Massive Fraud at SocGen Dwarfs Barings Scheme

A futures trader at the Societe Generale Group used "plain vanilla" trades to fleece the bank out of $7.2 billion.

French banking giant Societe Generale Group announced on Thursday morning that it uncovered a $7.2 billion fraud tied to the actions of one futures trader in the investment banking division. The employee, who confessed to the fraud, has been fired and legal action will be taken against him, said the bank in a statement. His name has not yet been released.

The managers that supervised the trader have also been fired. The scheme came to light following an internal investigation that took place over the weekend. Calling the fraud “exceptional in its size and nature,” bank officials identified as the culprit one trader who was responsible for “plain vanilla” futures hedging on European equity market indices. According to the bank, the trader took “massive fraudulent” positions in 2007 and 2008 beyond his limited authority. He used his in-depth knowledge of the bank’s internal control procedures — that he gained as a middle manager — and concealed his long and short positions by creating “elaborate fictitious transactions.”

As a result of the incurred losses, and as a way to strengthen the bank’s capital position, the board intends to raise $5.5 billion in new capital. The board is also expected to recommend a dividend for 2007 that will be in line with the group’s 45 percent payout target.

According to the bank, there is no residual exposure related to the positions that the trader took. However, the bank will post additional write-downs of $3 billion for the fourth quarter of 2007, comprising $1.6 billion related to U.S. residential mortgage risk; $806 million tied to exposure to U.S. monoline insurers; and $587 million of unallocated additional write-downs linked to the first two risks. The bank expects its net income for 2007 to range between $880 million and $1.4 billion, including the loss resulting from the fraud and the write-downs.

In the past, January has been a tough month for Societe Generale in terms of fraud revelations. In January of 2002, the bank was informed of a fraud committed by a former employee that worked in its retail brokerage business SG Cowen Securities, a company that was sold to Lehman Brothers in October 2000. The employee confessed to having stolen assets that he managed for his successive employers over the course of several years. As a result, several former clients launched lawsuits against SG Cowen.

The current Societe Generale misdeed dwarfs another high-profile fraud, the 1995 collapse of UK-based Barings Bank. In that scheme, Nick Leeson, a one-time futures trading manager in the bank’s Singapore office, wiped out Barings’ cash reserves with a $1.38 billion fraud.

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