Threat Management, Incident Response, TDR

Rogue trader conceals fraud costing French bank $7 billion

Major banks throughout the world are reviewing computer controls and risk management practices today in the wake of the revelation Thursday that a mid-level trader at French bank Societe Generale managed to lose more than $7 billion during the past year, and used his knowledge of the bank's computer security system to conceal these losses from the bank.

In a public statement, Société Générale said the rogue trader, “aided by his in-depth knowledge of the control procedures resulting from his former employment in the middle-office,” had managed to mask his activities “through a scheme of elaborate fictitious transactions.”

According to the New York Times, the trader, identified as 31-year-old Jérôme Kerviel, was a “computer genius” who breached five levels of computer security controls while piling up fraudulent transactions in a desperate attempt to recoup from a series of “bad bets” on stocks.

The trader's activities, one of the largest alleged frauds in financial history, continued for almost a year and were not detected by several internal audits, the Times reported. The scheme finally was exposed this past weekend, when auditors in the company's risk-management office detected a series of fictitious trades on its books, which it said was committed by “an employee in charge of hedging the bank's trades in European stock index futures,” according to reports.

Société Générale, also known as SocGen, is France's second-biggest listed bank. The bank announced Thursday that it would immediately try to raise 5.5 billion euros through a capital increase to shore up its balance sheet, which previously had been negatively impacted by the ongoing crisis in global credit markets.

The bank alerted market regulators and moved immediately to close the trader's positions. The announcement of the mammoth fraud exacerbated sharp declines on world markets.

Fortis analyst Carlos Garcia told ABC News that the fraud revelation at SocGen “puts into doubt the risk management systems at some banks.”

“In hindsight, it was this guy's superior knowledge of the control system of every aspect of trading at the bank that allowed him to build up fraudulent positions and hide them,” Janine Dow, senior director at Fitch Ratings financial institution group in Paris, told MSNBC.

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