Investigation at SocGen 'to take months'

Forensic accountants predicted months of investigation into what went wrong
at Société Générale, where a rogue trader is thought to have cost the bank
billions.

Rival investment banking executives also said it was ‘inconceivable’ that
rogue trader Jérôme Kerviel built up positions in excess of market value,
without triggering large and obvious margin calls which involve the bank putting
cash up as collateral.

People briefed on the fraud confirm that the bank received and paid large
margin calls as a result of the falling value of the futures position the trader
had accumulated, the FT reported.

Kerviel is also alleged to have constructed fake hedging contracts which were
then cancelled, leading to cash deficits.

An internal audit is currently underway at the bank, the paper said this
morning.

Meanwhile forensic experts preducted a long investigation. Simon Bevan, head
of the fraud team at BDO Stoy Hayward, said: ‘This is months of investigation.
Look at Barings – there’s no way you can do it in days. You interview people, go
through the accounting records, the electronic records, the e-mails, the phone
records. Then you look at their background, you check their holiday time – did
trades occur then, because you know there is collusion if so?’

‘Even if he was able to circumvent the normal controls, the deteriorating
cash position should have served as a warning sign,’ one bank executive said.

But Kerviel’s lawyers hit back accusing the bank of creating a ‘smokescreen’
to divert attention from other losses.

According to Kerviel’s lawyers, Elisabeth Meyer and Christian
Charrière-Bournazel, SocGen wanted to ‘raise a smokescreen that would distract
the public’s attention from far more substantial losses that it had made in
recent months, notably in the unbelievable subprime affair.’

They also insisted their client ‘did not commit any dishonest act, nor
embezzle a single cent, and he in no way benefited from the bank’s funds’.

The bank revealed that the trader had concealed trades by creating
‘fictitious operations’ registered in the bank’s systems but which did not
correspond to any economic reality.

An internal audit is underway to reveal more details about how the trader
evaded detection for almost a year, by only choosing ‘very specific operations
with no cash movements or margin call and which did not require immediate
confirmation’ and by constantly switching between different types of instrument.

By the time Kerviel was caught, he had amassed positions worth €30bn on the
Euro Stoxx, an index of Europe’s biggest companies, €18bn on Germany’s Dax and
€2bn on the UK’s FTSE.

The bank believes he acted alone and did not profit from his trades, and
promised to reveal more after the internal audit has completed.

Further reading:

Société Générale announces massive write-down – and
fraud

Societe
Generale chief, Daniel Bouton, faces President Nicolas Sarkozy’s wrath as
critical voices grow