The Wall Street Journal-20080204-France to Fault Societe Generale-s Controls in Report

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France to Fault Societe Generale's Controls in Report

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A French government probe into Societe Generale SA's rogue-trading scandal is expected to report today that control over the bank's trading operations was too lax, according to a person familiar with the report, putting renewed pressure on Chairman Daniel Bouton to explain how the bank lost 4.9 billion euros ($7.25 billion).

The report from Finance Minister Christine Lagarde is due to be made public just as France's largest bank, BNP Paribas SA, assembles a team of advisers to weigh when and whether to launch a bid for its troubled rival.

A bid by BNP, or by Credit Agricole SA, could whet the takeover appetite of non-French banks, despite the French government's resistance to a foreign swoop on Societe Generale.

Ms. Lagarde's report is one of several investigations into how trader Jerome Kerviel between 2005 and 2007 was able to use loopholes in Societe Generale's trading system to engage in risky transactions that ultimately forced the bank to report a 4.9 billion euros loss last month.

The report from Ms. Lagarde, a former Baker & McKenzie lawyer and former French trade minister, is also expected to provide some insight into the French government's view of the future for Societe Generale, including whether it should remain independent.

Ms. Lagarde and French President Nicolas Sarkozy have issued public statements that have been critical of Societe Generale.

Societe Generale has admitted to missing several opportunities to stop Mr. Kerviel's risky trading. The government investigation into the trading scandal points to these missed opportunities, suggesting that controls were too lax at Societe Generale, said a person familiar with the report. The report will also highlight that the bank may have made a mistake in allowing Mr. Kerviel -- an employee who had knowledge of control systems because he had worked in the bank's so- called back office -- to work as a trader, this person said.

Societe Generale has said Mr. Kerviel had extensive knowledge of control procedures and calendars, something that may have allowed him to elude supervision for so long.

Yesterday, a Societe Generale spokeswoman declined to comment on the government report ahead of its release. A spokesman for Ms. Lagarde couldn't be reached for comment.

In addition to the government, the Bank of France, French stock- market regulator Autorite des Marches Financiers, or AMF, and the French Parliament are preparing reports on the trading scandal at Societe Generale. The bank has set up a special board committee to try to ensure that no Societe Generale trader will be able to repeat Mr. Kerviel's behavior. Mr. Kerviel is also under criminal investigation by Paris prosecutors.

Societe Generale's main focus right now, however, is ensuring the success of a 5.5 billion euros issuance of stock in a so-called rights issue. The bank's top management, including Mr. Bouton, has been courting shareholders to support the stock offer. J.P. Morgan Chase & Co. and Morgan Stanley are overseeing the stock sale, which could launch in the near future, according to a person familiar with the situation.

"We are very supportive of management," said Benoit d'Angelin, managing director at London hedge fund Centaurus Capital, which owns Societe Generale shares. "They have done a remarkable job so far in handling this crisis." Mr. d'Angelin declined to say how much Societe Generale stock the hedge fund owns.