/ 2 February 2008

France’s fragile fraudster

Jerome Kerviel, an introverted young city trader, lived on a tree-lined street in Neuilly-sur-Seine, a wealthy Paris suburb.

Its yuppies live by Nicolas Sarkozy’s mantra “work more to earn more”. So when a handsome, well-dressed but solitary young banker rose at dawn every day for work and returned late at night to his one-bedroom flat, neighbours thought his dedication was to be encouraged.

Kerviel (31), a junior trader at France’s second-biggest bank Société Générale, cost his employers â,¬4,9-billion in the biggest trading fraud by a single person. His staggering scheme of fictitious customer accounts caused five times the financial damage of rogue trader Nick Leeson, who sparked the collapse of Barings Bank in 1995.

Like Leeson, Kerviel was an ambitious working-class lad who moved away from his parent’s fishing town on the Brittany coast to make it big. But while Leeson reached the top and lived the high life in Singapore, Kerviel, after eight years at SocGen, was a run-of-the-mill junior trader whose â,¬100 000 annual salary and bonus did not reach the heights of the trading floor pay potential. He made no money from the secret fraud run from his trading desk at the bank’s head office, leaving colleagues and the bank baffled as to what drove him. The bank said he had family problems.

Kerviel’s father, a blacksmith turned metalwork teacher, died suddenly two years ago, but locals in his home town said he was a serious man with “his head on his shoulders”, questioning the theory put forward by the head of the Bank of France that he was a “genius of fraud”.

Kerviel was said to have been given counselling by doctors from the bank, where officials painted a portrait of a troubled man with a fragile mental state. SocGen said he had acted alone in his own imaginary world.

There was speculation that he could have been trying to prove himself to the bank, to create his own spectacular method of making profits or simply prove the system could be broken. Union officials warned he might have been caught up in a quest to get a good bonus.

Kerviel hadn’t taken a day’s holiday in the past eight months, knowing that if he left his desk he would be found out.

Colleagues said he seemed to be a shy man who would answer questions with “yes and no”, but rarely struck up a conversation with anyone at work.

“If he was a genius, then we didn’t spot it,” said Dominique Chabert, his university tutor. He was “not a student who made an impression on his year, either in a good or bad way”.

Kerviel grew up with his brother and parents in Pont l’Abbe, a picturesque town of grey granite houses in western Brittany. There was disbelief in the town last week. The Kerviels were described by neighbours as a “normal family”. His father’s death was perhaps the only explanation for the “family problems”.

French bank was warned

Société Générale was alerted to the scale of Jerome Kerviel’s positions in November last year by the Eurex derivatives exchange, French prosecutors revealed on Monday.

The revelations came on a day of increasing pressure on the bank as 100 small shareholders took legal action against it over insider trading and market manipulation and minority investors accused it of issuing misleading information.

The bank’s woes were exacerbated when Kerviel, the “lone” rogue trader behind its â,¬4,9-billion losses, accused his SocGen colleagues of similarly trading beyond their limits.

Jean-Claude Marin, the Paris public prosecutor, said Kerviel had fooled his employer about his positions in the market by producing a fake document to justify the risk cover. This was seized upon by SocGen as it struggled to defend itself against mounting charges that its controls were extraordinarily lax and left Kerviel to act unapprehended for 15 months.

Eurex said its processes and controls “functioned correctly at all levels, also in this case” after SocGen admitted it had been warned by the exchange on more than one occasion. “There were false trades picked up but he explained them away, justified them or fabricated covers,” the bank said.

Investigating judges placed Kerviel under formal investigation on Monday while the inquiry continues. The allegations concern breach of trust, computer abuse and falsification, said his lawyer, Christian Charriere-Bournazel. He faces a sentence of up to seven years.

Marin said Kerviel, who gave himself up on Saturday, told investigators that other irregular deals had taken place since the end of 2005, which apparently contradicts SocGen’s contention that the 31-year-old trader was a one-off fraudster of genius.

The prosecutor said the investigation showed that Kerviel did indeed act alone — out of motives to prove himself a star trader and earn a bonus of ­â,¬R300 000, rather than to harm the bank. Kerviel was released on bail on Sunday night.

At the same time SocGen faces intense criticism from its shareholders. An enraged Colette Neuville, head of Adam, a minority shareholders’ lobby, asked the French financial services authority for a formal inquiry into alleged insider trading by a director and/or others at the bank.

She also wants the authority to investigate whether the bank deliberately misled investors about the scale of its sub-prime losses in November last year when it put them at â,¬230-million — only to announce a â,¬5-billion hit two months later.

Frederik-Karel Canoy, a lawyer acting for 100 shareholders, said he launched legal action against SocGen over the way it unwound billions of euros of allegedly fraudulent share deals last week.

The bank said on Sunday it had unwound Kerviel’s positions, amounting to â,¬50-billion, “in particularly unfavourable market conditions” between Monday and Wednesday last week after discovering them on January 18.

Canoy said the bank should have informed markets about its pending losses before embarking on its huge three-day selling spree to unwind Kerviel’s positions.

SocGen said it unwound these positions in a controlled manner and within a volume limited to less than 10% to “respect the integrity of markets”. — Â