Le Rogue Trader: Financial world left stunned by £3.7bn fraud

The world of high finance, already shaken by the imprudent greed of some of its biggest corporate names, was stunned yesterday by the largest ever fraud by an individual "rogue" trader.

Jérôme Kerviel, a Frenchman aged 31, working for Société Générale, one of the world's most reputable banks, lost almost €5bn (£3.7bn) in a series of complex, concealed deals on European stock derivatives.

The relatively junior bank employee, who earned less than €100,000 a year, managed to evade supposedly fraud-proof safeguards to stake an estimated €50bn – which is more than the GDP of Slovenia, Uganda or Cuba – on the future direction of European stock markets. France's second largest bank had to scramble desperately to abandon his concealed trades on Monday and Tuesday, against the calamitous background of sharply falling European stock exchanges.

According to one, unconfirmed, report, M. Kerviel was on the run last night after admitting his actions last weekend. Senior officials of SocGen said they "knew nothing" about his whereabouts. They admitted they had let him "go home" last Saturday and had kept the fraud secret until they had closed down his illegal deals. Officials said M. Kerviel was in a "fragile" mental state after family problems and had possibly acted out of "malevolence".

The massive fraud came at the worst possible time for the global finance industry. It will renew doubts about the stability, and ruling morality, of leading banks in the wake of the global recession threatened by the sub-prime crisis in the United States and beyond.

The French bank's president and chief executive Daniel Bouton, described the trader's behaviour yesterday as "totally irrational". He said there was no evidence of self-enrichment through embezzlement of funds.

M. Kerviel was an expert on the bank's computerised, anti-fraud protections from his previous work in another, junior managerial post. He was promoted to the bank's financial futures desk, Delta One, in the La Défense business district, west of Paris, two years ago.

In the space of the past year, he is believed to have set up an independent, "virtual" company at the heart of SocGen. He created a morass of larger and larger, unauthorised trades. He disguised them by seeming to cancel them on the computer and replacing them with, other, more reasonable but fictitious deals.

Unnoticed by his superiors, M. Kerviel bet huge sums – much larger than he was authorised to commit – on stock market "futures". He is also suspected of hacking into the bank's computers to alter data and cover his tracks.

The scale of M. Kerviel's losses dwarfs any previous fraud by any individual "rogue" trader. Société Gé*érale, a pillar of the French financial establishment since the 19th century, estimates its losses as €4.9bn or $7.2bn. That is almost five times as much as the $1.38bn blown by the British trader Nick Leeson on the Asian futures market in 1995: losses that destroyed the British merchant bank Barings. The money lost by the French bank approaches in dollar terms the $10bn wiped out by the world's biggest banking scandal, the collapse of the fraudulent Bank of Credit and Commerce International in 1991.

Société Gé*érale, the French government and the banking world sought yesterday to portray the disaster as the results of the deranged and inexplicable behaviour of a single individual. However, the calamity generated awkward new questions on the reliability of the anti-fraud defences erected by banks since the Leeson affair and similar rogue trading scandals in the US and Japan,

"We get the feeling that the financial markets have become a big casino which has lost control. It seems incredible that Société Gé*érale can lose €5bn through one operator," said Alain Crouzat, a portfolio manager at Montsegur Finance in Paris.

Centre-left French politicians asked if there was any moral difference between a single employee carried away with a desire to make a financial killing and the large US, and other, banks who had been swept along by the profiteering craze for "sub-prime" or unsound loans.

François Hollande, leader of the Parti Socialiste, called for new legislation to enforce more "transparency" in large transactions by French banks.

France has, until now, been relatively sheltered from the sub-prime crisis. Société Gé*érale had been a European leader in investing in new forms of financial instruments. It admitted yesterday, it had also lost €2.2bn on bad US investments, infected by the sub-prime virus. The bank, nonetheless, managed to record a profit of €800m in 2007 (compared to €5bn in 2006).

Unlike Barings, SocGen, the 13th largest bank in Europe, is not in danger of collapse. It has already raised over €5bn on the markets to help replace its losses.

The bank's shares were at first suspended yesterday but then fell more than 4 per cent when trading resumed. A group of 100 shareholders in SocGen then began a civil lawsuit against unnamed bank officials for "fraud, breach of trust, use of forged documents, complicity and receipt of stolen goods".

