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Trader at bank quelled suspicion, officials say

Societe Generale was warned of risky bets by Jerome Kerviel.

January 29, 2008|Geraldine Baum and Martin Zimmerman | Times Staff Writers

PARIS — Executives at French bank Societe Generale were warned about risky bets being made by rogue trader Jerome Kerviel two months ago, but Kerviel was able to quell suspicions by giving false information, authorities said Monday.

Internal bank audits also flagged Kerviel's actions, "but each time he managed to explain them," prosecutor Jean Claude Marin said. Kerviel, he added, thought bank officials didn't probe too deeply because he was pulling in profits for the financial institution.

Kerviel's trades, disclosed last week, resulted in $7.2 billion in losses for the bank. After two days of questioning, the 31-year-old trader was released from custody Monday but placed under formal investigation on three separate charges that could land him in jail for as long as seven years.

Also Monday, a group of bank shareholders filed a suit accusing Robert A. Day -- founder of Los Angeles-based Trust Co. of the West -- of insider trading in connection with $126 million in stock sales Jan. 9 and 10, before Kerviel's trades were exposed.

Day, who became a Societe Generale director after the French company bought TCW in 2001, denied the accusation through a spokesman. Societe Generale officials have previously said Kerviel's allegedly fraudulent trades weren't discovered until Jan. 18.

"No inside information was used in any way," said Day's spokesman, Josh Pekarsky, who added that the bank director would cooperate with any investigation.

Kerviel stayed out of the public spotlight but was released from police custody and allowed to return home after he turned in his passport and promised not to have any contact with his former colleagues nor leave the country, his attorney said Monday.

Marin of the Paris prosecutor's office said the $145,000-a-year trader was largely motivated by the desire to prove himself as a star trader, making increasingly larger and riskier bets. Like a gambler, he became hooked on the action.

"There is an addiction, a dependency on this complex game of markets . . . that is hard to exit," Marin said.

Kerviel's job was a little like that of a bookmaker adjusting the odds to equalize betting on either side of a big football game. As long as the bets are roughly balanced, it doesn't matter to the bookie who wins the game because he's not personally taking much risk.

Marin said that during his interview with police, Kerviel apparently said his strategy for betting on the future movements of the European stock market was profitable by almost $2 million as of December, and that he was expecting to get a more than $400,000 bonus for his work in 2007.

"He wanted to be seen as an exceptional trader, an astute market player," Marin told reporters during a news conference Monday. "He went beyond what he was authorized to do on the market, it is true, but he wasn't trying to plunder the bank."

But instead of winding up a winner, Kerviel was found out Jan. 18 when one of his allegedly unsanctioned trades alerted the bank's security control department, where he had begun his career at the institution in 2000 at age 23.

By the time he was dismissed last weekend, Kerviel had held positions in futures equivalent to about $73 billion in stock by allegedly creating a fictitious portfolio of counter-trades that appeared to balance out his real positions.

The bank didn't catch on, it said in a five-page statement released Sunday, because Kerviel used other people's computer passwords to take actions that hid his tracks and, the statement alleged, he cleverly chose financial instruments for his fictitious portfolio that wouldn't normally change cash positions or trigger inquiries from the outside.

But once they understood what Kerviel had allegedly done, the bank's senior executives quietly alerted regulators. Over the next few days, with the markets falling, they wound down his positions, losing $7.2 billion and, after the scandal became public, raising doubts in the financial community about the bank's management capabilities.

In November, Eurex, a European-based international derivatives exchange, had contacted Societe Generale officials because it was worried about a particular position Kerviel had taken, Marin said. Kerviel told investigators he fended off a probe by convincing bank officials that he had properly hedged his positions, the prosecutor said.

Marin added: Kerviel "thinks that for a long time he generated profit, and that he was tolerated to a certain extent."

Under French law, being placed under formal investigation doesn't necessarily mean there will be a trial.

The suit that names TCW's Day, filed on behalf of the Assn. of Small Shareholders, targets both the bank for the way it unwound Kerviel's allegedly bad trades without informing the public last week and for stock trades made by Day and two foundations that he is associated with, a lawyer for the group told Reuters.

Day is known locally for his pioneering work in the Los Angeles money market industry and for his prodigious, if low key, philanthropic work. He founded TCW in 1971 with $2 million under management.

One industry consultant said it was unlikely the crisis at Societe Generale would force it to unload its profitable California acquisition.

"While Soc Gen had to take a large write-off, it's not so large that it would force them to liquidate assets, including TCW," said Michael Rosen, a principal at the investment consulting firm Angeles Investment Advisors in Santa Monica. "TCW has been a great acquisition for them."

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geraldine.baum@latimes.com

martin.zimmerman@latimes.com

Baum reported from Paris and Zimmerman from Los Angeles. Times staff writer Thomas S. Mulligan in New York and special correspondents Achrene Sicakyuz and Devorah Lauter in Paris contributed to this report.

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