The board of Société Générale admitted last night to serious lapses in its internal controls during the period that rogue trader Jérôme Kerviel racked up €50bn (£38bn) in positions that ultimately cost the French bank a record €4.82bn loss.
An internal investigation by the bank, published by a three-member committee of inquiry, found that operating staff "did not systematically carry out more detailed checks" of Kerviel’s long-standing activities which only came to light on January 18. SocGen was alerted by European derivatives exchange EDurex to strange dealings by traders as early as last November and has been charged by the French government and the Bank of France with failing to follow up on these warnings or commit enough trained staff to handle risk management.
The 20-page "progress report" published by the committee headed by former Peugeot Citroën chief Jean-Martin Folz also pointed to "the absence of certain controls that were not provided for and which might have identified the fraud".
It comes on the eve of SocGen’s annual results which are provisionally expected to show a net profit of €947m after accounting for the €4.82bn loss engendered when the bank "unwound" Kerviel’s positions and a further €2.05bn losses related to the sub-prime crisis. Investors and analysts will scrutinize the figures to see if they indicate wider deficits, notably regarding the sub-prime related market and subsequent credit crunch.
SocGen has accused Kerviel, a 31-year-old back office administrator turned would-be star derivatives trader, of being a "fraudulent genius" who acted alone. But Kerviel, who is being held on remand in a Paris prison, has not been charged with fraud.
The report backs SocGen’s main argument that Kerviel acted alone. It says: "At this stage of the investigations there is no evidence of embezzlement or internal or external complicity (ie the existence of a third party who knowingly assisted the fraudster to conceal his positions)."
Kerviel, charged so far with breach of trust, forgery and computer hacking, has been linked with a broker called Moussa Bakir, employed at Fimat, a brokerage now half-owned by SocGen and renamed Newedge, and with a London-based broker known as "Mat". Bakir, interviewed by police, prosecutors and magistrates, was released without charge.
The report said the bank’s internal investigations were continuing, particularly to "cover a wider area than the activities of the author of the fraud".
It gave no further details of the scope of the inquiries which are assisted by auditors Price waterhouse Coopers.
It also suggested that "on the whole" the bank’s internal controls "were carried out in accordance with the procedures but did not make it possible to identify the fraud before January 18 2008".
The report reiterated that Kerviel started building up unauthorized trading positions in 2005 and 2006 for "small amounts", but they got bigger from March 2007 onwards.
The SocGen report reveals that Kerviel got a €60,000 bonus for 2006. He asked for a €600,000 bonus for 2007, after building up a €1.4bn profit but instead received half that. Leaked judicial documents suggest he had been sitting on a €2bn loss six months earlier. The report said Kerviel’s deception included rogue deals on warrants with a deferred start date and futures contracts.
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