Major French Bank Uncovers Massive Fraud

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CBNNews.com -- Societe Generale, one of the oldest banks in France, has uncovered a fraud scheme worth more than $7.14 billion. If verified by financial experts, it could go down as the largest fraud in history.

The bank said Thursday that the fraud was instituted by a single futures trader. The plan was orchestrated as a series of bogus transactions, which came undone this week amid the volatile world markets.

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 discovery and subsequent announcement of the fraud has shaken the Paris-based major financial institution. The bank known in financial circles as SocGen, is dealing with the subprime crisis which has also rattled the global banking industry. France's second largest bank said it will seek 5.5 billion euros in new capital.

Trading in SocGen shares was suspended Thursday morning. Trading resumed midday and shares dropped 5.5 percent to 74.77 euros. The company's stock has lost nearly half its value over the past six months.

Bank Detected the Fraud

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 , 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.

Largest Fraud Ever?

The fraud may be the largest ever by a single trader. The largest fraud to date is the Nick Leeson trading scandal in 1995 that bankrupted British bank Barings. Barings collapsed after Leeson, lost 860 million pounds - then worth $1.38 billion - on Asian futures markets, wiping out the bank's cash reserves. Leeson had served as the bank's Singapore general manager of futures trading. The company had been in business for more than 230 years.

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.

The SocGen reported that it expects net profit of 600 million euros to 800 million euros for all of 2007, even with the fraud and reported losses.

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.

Sources: Associated Press, Societe Generale Web Site, Wikipedia

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