The New York Times-20080127-French Trader in Custody After --36-7 Billion in Losses

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French Trader in Custody After $7 Billion in Losses

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Jerome Kerviel, a former trader at Societe Generale, surrendered to the police on Saturday as investigators looked into what had caused the bank, one of Europe's largest, to lose more than $7 billion.

Investigators were expected to question Mr. Kerviel, 31, a low-level employee of the bank. Societe Generale has asserted that he was the lone architect of an elaborate fraud that involved betting tens of billions of dollars of the bank's money on European stock index futures.

The Paris prosecutor's office formally opened an investigation of Mr. Kerviel on Friday after the bank filed a complaint accusing him of computer fraud and of falsifying bank records.

The bank, which has said it uncovered the scheme on Jan. 18, was ultimately forced to unwind Mr. Kerviel's trades early last week, leading to losses of 4.9 billion euros ($7.2 billion) and requiring Societe Generale to seek 5.5 billion euros in fresh capital.

French investigators on Saturday began poring over documents and computer files obtained from Mr. Kerviel's residence and from the bank offices where he had worked.

A lawyer for Mr. Kerviel, Elisabeth Meyer, could not immediately be reached for comment.

Laura Schalk, a Societe Generale spokeswoman, said officers of the financial police had searched the bank's offices in La Defense, a business district to the west of Paris, on Friday night. They were there mostly to collect data from the trader's electronic files, Ms. Schalk said.

The police also searched an apartment in the upscale Paris suburb of Neuilly-sur-Seine.

The bank's management has come under increasing pressure from French officials to provide a more detailed accounting of how Mr. Kerviel could have racked up such enormous losses by himself, over a year, without raising any red flags among either his supervisors or the bank's internal auditors.

Daniel Bouton, the Societe Generale chief executive, again said that Mr. Kerviel had acted alone, using knowledge of the bank's risk-control software systems that he had gained from a previous back-office position.

In an interview with the French newspaper Le Figaro published Saturday, Mr. Bouton described Mr. Kerviel's elaborate efforts to hide his activities as being like a mutating virus.

The nature of his fictitious and fraudulent operations were constantly evolving, Mr. Bouton said. And when the control systems detected an anomaly, he managed to convince control officers that it was nothing more than a minor error.

In 2007, Mr. Bouton said, Mr. Kerviel was placing virtual bets that stock market indexes would fall -- bets that for much of the year would have been correct. In early January, Mr. Bouton said, Mr. Kerviel also set up fictitious losing bets to offset his gains, possibly to avoid detection.

But after the market slide accelerated sharply on Jan. 18, the losses became unmanageable. Within six hours, Mr. Kerviel's losses swelled by 1.4 billion euros.

Mr. Bouton said the size and swiftness of the losses set off the bank's internal control systems. It took until 3 a.m. on Jan. 20 for the bank's auditors to reconstruct Mr. Kerviel's trading history of the previous 12 months.

The board was informed of the scale of the losses around 6 p.m. that day, and the management decided to close out Mr. Kerviel's positions on the open market.

We expected it would take five or six days to unwind the positions, Mr. Bouton said.

Asian stock markets opened sharply lower last Monday, catching up with the steep slide on Wall Street on Jan. 18.

That had a catastrophic effect, Mr. Bouton said. The losses of Societe Generale became even more enormous.

The bank finally closed out the positions by Wednesday, losing 4.9 billion euros in the process.

[Illustration]PHOTO: Jerome Kerviel