PAIR (AP) — Societe Generale uncovered a $7.14 billion fraud — one of history's biggest — by a single futures trader who orchestrated a series of bogus transactions that spiraled out of control amid roiling markets this week, the French bank said Thursday.
Executives said the trader, a French man in his 30s, acted alone. CEO Daniel Bouton said the trader's motivations were “irrational” and that he may not have benefited directly from the fraudulent deals.
The bombshell announcement destabilized a major bank already heavily exposed to the subprime crisis and rattled the global banking sector. France's second largest bank said it will seek 5.5 billion euros ($8.02 billion) in new capital.
Trading in Societe Generale's shares, which have lost nearly half their value over the past six months, was suspended Thursday morning. Trading resumed midday and shares dropped 5.5 percent to 74.77 euros ($108.97)
Societe Generale said it detected the fraud over the weekend at its French markets division.
The trader had misled investors in 2007 and 2008 through a “scheme of elaborate fictitious transactions,” the bank said. The trader, who was not named, used his knowledge of the group's security systems to conceal his fraudulent positions, the statement said.
The man confessed to the fraud, the bank said, and was being dismissed. His supervisors were to leave the group. Bouton offered his resignation but it was rejected by the board.
Bouton said the fraud was uncovered after the crisis on world markets began late last week, as the trader rushed to close fraudulent positions.
The man had worked for the bank since 2000 and earned a salary and bonus of less than 100,000 euros ($145,700), executives said.
“I'm convinced he acted alone,” said Jean-Pierre Mustier, chief executive of the bank's corporate and investment banking, who interviewed the trader when the fraud was uncovered.
The trader was responsible for basic futures hedging on European equity market indices, the company said, making bets on how the markets would perform at a future date.
“Detecting the fraud over the weekend was problematic because world stock markets on Monday and Tuesday fell hugely around the world,” said Janine Dow, senior director at Fitch Ratings financial institution group in Paris. “When the positions had to be unwound, the bank did that in a terrible market of falling equities.”
“In hindsight, it was this guy's superior knowledge of the control system of every aspect of trading at the bank that allowed him to build up fraudulent positions and hide them,” she said.
The fraud appeared to be the largest ever by a single trader. If confirmed, it would far outstrip the Nick Leeson trading scandal in 1995 that bankrupted British bank Barings. Barings collapsed after Leeson, the bank's Singapore general manager of futures trading, lost 860 million pounds — then worth $1.38 billion — on Asian futures markets, wiping out the bank's cash reserves. The company had been in business for more than 230 years.
The Bank of Credit and Commerce International failed after a 1991 scandal that led to claims by depositors and creditors exceeding $10 billion at the time.
Gilles Glicenstein, president of asset management at rival French bank BNP Paris — France's largest — said, “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.”
“This is not good news for Societe Generale, but also for banks in general. It can create doubt, but at the same time in this period, we are making efforts to be transparent in order to give confidence back,” he said at the World Economic Forum in Davos, Switzerland.
Axel Pierron, senior analyst at Celent, an international financial research and consulting firm, was stunned that a trader could be involved in such a massive fraud 13 years after the Barings Bank collapse.
“The situation reveals that banks, despite the implementation of sophisticated risk management solutions, are still under the threat that an employee with a good understanding of the risk management processes can getting round them to hide his losses,” he said.
At Societe Generale, the fraud announcement came on the back of subprime-related difficulties. Subprime writedowns linked to the crisis in financial markets amounted to 2.05 billion euros ($2.99 billion), Societe Generale said.
The Paris-based bank said that with the fraud and writedowns, it expects net profit of 600 million euros to 800 million euros ($874 million to $1.16 billion) for all of 2007.
The Bank of France said it was immediately informed of the fraud and was investigating.
Societe Generale's full-year results will be announced Feb. 21.
AP writers Matt Moore in Davos, Switzerland, and Thomas Wagner in London contributed to this report