“We accuse Société Générale…” of letting Kerviel off the hook (2/2)

While the Kerviel trial is about to open in Paris a new case is opening in New York for the Société Générale. The class action brought in January having been deemed acceptable, the bank has to transmit its answers to the charges  before April 15th. The plaintiffs consider that the Société Générale concealed the impact of the subprime mortgage crisis on its financial results (1/2) and turned a blind eye on or even condoned Jérôme Kerviel’s actions (2/2). Translation of french by VCK. Read it in french.

Jérôme Kerviel will be very much alone in the dock next June. A little too alone to the taste of the American shareholders who launched into a class action by filing a complaint at the New York Court (Southern District) on January 10^th. How can a bank possibly let a trader broker 50 billion euros on his own and lose 5 billion? How can phoney transactions and fake e-mails escape its scrutiny? How could the specific alarms raised by the appointed watchdogs have been overlooked? How likely is it that the Internal Audit Department really was so ineffective? To put it in a nutshell shareholders do not buy the story of the lone trader acting on his own. Establishing the responsibility of the executives and administrators was quite an easy job for the lawyers representing the American shareholders’ class action group: they swept up the dirt from under the couch by building a clever medley of various unequivocal, sometimes even surrealist – or Dadaistic – reports. You name it.

On January 24^th Daniel Bouton unveiled astronomical numbers: Jérôme Kerviel had caused a 5-billion-euro loss to the bank. Simultaneously, the Générale chairman announced a provision of 2 billion euros, linked, among other things, to the meltdown of the American real estate market. On the following day, a Special Committee was created within the Board of Directors. Three spotless administrators are appointed: Jean-Martin Folz, former CEO of PSA Peugeot Citroën, Antoine Jeancourt-Galignani, former CEO of AGF insurances and Jean Azéma (Groupama). With the help of audit firm PricewaterhouseCoopers they quickly produce a preliminary report, which happens to be much more detailed and complete than the one dated May 23^rd 2008 and is supposed to be the final one.

The administrators-investigators started by taking a look at the detailed report of the bank’s internal Inspection which tracked 75 alarm bellss going off between December 2006 and 2008! Seventy five alarm bells went off for… nothing. Seven instances of fake e-mails, an operation made on a Saturday in May 2007, unexplainable accounting gaps amounting up to more than one billion euros (May 2007), astronomical commissions (1.2 million euros on December 7^th 2007), transactions with seemingly unreal amounts : 7 billion euros. You can’t believe it? Neither can we. And yet it is written in black and white in the Internal Inspection report. “July 2007/ Agent 29: two transactions are booked with fictitious counterparties (PRE HEDGE and PROD EXCEPT) for a nominal value of 7 GEUR.” 7 GEUR meaning 7 billion euros. The inspection steps in and asks for an explanation  but is happy with very little: “ [Control] procedures respected but no initiative taken to ensure that JK’s [Jérôme Kerviel] answers and the corrections he suggested are true, even though they seem unconvincing. When the hierarchy was alerted it did not react.”

One transaction, two transactions, can go unnoticed. The problem is that Jérôme Kerviel took this to a whole different scale. Let’s get back to the report of the internal inspection: “From March 15^th to July 23^rd 2007 the trader progressively built a very important short position on DAX (he treats an average of 1,700 contracts per working day over this period) and reached a total of 150.000 contracts in that timeframe, namely a total of approximately 30 GEUR [30 milliards d’euros]”. When a human starts sticking his nose in this business it is about to get big and then… nothing happens. On April 16^th 2007, Maureen [or Marine, the two spellings are alternately used in the complaint] Auclair, supervisor of the transactions carried out by the traders sends out an email to Jerome Kerviel’s supervisors and points out  substantial discrepancies between what Kerviel reports and the truth. During the emergency meeting, Kerviel admits having made up a compensation and that’s as far as it goes. When the alarm bell goes off on the inside it is ineffective.

What about inspections from the French Banking Commission? The bank watchdog body wrote two letters to Daniel Bouton, in 2007, to ask him to reinforce controls, before inflicting a 4-million-euro fine. The “jurisdictional decision” dated July 3^rd 2008 gives a ten-page account of the total absence of controls. Better still, it singled out Delta One, Jérôme Kerviel’s desk. The inspectors noticed that “Delta one operators had tremendous latitude regarding creating, editing and suppressing transactions using the computer software.” A little further on it reads: “It emerges from the inquiry that the security of the information system had substantial flaws brought to light by the internal inspection; that the project aiming to banning traders from entering transactions data into the system had not been implemented for the Delta one desk at the time of the investigation of the Commission. This enabled the operator to create, edit and delete fictitious transactions used to hide the risks he had taken and the results obtained. (…).»

Some scenes become simply surreal. On January 8^th, 10 days before the story goes public, a woman in charge of controlling Delta one transactions, nicknamed Agent 3, asks for some explanations and gets this answer: “it materializes late-in-the-day give-ups, I owe money to the counterparty. We are going to rebook it asap.” You don’t understand any of it? Neither did Agent 3. “She confessed that she didn’t understand the explanation”, the inspectors for Société Générale indicate.

At the end of 2007 the magician asks for a 600.000 euros bonus. A very large but not underserved sum since in November 2007 he sported a 1.5-billion-euro profit for his activities alone. The question is: how could he possibly have earned so much money while playing by the rules? A trader puts it this way: “im-po-ssi-ble.” Yet Kerviel ends up with a 300.000 euros bonus anyway.

On Friday January 18^th 2008, a man, a human, called “Agent 27” does something out of this world. He picks up his phone, calls another human and realizes that Kerviel is doing fictitious transactions. “Agent 27 takes the matter in his own hands and decides to call the contact in bank C on the Saturday (whom he knows personally). This is how he finds out that the transaction is fake.” The hierarchy is alerted and wakes up. On Monday 21^st January, the bank decides to unwind 50 billion worth of positions as quickly as possible. “I was in front of my trading screen that morning and could not believe what was happening, recalls a Dutch trader. It was horrible. Someone was selling a massive position by volume, not by price. When we heard it was SocGen, we just laughed. No trader would have done such a bad job,” reads the charge of the class action.

The irritation the French and American shareholders felt upon reading the soothing press release is quite understandable: “An abnormally high risk was detected on a broker a few days ago.” The May 23^rd report seems to have overlooked all the spicy details of the February pre-report and concludes that “the trader’s moves and his skilfulness at concealing his positions, risks and results enabled him to escape detection of his massive directional positions by his superiors and the bank watchdogs since January 2008.”

Even if one has to admit that the fraud was made easier and its detection delayed by shortcomings in the trader’s supervision and in the control of market activities.” Let’s see at the beginning of June how the trial of the lone trader goes. The debate will be followed closely by the shareholders who took part in the class action. The Vermont Pension Investment Committee, the Boilermaker-Blacksmith National Pension Fund, the United Food and Commercial Workers Local 880 in Cleveland (Ohio) will seek to find new arguments to fuel their case against Société Générale.

PhDx