Rogue Trader Says His Bosses Turned Blind Eye

Discussion in 'Wall St. News' started by crgarcia, Jan 29, 2008.

  1. AP
    Trader Turns Tables on Bosses in Scandal

    Tuesday January 29, 5:32 pm ET

    By Jamey Keaten and John Leicester, Associated Press Writers

    New Twist in French Bank Scandal: Trader Says His Bosses Turned Blind Eye

    PARIS (AP) -- Terrorist bombs hit London, financial markets wobbled, and Jerome Kerviel was hooked.

    The trader at the center of a massive banking scandal in France told investigators that his spiral of trades that ended in a loss of about $7 billion for Societe Generale began with a 2005 bet that markets would fall -- which proved true after the London bombings that July.

    Perhaps more damaging for Societe Generale, Kerviel also claimed to investigators that his bosses at France's second-largest bank must have been aware of his massive risk-taking on markets but turned a blind eye as long as he was earning them money.

    Kerviel was questioned by police from Saturday through Monday and then presented to judges who pinned him with preliminary charges of breach of trust, forgery and unauthorized computer activity. Such charges mean judges decided that further investigation is needed. If sent to trial and convicted, Kerviel risks up to three years in prison and hefty fines.

    "I can't believe that my superiors were not aware of the amounts I was committing, it's impossible to generate such profits with small positions, which leads me to say that when I'm in the black, my superiors close their eyes about the methods and volumes committed," Kerviel told investigators, according to published excerpts that the prosecutor's office confirmed.

    Respected daily Le Monde and a French Internet news site, MediaPart, published portions of his police questioning on Tuesday. Isabelle Montagne, a spokeswoman for the Paris prosecutor's office, confirmed that the remarks were Kerviel's.

    A lawyer for the bank, Jean Veil, accused Kerviel of lying, telling RTL radio: "When you are questioned by police or judges, you have the right to lie."

    He said the bank was "a victim of someone who lied, who cheated."

    Nevertheless, Kerviel's claims that managers looked the other way were likely to increase pressure on the bank, which has struggled to explain how its layers of checks failed to detect that Kerviel had bet 50 billion euros (nearly $74 billion) -- more than Societe Generale's market worth -- on European markets.

    CEO Daniel Bouton says his offer to resign, already rejected by the board, is still on the table. He found some support Tuesday from French Finance Minister Christine Lagarde, who told senators: "I am not convinced that it is wise to change the captain when the ship lists a little."

    Prime Minister Francois Fillon also said the government will seek to fend off any hostile takeover for Societe Generale.

    France's financial market regulator said Tuesday it has opened an investigation into Societe Generale, but did not give details. Les Echos newspaper reported that the AMF has been examining trading in the bank's shares in the days before it stunned the industry with its Jan. 24 announcement that "massive" fraud by Kerviel cost 4.82 billion euros ($7.09 billion) as it unwound his trades.

    According to five routine declarations published this week by the market watchdog, board member Robert Day, and his family's trusts and charitable foundations sold shares in Societe Generale on Jan. 9, Jan. 10 and Jan. 18 -- the day the bank says it launched an emergency in-house investigation after Kerviel's transactions begin raising red flags.

    The sales totaled 140 million euros ($206 million). Regulators made no allegation of wrongdoing. A lawyer for a group of Societe Generale shareholders has filed a legal complaint asking investigators to look into possible insider trading.

    Societe Generale said Tuesday that Day sold the shares during a limited window when board members are authorized to sell stock.

    "No inside information was used in any way," it said in a statement. "Mr. Day, like the other board members, was not advised of Mr. Kerviel's trading losses."

    The 31-year-old junior trader told investigators of efforts to mask his massive transactions, but said the bank must nonetheless have noticed something suspicious, according to the excerpts of his police testimony.

    "Since I was generating cash, the signs were not that worrisome. ... As long as we are winning and it isn't too obvious, and it's convenient, nobody says anything."

    Kerviel said he had sought a 2007 bonus of 600,000 euros (about $886,000), but was told by a supervisor that he couldn't expect more than 300,000 euros (about $443,000).

    He insisted that his No. 1 concern was "earning money for my bank" -- not personal enrichment. The bank and prosecutors also say he did not appear to have pocketed money from the massive positions he built up in futures on European markets.

    Kerviel said the mere fact that he only took four vacation days in 2007 should have been a glaring sign to the bank that he was unwilling to let another trader step in for him.

    "The techniques I used were not at all sophisticated, and in my opinion, any correctly conducted check should be able to detect these operations," he said, according to the testimony in Le Monde.

    The bank has acknowledged that Kerviel triggered alarms with his transactions "from time to time," but also said that he explained away the red flags as trading errors, and that his mistakes did not outnumber those of other traders.

    But Kerviel told police that other traders and managers concealed some of their trading practices from the bank, according to MediaPart's account of his testimony, which Montagne also confirmed. Kerviel claimed that "several alerts (were) sent to my superiors" in 2007, which he said were e-mail queries about his transactions.

    "If you are not spotted, you are not caught. If you are caught, you are hung out to dry," Kerviel said, according to the account.

    Kerviel acknowledged that he purposefully deceived the bank to hide his trades. He said he forged e-mails and used colleagues' computer log-ins. He claimed he was 1.4 billion euros ($2.07 billion) in the black by the end of 2007 but didn't know how to explain the huge sum to his bosses -- so he hid it with an equal amount of fictional losses.

    "I didn't know how to manage it. I am happy, proud of myself, but I don't know how to justify it. So I decided not to declare it to the bank," he said. "I admit to having taken big positions, which could be qualified as beyond the limits of my role, that I masked with a fictitious operation."

    According to the testimony, Kerviel told investigators that his pattern of hidden trades started with a bet in 2005 on Allianz, apparently referring to the German insurance and banking group. He did not specify which market he bet on, or exactly when it fell. Europe's main indexes all dipped in the immediate aftermath of the attacks.

    "I took a position on Allianz, betting the markets would fall. It just so happened that a little while later, the market fell after the London bombings and it's the jackpot, euro500,000," Kerviel claimed. "It makes you want to continue, there's a snowball effect."

    Associated Press writer Angela Doland in Paris contributed to this report.
  2. I like this because he wasn;t even a high level trader.