M. Kerviel also faces criminal action. The bank has begun legal proceedings against him for "forgery" and "intruding" into its computer hard disks. He and all the managers responsible for him have been fired. M. Bouton, offered to resign earlier this week but was asked to carry on by his board.

M. Kerviel worked for a division of the bank that traded in stock exchange "futures". More specifically, he worked on so-called "plain vanilla" futures – bets on the direction of European share prices.

Plain vanilla futures are relatively simple financial instruments that take out a position on the upwards or downwards direction of stock exchanges and can be cancelled up to an agreed date.

SocGen said yesterday it had uncovered the fraud in a routine inspection last weekend. M. Kerviel had evaded detection because he knew when the inspections took place. Finally, he made a mistake.

He admitted his actions last weekend and was allowed by the bank to go home. Senior bank officials admitted yesterday it might have been a "mistake" but they were anxious to conceal the fraud until they had taken action to abandon M. Kerviel's massive cat's cradle of illegal trades.

When the full extent of the fraud was uncovered – amounting to an "accumulator" bet of more than €50bn on rising share prices – European stock exchanges were in freefall on Monday. A taskforce of the bank's most senior officials – sworn to secrecy – scrambled to sell off the futures and save as much of the money as possible. "It was the worst two days of my life," one bank official told Le Monde.

M. Bouton told a press conference that initial investigations suggest the trader was acting alone: "It was an extremely sophisticated fraud in the way it was concealed." But he said the trader's actions were "totally irrational". There was no sign that the dealer had sought to make personal gains.

"From his trading position, he created his own clandestine business within our trading floor ... He managed to hide each position he took by taking other positions."

Another SocGen official described M. Kervile as "relatively junior, not one of our stars." Small wonder, if the trader was working, not for SogGen, but on his own, mysterious network of trades.

The man who broke a bank – and other trading disasters

Yasuo Hamanaka

Sumitomo; Lost £1.3bn in 1996

Hamanaka, a chief copper trader at Sumitomo Corporation – one of the largest trading companies in Japan – was jailed for eight years in 1998 after it emerged he had conducted off-the-book and bogus trades for more than 10 years. At first, Hamanaka's fraudulent activity, driving up the price of copper, had made Sumitomo huge profits, but eventually cost the corporation £1.3bn.

Nick Leeson

Barings; Lost £827m in 1995

Leeson, who worked in Barings' Singapore office, at first made great profits for the bank through unauthorised speculative trades in derivatives and futures. His efforts added £10m to Barings' annual income and earned Leeson a bonus of £130,000. However, his luck turned and he began hiding his trading losses in one of the bank's error accounts. The losses grew to £208m by the end of 1994 as he made more desperate attempts to recoup the money. Leeson fled in February 1995 after taking a final gamble that the Toyko Stock Exchange would not move significantly overnight. It would have been a pretty safe bet, had the Kobe earthquake not struck, sending Asia's markets into a frenzy. Leeson left a note saying "I'm sorry". The bank's losses at this stage were £827m, twice the bank's trading capital. After a failed bail-out attempt, Barings was declared insolvent, after more than two centuries of trading, on 26 February. In December 1995, Leeson was jailed for six years Singapore, and was released in 1999. He is now the commercial director of Galway United FC.

Toshihide Iguchi

Daiwa Bank; Lost £557m in 1995

Iguchi, a former car salesman who rose to become one of Daiwa's senior US executives, confessed in 1995 that he had lost £557m through unauthorised bond trading. Hiding his losses from his bosses while he tried to trade back to a profit, Iguchi sometimes traded as much as £250m worth of US Treasury securities in a day. It emerged he had falsified more than 30,000 trading slips over a decade. He was jailed for four years for fraud and falsifying documents, and had to pay £1.3m in fines.

John Rusnak

Allied Irish Bank (AIB); Lost £350m in 2002

Rusnak was a Baltimore-based currency trader for Allfirst bank, which had been part of the AIB Group. Betting mainly on the Japanese yen, Rusnak used fictitious options contracts to hide his trading losses of more than £350m over several years. By 2002, when checks revealed the bank's exposure, Rusnak had secretly bet £3.8bn of AIB's money on the yen rising against the dollar – a good deal more than his trading limit of £1.25m. Rusnak faced a jail sentence of 30 years, but achieved a 7.5-year term after a plea bargain with US prosecutors. He will have to pay £500 a month when he is released, and is still liable to pay back all of the £350m he lost.

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