Collaboration at Société Générale? 2nd person taken into custody

By Nicola Clark, Katrin Bennhold and James Kanter

Friday, February 8, 2008

PARIS: A French investigation into Jérôme Kerviel, the former trader who Société Générale says cost it nearly €5 billion, or more than $7 billion, last month, took on wider dimensions Friday as French financial police interrogated a second person in relation to the case, calling into question the bank’s assertion Kerviel had acted alone in setting up billions of euros worth of fictitious trades.The news came as a Paris court bowed to prosecutors’ arguments that Kerviel should be taken into custody, partly to prevent him from having contact with significant witnesses in the case.Legal experts said that the revelation that Kerviel – who courtroom observers said appeared shocked by the decision to detain him – might not have been the lone operator the bank has made him out to be suggested that oversight of Société Générale’s trading room may have been recklessly lax. That may put added pressure on Daniel Bouton, the bank’s chief executive, and other top managers to explain more fully the circumstances that led up to the losses.”

It really suggests a higher-level failure of risk management than we thought two weeks ago” when the bank initially disclosed its trading losses, said Christopher Mesnooh, an international business lawyer based in Paris.”It’s one thing to overlook one person, but if it’s two people then it begins to stagger the imagination,” he said. “It looks as if there was probably a greater deal of collaboration than has so far been disclosed, as well as oversight failure.”

According to two people with knowledge of the investigation, Société Générale has provided prosecutors with new evidence related to Kerviel’s fictitious trades, including a series of electronic message exchanges between Kerviel, 31, and Moussa Bakir, a 32-year-old broker at Newedge, Société Générale’s futures brokerage unit formerly called Fimat, that were sent using the bank’s internal computer system.

According to these people, who requested anonymity because they were not allowed to discuss the case, one such message, sent by Bakir to Kerviel on Nov. 30, read: “You have done nothing illegal in terms of the law.”

Both added that this message was only a “small part” of the communications linking the two men and that there was more “interesting” correspondence that had yet to be disclosed.

The message was sent four days after Eurex, the Frankfurt-based derivatives exchange, had sent a query to Société Générale’s compliance department on Nov. 26 demanding clarification of several suspicious trades of stock index futures that Kerviel had made.

This was the second letter from Eurex in less than three weeks questioning Kerviel’s investment strategy and, in particular, asking about his habit of entering trades through a broker at Fimat, rather than from Société Générale directly.

In a letter Nov. 7 letter to Société Générale, Eurex even inquired whether Kerviel had entered the transactions automatically or manually.

“Please explain the background for this procedure,” two Eurex officials wrote.

Investigators are also examining Kerviel’s mobile phone bills, which Jean Veil, a lawyer for Société Générale, earlier this week described as unusually high, suggesting, he said, that there “could have been” others involved.

Veil emphasized the bank had found no evidence to suggest that Kerviel had accomplices.

“That said,” Veil said, “I am asking myself how he could have built up a €1,000 monthly cellphone bill given that he worked all day long in an office with telephones.”

A spokeswoman for the Paris prosecutor’s office, Isabelle Montagne, confirmed that the police had taken a male employee of Newedge into custody around midday on Thursday and that he was expected to be held for questioning until around midday on Saturday.

She added that the police had also raided Newedge’s offices on the Champs-Elysées in central Paris on Thursday, taking documents and computer files.

A spokeswoman for the Société Générale, Joelle Rosello, declined to comment, saying the bank was “cooperating closely with the investigation.”

Société Générale last month merged Fimat into Newedge, a joint-venture with the futures brokerage unit of Calyon, the investment banking arm of Crédit Agricole, another French bank. Spokespeople for Newedge referred all inquiries about the matter to Société Générale.

Stéphane Bonifassi, a business crime expert at the law firm Lebray & Associes in Paris, said the emergence of Bakir as a possible accomplice could have played favorably for the prosecution at the hearing Friday.

“The prosecution played it very subtly by having this other guy in the background,” Bonifassi said. “That there is this other guy may have strengthened the need to place Kerviel in pre-trial detention to avoid them talking together or coordinating their stories,” a risk often used to justify a request for pre-trial detention, he said.

Frédérik-Karel Canoy, a lawyer acting for small shareholders who was present as the ruling was read, said that when informed of the decision, Kerviel appeared as if “the sky had fallen on his head.”

“When he heard the words ‘placed in detention’ you could see his body crumple slightly as if it suddenly hit him that he really was going to prison,” Canoy said. Another lawyer who was present said that Kerviel was escorted away from the hearing room by three gendarmes but that he was not handcuffed. Kerviel’s lawyer, Elisabeth Meyer, wept, Canoy said.

Looking ashen-faced as she addressed a crush of cameras after the verdict, Meyer spoke in short, clipped sentences and vowed to appeal the decision.

“I cannot explain this decision,” Meyer said. “He’s met more than his match,” she said of Kerviel.

Ulrike Weiss, a spokeswoman for the Paris prosecution described the court’s decision as being “in line with our arguments.”

The Paris prosecutor, Jean-Claude Marin, last month requested that Kerviel be detained to protect him from media and professional pressure and because of concern about his mental health – and the possibility of suicide – before a trial.

Veil, the Société Générale lawyer, said the decision also reflected the concerns of prosecutors and the bank’s defense team that letting Kerviel go might risk interference with important witnesses or evidence in the case.

Kerviel, who was held by the police for two days of questioning last month was released under judicial supervision on Jan. 28. But that decision, by investigating judges in the case, was appealed by the prosecutor, Marin, which prompted Friday’s hearing.

Weiss, the prosecution spokeswoman, said that Kerviel could be detained for a period of between four and 12 months.

Kerviel was taken to La Santé prison, close to the center of Paris, where high-profile suspects like business leaders and politicians are often held while under investigation, according to Christophe Reille, his lawyer’s spokesman.

Kerviel is being investigated on allegations of forgery, breach of trust and illegal computer use, but he has not been formally charged with a crime.

In France, before formal charges can be brought, a judge must complete an investigation. If convicted, Kerviel could face a maximum sentence of three years in prison and a fine of €370,000.

jerome.kerviel.societe.general.banktrader

Bonifassi said that any chances of an appeal by Kerviel against an detention would be unlikely to succeed.

“I’d give an appeal extremely thin chances,” Bonifassi said.

He also said that the decision Friday represented a preliminary judgement on Kerviel’s guilt.

“Although judges will not admit it because pre-trial detention should not be based on feelings about someone’s guilt, the decision does show a feeling among the judges that he is guilty of something,” Bonifassi said.

Advertisements