$7.2 bn employee fraud at French bank

From Forbes (Original article here )

LONDON –

Societe Generale stunned investors on Thursday when it announced that “exceptional fraud” at its French markets division, and new subprime related write-downs, would cost it up to $10.2 billion.

The fraudulent positions adopted by an unnamed trader in 2007 and 2008 are costing France’s second largest bank 4.9 billion euros ($7.2 billion). SocGen also announced write-downs Thursday worth 2.1 billion euros ($3.0 billion), from failed investments in collateralized debt obligations and bond insurers in the United States.

The bank will now sell 5.5 billion euros ($8.0 billion) in shares to strengthen its capital position.

Societe Generale shares closed down 3.42 euros ($5.00), or 4.2%, to 79.08 euros ($115.61), on Wednesday in Paris, and trading was completely suspended on Thursday morning.

Leading European shares shrugged off the news. The Dow Jones Eurostoxx 50 was trading up 5.1%, at 3,761.43 points, as shares across the board bounced back from heavy losses on Wednesday.

SocGen’s fraud is one of the largest in Europe, far larger than the £800 million ($1.6 billion) lost by Nick Leeson, who triggered the collapse of Britain’s Barings Bank in the 1990s.

Soon after SocGen’s announcement, Fitch Ratings downgraded its long-term default rating to “-AA,” from “AA,” and the bank’s individual rating to B, from A, citing the substantial trading losses that had occured within its core trading division.

It described the subprime mortgage-related write-downs as adequate, given market conditions, and said the bank’s valuation of these assets was reasonable.

No details are yet know of the enfant terrible that caused Thursday’s shock write-down. SocGen said the trader worked in European stock market index futures where big bets are made on the direction of market indexes like France’s CAC-40, or the FTSE 100.

“Aided by his in-depth knowledge of thoe control procedures resulting from his former employment in the middle-office, he managed to concel these positions through a scheme of elaborate fictitious transactions,” the bank explained Wednesday. It added that the trader had confessed to the fraud and that a dismissal procedure had been launched.

Societe General said it had rejected a proposal by chief executive Daniel Boution to resign.

Thomson Financial contributed to this report.

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