The Wall Street Journal-20080205-SEC Probes French Bank- U-S- Investigation Of SocGen Focuses On Stock Sales
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SEC Probes French Bank; U.S. Investigation Of SocGen Focuses On Stock Sales
Full Text (939 words)Societe Generale's woes extended across the Atlantic, as U.S. authorities began a probe into stock sales by a bank board member just as France's government blamed the institution's recent €4.9 billion ($7.3 billion) trading loss on lax internal controls.
Mirroring an investigation opened last month by France's stock- market watchdog, Autorite des Marches Financiers, the U.S. Securities and Exchange Commission is investigating sales of stock by Societe Generale board member and American investor Robert A. Day and two foundations associated with him, people familiar with the matter said.
The French regulator has said in recent legal filings that Mr. Day, chairman and founder of U.S.-based Trust Company of the West, and the foundations sold about 140 million euros of shares on Jan. 9, 10 and 18. Mr. Day sold a majority stake in TCW to Societe Generale in 2001 and still maintains a large stake in the bank, owning close to 1.9 million shares.
A spokesman for Mr. Day said the investor and the foundations sold shares in line with the timing permitted by Societe Generale's trading policies. "All required government disclosures were made. No inside information was used in any way with respect to these sales," added Josh Pekarsky, the spokesman.
Further details of the SEC and AMF probes weren't available. Any allegedly irregular share sales could be related to concerns in the middle of last month that Societe Generale might have to book extra provisions in connection with its exposure to U.S. mortgage credit.
Societe Generale's share price fell heavily in the days leading to Jan. 24, when the bank did end up announcing 2.05 billion euros in asset write-downs, primarily related to its portfolio of subprime U.S. mortgage loans.
That same day, Societe Generale's subprime news was overshadowed by a bigger disclosure: The bank said it had lost 4.9 billion euros in the world's biggest-ever trading scandal.
Executives pointed the finger at Jerome Kerviel, an employee in the bank's lowest trading unit, whom they said had engaged in risky and fraudulent trading that at one point had left the bank exposed by 50 billion euros. Bank executives said they had first learned about possible problems with Mr. Kerviel's trading on the evening of Jan. 18 and discovered the full extent of the illicit transactions on Jan. 19 and 20.
Since announcing the trading loss, Societe Generale has been the subject of speculation that it could be taken over and is also seeking to raise funds from investors to strengthen its balance sheet.
A flurry of investigations into the trading fiasco has also ensued, including the government report released yesterday. In it, the government said that Societe Generale failed to exercise appropriate controls over Mr. Kerviel.
"Clearly, some mechanisms did not work," French Finance Minister Christine Lagarde told a parliamentary committee yesterday as she presented the paper's findings.
At Societe Generale, Mr. Kerviel's job was to balance a series of opposite positions on stock-futures markets in what amounts to a low- risk technique to make a profit. In an effort to make more money, however, the trader was building up a real position in one direction and hiding the risk he generated with fake parallel transactions. Ms. Lagarde said the bank should have better monitored the trader's nominal positions and not just the net value of his book.
Ms. Lagarde said Societe Generale missed out on several alarms, notably when German-Swiss-operated futures exchange Eurex alerted the bank about unusual positions in Mr. Kerviel's book in November.
The minister said Societe Generale may have relied too extensively on computerized risk analysis and omitted to keep track of "human factors." She said the bank should reinforce "Chinese walls" between control and trading operations and monitor unusual behavior, notably when a trader doesn't take vacation.
Mr. Kerviel worked for several years in the bank's back office, where transactions are processed and controlled, before joining the trading desk in early 2005, experience that may have helped him elude checks. In 2007, he took only four days of vacation.
In a statement, Societe Generale said the government report doesn't challenge the bank's risk-assessment tools. The bank has acknowledged missing several opportunities to stop Mr. Kerviel's risky trading. It said it has reinforced controls and will introduce additional measures.
The Bank of France, the AMF and the French parliament also are preparing reports on the trading scandal at Societe Generale. Mr. Kerviel is under criminal investigation by a pair of Paris investigative magistrates on charges of forgery, breach of trust and breaking into computer systems.
The U.S. attorney in Brooklyn, New York, has also opened a criminal probe related to Societe Generale, according to a person familiar with the matter, although its precise focus wasn't immediately clear. A spokesman for Societe Generale said the bank's New York branch was contacted by the U.S. Attorney's Office for the Eastern District of New York Jan. 25 regarding the trading losses announced Jan. 24. The bank is cooperating fully with the investigation.
During her presentation, Ms. Lagarde said she was alerted about the trading loss at Societe Generale on Wednesday, Jan. 23, a day before the company went public with the problem.
Societe Generale has said it didn't warn the government immediately for fear leaks would have made it more difficult to unwind the 50 billion euros, unhedged position allegedly built up by Mr. Kerviel. Ms. Lagarde said Bank of France Gov. Christian Noyer was alerted on Sunday, Jan. 20, immediately after the bank realized the scale of its risk exposure. Mr. Noyer warned the European Central Bank and the U.S. Federal Reserve on Jan. 23, the minister said.
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Amir Efrati contributed to this article.
