On the 27th of January 2008, Société Générale presented a doucment describing the method behind the fraud as revealed by Société Générale's investigations at January the 26th 2008. On January 29th, the Audit Committee will take a decision on an additional external audit.

The mehtod behind the fraud. The trader involved had been employed with Société Générale since 2000. He first spent five years working in different middle-offices (one of the departments which controls trading). Consequently, he had a very good understanding of all of Société Générale’s processing and control procedures. In 2005 he became a trader in the arbitrage department.

In the course of his arbitrage activity, the trader developed an initial portfolio A comprising genuine operations using financial instruments (futures) which reproduced changes in the main European stock market indices (Eurostoxx, the DAX, the FTSE, etc.).

The financial instruments in the portfolio, which were genuine and consistent with the volumes traded by a large investment bank, were subject to daily controls and in particular margin calls with the main clearing houses. Insofar as these instruments were actually purchased and considered as such by Société Générale, the margin calls were checked and settled by or paid to the bank.

The risks generated from commitments made by the bank are managed and controlled on a daily basis. With regard to this fraud, the financial instruments in portfolio A were in appearance offset by the fictitious operations housed in portfolio B, which meant that the only visible risk was very low residual risk.

As a result, the trader was able to hide a very sizeable speculative position, which was neither consistent with nor related to his normal business activity for the bank.

In order to ensure that these fictitious operations were not immediately identified, the trader used his years of experience in processing and controlling market operations to successively circumvent all the controls which allow the bank to check the characteristics of the operations carried out by its traders, and consequently their real existence.

In practice, the trader combined several fraudulent methods to avoid the controls in place:
  • Firstly, he ensured that the characteristics of the fictitious operations limited the chances of a control: for example he chose very specific operations with no cash movements or margin calls and which did not require immediate confirmation;
  • He misappropriated the IT access codes belonging to operators in order to cancel certain operations
  • He falsified documents allowing him to justify the entry of fictitious operations
  • He ensured that the fictitious operations involved a different financial instrument to the one he had just cancelled, in order to increase his chances of not being controlled.

Paris, January 27th 2008


Source: Société Générale, Paris, France


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