Socit Gnrale Group uncovered fraud in a sub-section of its market activities that will cost the French bank $7 billion.
Bloomberg reports this as the largest in European history. The trading loss wipes out almost two years of pretax profit at SocGen’s investment-banking unit.
The trader, responsible for plain vanilla futures hedging on European equity market indices, had taken massive fraudulent directional positions in 2007 and 2008 beyond his limited authority. Aided by in-depth knowledge of the control procedures resulting from his former employment in the middle-office, he managed to conceal these positions through a scheme of elaborate fictitious transactions.
The trader who confessed to the fraud has been supended and dismissal iniated and his managers were fired.
With the fraud loss and the U.S. mortgage writedowns (1.1 billion), SocGen estimates its net income for 2007 to be in the range of 0.6 to 0.8 billion.
The group announced its plans to launch a capital increase of 5.5 billion, underwritten by a bank syndicate. Bloomberg reports the company plans to raise the capital by selling shares to JPMorgan Chase & Co. and Morgan Stanley. This could also require them to open the doors to a sovereign wealth fund in the middle east as other banks struggling for capital have done.
SocGen’s balance sheet is extremely strong and they have undergone relatively low levels of subprime related loses, notes TowerGroup, research and advisory firm for the financial services industry, believes this fraud level will not be lethal to the organization.
TowerGroup says fraud prevention is a fundamental aspect of operational risk, and in SocGen’s case there was a failure in the operational risk program. Also, fraud prevention requires cultural as well as operational change. SocGen will need to embark on an internal campaign to truly change the culture of their organization in relation to fraud prevention, the firm notes.