Bank ignored warning signs

From Bloomberg News

Societe Generale, France's second-largest bank, failed to follow up on 75 warnings on securities trading bets by Jerome Kerviel that led to a stunning loss of $7.2 billion, independent board members concluded in a report issued Wednesday.

Written by a three-person committee, the report said Kerviel acted alone, allaying concerns that he had accomplices in the bank.

But not all of his trading positions have been identified, the report warned. The bank has tightened controls to prevent a repeat of Kerviel's unauthorized trading, it said.

"Controls in place were conducted without triggering a strong or persistent enough alert to enable the identification of the fraud," the report said.

The document highlights the shortcomings of Societe Generale's management supervision that allowed the 31-year-old trader on the bank's equity derivatives desk in Paris to amass $73 billion in unauthorized positions in European stock index futures.

Societe Generale posted the biggest trading loss in banking history unwinding the positions. The bank, which announced the loss Jan. 24, said it discovered the bets Jan. 18. The report said the trades that were Kerviel's undoing were first queried Jan. 8.

For more than two years, Kerviel's forging of documents and e-mails to pretend he'd hedged his bets went undetected, the committee said.

Kerviel has been charged with hacking into the bank's computers, falsifying documents and breach of trust. He's in jail during the investigation.

Kerviel told prosecutors during his interrogation that the bank's "complacency" made him think it knew what he was doing.

The report refrained from drawing any conclusions about the responsibility of Kerviel's managers, citing a criminal investigation by French judges. It did say that compliance officers rarely went beyond established routine checks.

The committee said there were 75 red flags between June 2006 and the beginning of 2008 that should have alerted managers to Kerviel's trades. The warning signs included a trade with a maturity date on a Saturday, bets with "pending" counterparties and missing broker names, the report said.

In other cases, procedures simply were not in place or the risk official didn't understand Kerviel's explanations, the report said.

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