The Wall Street Journal-20080129-Societe Generale Blew Chances To Nab Trader- Kerviel Said to Fake Counterparts- Emails- Talk Rises of Takeover

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Societe Generale Blew Chances To Nab Trader; Kerviel Said to Fake Counterparts' Emails; Talk Rises of Takeover

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PARIS -- Societe Generale's account of how a rogue trader triggered billions of dollars in losses is coming under strain, as it emerges that his risky trades may have begun over a year earlier than the bank has said and warnings were repeatedly missed.

Jerome Kerviel, whom the bank has portrayed as an ingenious fraudster, sometimes used simple tricks to cover his tracks, according to investigators on the case. One of them was to fabricate email messages from nonexistent trading partners to deflect supervisors' concerns about unusual trades, a police official said.

Societe Generale's woes are making it vulnerable to potential predators, especially as its stock has fallen to a three-year low. France's largest bank, BNP Paribas, has started preliminary internal talks over whether to make a takeover bid for its smaller rival, according to a person familiar with the matter.

Following Societe Generale's disclosure last week of a $7.2 billion loss, the biggest individual trading hit in banking history, French authorities placed Mr. Kerviel under formal investigation yesterday on charges of forgery, breach of trust and breaking into computer systems. But judges won't investigate Mr. Kerviel for alleged fraud, and his lawyer said he had been released from custody.

Discussing the case for the first time in public, prosecutor Jean- Claude Marin said Mr. Kerviel was trying to make his name as a trader, not rob a bank. Mr. Kerviel's positions at the end of 2007 amounted to a nominal gain of $2.2 billion before the markets turned against him this month, said Mr. Marin.

"He lost control," Mr. Marin told a news conference, likening trading to "a drug" and "an addiction." Relaying information collected during two days of questioning Mr. Kerviel, the prosecutor said the trader's risky transactions began in late 2005. The bank had said the irregularities began last year. Mr. Marin also said that Mr. Kerviel admitted to disregarding the bank's limits on how much risk he could take. But Mr. Kerviel said other traders flouted the rules too, according to Mr. Marin.

The alarm bells set off by Mr. Kerviel's activities appear to have been louder than Societe Generale has suggested. Eurex, the futures- exchange arm of Deutsche Boerse AG, questioned the bank about the trading positions of Mr. Kerviel last November, Mr. Marin said, but the trader managed to allay concerns.

The bank has acknowledged that it missed a few internal warnings. But it has insisted that its safeguards are fundamentally sound and that Mr. Kerviel outfoxed them through a series of elaborate ruses that Chairman Daniel Bouton compared to "a mutating virus."

Mr. Bouton and his co-chief executive, Philippe Citerne, have offered to resign. The bank's board rejected the offers, but the new information about missed warning signs may put more pressure on top managers to step down.

The Kerviel scandal has revived BNP's interest in buying Societe Generale, said people familiar with the matter. A spokesman for BNP declined to comment. The two banks have discussed a merger in the past, but political opposition to a marriage that would lead to many job losses has always been strong.

Now French President Nicolas Sarkozy, embarrassed by the scandal, might be less willing to defend the bank's independence. "When there is an event of this nature, it cannot remain without consequences as far as responsibilities are concerned," Mr. Sarkozy said yesterday.

Societe Generale's share price, which had already fallen sharply since last year amid global credit concerns, has dropped further since news of the rogue trader broke. In Paris trading yesterday, the stock fell 3.82%, giving the bank a market capitalization of 33.1 billion euros ($49 billion).

Meanwhile, Mr. Kerviel's defense lawyers say he is innocent of fraud and didn't steal a penny from the bank. Mr. Kerviel "is not a robber, he is a good man," said one of his lawyers, Christian Charriere- Bournazel, yesterday as he took a break during a daylong meeting between his client and magistrates. Mr. Kerviel's whereabouts after his release yesterday weren't clear.

In a complaint filed by Societe Generale to prosecutors last week, the bank alleged fraud on the part of Mr. Kerviel. Judges didn't put that on the list of crimes for which he is being investigated, in part because there isn't evidence so far that Mr. Kerviel profited personally from his actions.

In a separate statement to French news agency AFP, Mr. Charriere- Bournazel accused Societe Generale of creating a "smoke screen" to mask losses that had nothing to do with Mr. Kerviel. On the same day that Societe Generale disclosed its trading loss last Thursday, it also detailed a nearly $3 billion write-down due to exposure to the U.S. subprime-mortgage market.

Mr. Kerviel started at the futures trading desk in 2005 after spending five years in the bank's back office, where hundreds of clerks control and process transactions. His promotion was unusual in an industry where most traders start their careers directly on the trading desk.

Mr. Kerviel's job as a low-level trader in a unit called Delta One was to invest by simultaneously taking opposite bets on the direction of the markets. The bets were supposed to mostly offset each other in what is typically a low-risk way to make a small profit.

But Mr. Kerviel told prosecutors that starting in November 2005, he engaged in a much riskier business: placing bets only in one direction to potentially make far bigger gains. To hide his strategy, he created a set of parallel fake bets in the other direction to give his supervisor the illusion that his books were correctly balanced. Over time, Mr. Kerviel made bigger and bigger unhedged bets, leaving Societe Generale with heavy exposure to market fluctuations.

For many months, Mr. Kerviel was in the money. He told investigators that by the end of 2007, he had cashed out positions producing a profit of 55 million euros ($81 million) for the bank. That was far more than his annual target, so Mr. Kerviel was expecting a bonus of 300,000 euros to be paid out this year, according to Mr. Marin. Mr. Kerviel's open positions at the end of 2007 showed an additional nominal gain for the bank of 1.5 billion euros, although the bank wasn't aware of the positions.

Mr. Kerviel's luck turned earlier this year when he bet that European stock markets would rise and they started falling instead. When Societe Generale dug into its books, the bank found uncovered bets worth 50 billion euros, more than its entire stock-market value. On Jan. 21, the bank assigned a single trader to unwind all the positions taken by Mr. Kerviel. The result was a 4.9 billion euro loss for the bank.

Societe Generale officials who have been investigating Mr. Kerviel's actions have described him as a cunning trader who used his back- office experience to fool supervisors.

But according to a senior police official with knowledge of the investigation, not all of his deception required great sophistication. "When a back-office supervisor would come to him to inquire about a suspicious position, Mr. Kerviel would produce a fake email showing that the position was correctly balanced," the official said.

Mr. Kerviel sometimes used the login and password of his colleagues to conduct fictitious trades, Societe Generale officials and investigators say.

Mr. Kerviel's simplest technique was to claim that he had made a mistake. "He would clear the suspicious position from the computer system, supervisors felt relieved and life went on," the police officer said.

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Stacy Meichtry and Max Colchester contributed to this article.