SocGen’s Unwinding of Kerviel Bets in Spotlight Again

A Logo Sits Outside Societe Generale's Headquarters in Paris
A logo sits on display on the headquarters of Societe Generale SA in the La Defense business district in Paris. Photographer: Balint Porneczi/Bloomberg

Societe Generale SA had turned the page on Jerome Kerviel’s record trading fraud. Until yesterday.

The Cour de Cassation, France’s highest appeals court, yesterday ruled that the bank’s 2008 unwinding of the former trader’s unauthorized bets of more than 50 billion euros ($70 billion) -- exceeding the market value of France’s second-largest lender -- needs fresh scrutiny. The court accepted the former trader’s civil appeal that challenged the Paris-based bank’s claim that he was solely responsible for the lender’s 4.9 billion-euro loss from liquidating the positions.

“The spotlight will be on the bank again,” said Jerome Forneris, who helps manage 8.5 billion euros at Banque Martin Maurel in Marseille and owns Societe Generale shares. “For sure they wanted to be completely finished with this affair.”

While the court confirmed Kerviel’s three-year jail sentence from a 2012 verdict that found him guilty of abusing the bank’s trust, faking documents and entering false data into computers, its decision to get a court in Versailles to re-examine the facts of the case was claimed as a victory by Kerviel’s lawyers.

“We will continue to fight to show that the so-called Kerviel case was in fact the Societe Generale case,” David Koubbi, his lawyer, said.

The bank’s lawyer Jean Veil said yesterday that the decision was not a defeat. The court considered it necessary to examine “if a part of the responsibility had to be shared in terms of damages and interest,” he said, adding that Societe Generale has spent hundreds of millions of euros to change its controls to address the shortcomings in its systems.

Unexpected Ruling

Societe Generale shares slid as much as 1.2 percent after the ruling, closing 0.3 percent lower yesterday. They were down 0.1 percent at 44.86 euros as of 10:52 a.m. in Paris today.

“I am surprised,” Societe Generale Chief Executive Officer Frederic Oudea was cited as saying by Milan-based newspaper Corriere della Sera. “I had expected the court to confirm the entire sentence. We have always said we knew we wouldn’t get back the lost 4.9 billion, but individual responsibility can’t be diluted.”

Kerviel has argued at every trial that Societe Generale stealthily sold subprime mortgage investments as it liquidated his positions.

While he admitted to exceeding trading limits, faking documents and entering false data into computers, Kerviel said his superiors turned a blind eye as long as his transactions made money.

Secret Sales

Judges didn’t accept Kerviel’s version of the events in both a 2010 trial and a 2012 appeal.

Kerviel’s defense team had argued at the Cour de Cassation that prosecutors never did a detailed study of how Societe Generale sold off the positions.

Societe Generale has always dismissed claims that it hid other losses while unwinding Kerviel’s bets.

Maxime Kahn, the Societe Generale trader who unwound Kerviel’s bets, testified in June 2012 that the subprime conspiracy theory was “absurd” and that he was absolutely certain he only sold off Kerviel positions.

He also explained that he was told only that it was for a client who had to remain confidential. Kahn said that throughout the three days starting Jan. 21, 2008, he “never for a moment” realized what was really afoot.

Weak Systems

The secrecy was necessary because had the markets known Societe Generale was selling off 50 billion euros in positions, the bank could have faced a meltdown, Kahn said.

Kerviel’s managers missed at least 1,071 bogus trades, a special committee of the bank’s board found six years ago. His supervisors missed the level of his gains, cash flows, brokerage expenses and overlooked warnings from Eurex AG, Europe’s biggest futures exchange, as the former trader amassed his positions.

In July 2008, after the fraud was revealed, Societe Generale was fined 4 million euros by the country’s Banking Commission for failing to comply with rules on internal controls.

While Kerviel’s lawyers said they were awaiting the timing of his incarceration, they also questioned how he could be put behind bars when the new trial would get started.

“It would be a little surprising to jail Jerome Kerviel while acknowledging the existence of significant gaps at his employer and the implications of those gaps on the facts of the case that are being criticized,” Patrice Spinosi, a Kerviel lawyer, told reporters yesterday.

Kerviel’s Walk

Meanwhile, the 37-year-old former trader is in Italy after he undertook a 1,400-kilometer walk from Rome to Paris following a brief meeting with Pope Francis on Feb. 19.

Kerviel left his job at a computer consulting firm in 2010 to focus on his appeal. In an interview last week, Kerviel said his trek from Rome was aimed neither at getting publicity and sympathy nor at keeping himself out of jail.

His walk is a personal journey aimed at bringing the message of Pope Francis’s November attack on the “tyranny” of financial markets, he said. The Pope has criticized capitalism for its “idolatry of money.”

Kerviel -- a native of Brittany who rose through the ranks to Societe Generale’s trading floor without having attended any of France’s elite schools -- became something of a cult hero in the country in the aftermath of the 2008 loss.

There was a comic book, fan clubs and t-shirts supporting his cause. A poll taken after news of the loss broke showed 77 percent of French respondents saw him as a “victim.”

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