Kerviel case raises difference between virtual and fake trades

Société Générale knew Jérôme Kerviel was using fictitious trades several months before it lost €4.9bn ($7.6bn) as a result of the former employee’s positions, according to a court document seen by the Financial Times.

One of the bank’s internal accounting committees raised concerns about Mr Kerviel’s use of fake transactions in April last year but no action was taken. Lawyers for both sides are likely to use the situation to debate the difference between a “virtual trade”, some of which were allegedly tolerated, and an illegal fake trade.

SocGen has acknowledged that there were management and risk control failures that enabled Mr Kerviel to build up his positions undetected until January 18 this year. But it has claimed Mr Kerviel concealed his unhedged transactions using lies. Vincent Guyot, one of SocGen’s financial controllers, told the police that anomalies discovered in March 2007 indicated that some of Mr Kerviel’s operations amounted to “real fake trades which had no economic significance”.

Guillaume Selnet, one of Mr Kerviel’s lawyers, claims Mr Guyot’s testimony proved the bank knew about and tolerated his actions.

“From the moment when an accountant says, ‘We have detected fictitious trades,’ this becomes more than negligence. It looks like complicity.”

However, Jean Veil, SocGen’s lawyer, said: “It is untrue to say that SocGen knew in any way whatsoever before January 18, 2008. SocGen’s controls revealed anomalies. The ingenious explanations of Mr Kerviel, which were falsehoods, deceived the controllers.”

According to Mr Guyot’s statement, use of “virtual transactions” was a common practice at the bank and they were used by traders to complete trades before they had been formally hedged or before the identity of the broker was known.

When questioned by the controllers, Mr Kerviel said he had used fictitious counterparties to buy time in order to reconcile his futures trades. According to the witness statement, Mr Guyot told police: “We tried to understand why Jérôme Kerviel had undertaken these transactions. He explains to us that these futures, with counterparty pending, were to correct a valuation error on a certain number of warrants.”

Meanwhile, examining magistrates on Tuesday visited trading rooms where Mr Kerviel worked. SocGen said the visit was made at the bank’s request. The investigation is expected to finish by the end of next month with a hearing likely in May or June next year. A trial could follow in the autumn.