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Societe Generale suffers massive fraud bodyblow

French bank Societe Generale said yesterday it uncovered a 4.9 billion euro (US$7.14 billion) fraud -- one of history's biggest -- by a single futures trader whose scheme of fictitious transactions came undone when stock markets plunged this week.

Executives said the trader, a French man in his 30s, acted alone.

CEO Daniel Bouton said his motivations were "irrational" and said he may not have benefited directly from the fraudulent deals.

The announcement destabilized a bank already exposed to the subprime crisis. France's second-largest bank by market value said it would be forced to seek 5.5 billion euros in new capital.

Trading in Societe Generale's shares, which have lost nearly half their value over the past six months, was suspended in Paris yesterday morning. Trading was resumed at midday, with shares dropping 5.5 percent to 74.77 euros.

Societe Generale said it detected the fraud -- comparable to a full year of the bank's profits in stable times -- at its French markets division at the weekend.

It said the trader misled investors through a "scheme of elaborate fictitious transactions." The trader, who was not named, used his knowledge of the group's security systems to conceal his fraudulent positions, the statement said.

The man admitted to the fraud, the bank said, and was being dismissed. His supervisors were to leave the group. Bouton offered his resignation, but it was rejected by the board.

Bouton said the fraud was found out after the sharp declines on world markets began late last week, as the trader rushed to close fraudulent positions.

The trader had worked for the bank since 2000 and earned a salary and bonus of less than 100,000 euros, executives said.

"I'm convinced he acted alone," said Jean-Pierre Mustier, chief executive of the bank's corporate and investment banking, who interviewed the trader when the fraud was uncovered.

The trader was responsible for basic futures hedging on European equity market indices, the company said. That means he made bets on how the markets would perform at a future date.

The fraud appeared to be the largest ever by a single trader. If confirmed, it would far outstrip the Nick Leeson trading scandal in 1995 that bankrupted British bank Barings. Barings collapsed after Leeson, the bank's Singapore general manager of futures trading, lost £860 million -- then worth US$1.38 billion -- on Asian futures markets, wiping out the bank's cash reserves. The company had been in business for more than 230 years.

The fraud was not as big as the 1991 scandal that led to the demise of the Bank of Credit and Commerce International. Claims by depositors and creditors there exceeded US$10 billion at the time.

International bank regulators seized BCCI, which had headquarters in Luxembourg, London and the Cayman Islands, on July 5, 1991.

At Societe Generale, the fraud announcement came on the back of subprime-related difficulties. Subprime writedowns linked to the crisis in financial markets amounted to 2.05 billion euros, Societe Generale said.

The write-down and losses will lead the company to post a net profit of 600 million euros to 800 million euros for all of last year, the Paris-based bank said.
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