Eurex warned Société Générale of suspect Kerviel trades in November

Nick Clark
Tuesday 29 January 2008 01:00 GMT

The derivatives exchange Eurex alerted Société Générale, the French group hit by the world's biggest banking fraud, to the activities of alleged rogue trader Jérôme Kerviel last year, according to French prosecutors.

Jean-Claude Marin, the head of the Paris prosecutors office, announced in a press conference yesterday: "Eurex alerted Société Générale in November 2007 about the positions taken by Jérôme Kerviel. Questioned by the bank, he produced a fake document to justify the risk cover."

SocGen declined to comment yesterday. Eurex said it could not comment on an individual trader's activities but added that the risk management at its exchanges had functioned correctly, "also in this case".

As well as warnings from Eurex, the bank had also questioned M. Kerviel after internal alarms were set off. Jean-Pierre Mustier, the head of investment banking, said over the weekend: "When controls came up, most of the time he admitted that it was not a proper transaction and that it was a mistake. He was replacing it with another transaction of a different nature that would be checked by another department."

The French banking group said it first became aware of M. Kerviel's activities on 18 January. Yesterday's announcement will heap further pressure on the chairman, Daniel Bouton, as well as M. Mustier over how M. Kerviel's activities were not discovered earlier.

The Paris prosecutor confirmed M. Kerviel would be charged with forgery, breach of trust and fraud and could face a sentence of up to seven years if found guilty. He has admitted hacking into computers and forging emails, and that he had acted alone. He also alleged that other traders at the bank had acted in a similar fashion by breaching their trading limits. The French bank would not be drawn yesterday on whet-her it intends to investigate these claims.

M. Kerviel built up €50bn (£37bn) worth of bets, which he hid from his managers partly through the use of fictitious accounts and falsified documents. As he worked on secret late-night trades, he built up a profit that would have been difficult to explain to his bosses. Instead of stealing the money, he set out to lose it and send the balance back to neutral. He was too successful and ended up with a €1.4bn deficit, which caused losses of €4.9bn when it was unwound as the markets fell on so-called "Black Monday" last week. M. Kerviel gave himself up to French authorities on Saturday. He had been lying low after SocGen announced the losses two days earlier. Jean-Michel Aldebert, who heads the prosecutor's financial division in Paris, said on Sunday that the interrogation had been "extremely fruitful".

After days of speculation over his motives, the prosecutors revealed he had wanted to prove himself an "exceptional trader". He had joined SocGen in 2000 and spent five years in the middle offices. It was here that he familiarised himself with the group's systems and controls, the group said.

Elisabeth Meyer, one of M. Kerviel's lawyers, called the reaction to M. Kerveil's actions a "lynching". She said he would deny fraud, adding: "In my view, he was thrown to the lions before being able to explain himself." Separately, a French lawyer has launched two complaints against the group on behalf of 100 small shareholders. Frederik-Karel Canoy has filed separate suits against a director and the bank, alleging insider dealing and market manipulation.

Canoy is seeking damages for his clients, who have seen the value of their shares plummet from €130 to a little over €70 in just six months.

SocGen's shares tumbled yesterday after a report by Citigroup said its shares were worth €65 each. The stock fell from €73.87 to as low as €66.8, although it rallied to close at €71.8. The US broker said SocGen had become vulnerable to a potential takeover and backed HSBC as the most likely candidate.

Citigroup analyst Kimon Kalamboussis said in the report: "HSBC would be among the most convincing bidders for SocGen." Mr Kalamboussis added that the losses had "severely impaired" SocGen's franchise and that the forthcoming €5.5bn right issue would dilute earnings. M. Bouton, the chairman, was in London yesterday to try to drum up support for the capital raising.

A cross-border move for the French bank could spark a storm over protectionism, as it seems likely that President Nicolas Sarkozy would block a deal.

Traders remained in shock about the size of the losses yesterday. Matt McKeith, head of equity dealing at First State Investments in Hong Kong, told Reuters: "I'd always be slightly suspicious of the company line in these circumstances."

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