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$7 billion French bank fraud

A trader is accused of making unauthorized bets on markets.

Jerome Kerviel had limited authority.
Jerome Kerviel had limited authority.Read more

PARIS - In what appears to be the largest trading fraud ever carried out by a single person, a futures trader at the 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 Societe Generale's multilayered security systems.

It would place the bank employee, identified as Jerome Kerviel, 31, 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 officer Daniel Bouton said Kerviel's motivations were "irrational" but offered no details.

The bank, France's second-largest, said yesterday that it had learned of the fraud last weekend. 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 three days to unload them.

Societe Generale said the losses amounted to 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 the British bank Barings in 1995 after he lost $1.38 billion on Asian futures markets, wiping out the bank's cash reserves.

Leeson told the British Broadcasting Corp. yesterday that he was not shocked such a fraud had occurred again, but that "the thing that really shocked me was the size of it."

Bouton insisted Societe Generale was 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.

Kerviel, employed by the bank since 2000, had worked his way up from a supporting role in an office that monitored trades to a job on the more glamorous futures desk, where 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 was involved in what the bank calls "plain vanilla," or the more basic form, 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 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.

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 believed Kerviel had acted alone. Three union officials representing Societe Generale employees said managers at the bank had told them Kerviel was having "family problems."