarde's report said the Finance Ministry had no reason to question the bank's assertion that Kerviel acted alone, and that it followed market rules in unwinding his transactions.

Societe Generale says the losses were so staggering because of bad timing. Just as it discovered Kerviel's activity and started closing his positions, world financial markets fell. Some have speculated the bank's actions in liquidating Kerviel's moves may have helped send stock markets down.

Lagarde said Societe Generale's management of the transactions was "in conformity with the existing regulations."

"The unwinding of the positions at the source of the loss on Jan. 21, 22 and 23 was done in a professional way in difficult market conditions that could not be attributed to Societe Generale," Lagarde said.

Her report suggested that other banks could be susceptible to similar problems. She urged closer study of trading risks linked to human error or fraud and suggested tighter and more consistent European and international banking controls.

Among problems the report cited at Societe Generale were cracks in the wall separating the trading floor and the offices where trades are controlled; problems with computer passwords and other security measures; and "atypical behavior" such as Kerviel not taking vacation days that went unnoticed.

Judges have filed preliminary charges against Kerviel for forgery, breach of trust and unauthorized computer activity. Such preliminary charges allow the magistrates time to further investigate and decide whether to send the case to trial.

French market regulators are looking into stock sales by U.S. investor Robert Day, a member of the Societe Generale board. Day, an investment manager with U.S.-based Trust Company of the West, or TCW, and his family's trusts and foundations sold 140 million euros ($206 million) worth of shares in January, before the trading losses were announced.

Societe Generale would not comment on the report of the U.S. probe. The bank maintains that Day had no inside information about Kerviel's unauthorized activity.

A spokesman for Day, Josh Pekarsky, said in an e-mail: "Mr. Day and his family's trusts and charitable foundations sold Societe Generale shares in December and January, which was a window of time where such trades were permitted under Societe Generale's trading policies. All required government disclosures were made. No inside information was used in any way with respect to these sales. Mr. Day has pledged his cooperation into any inquiries of this matter."


Associated Press writer Nathalie Schuck contributed to this report.