Europe News

Police Make New Arrest in SocGen Trading Scandal


Police arrested another employee of French bank Societe Generale on Wednesday as they probe the world's biggest rogue trading scandal, Paris prosecutors said.

The arrest came as a U.S.-based law firm said it had filed a class action suit against SocGen, alleging France's second-biggest listed bank misled investors about its exposure in the subprime mortgage markets and failed to act on information about trades by Jerome Kerviel.

In January, SocGen unveiled 4.9 billion euros ($7.53 billion) of losses which it blamed on rogue deals carried out by Kerviel, a 31-year old junior trader at the bank.

The trading losses and writedowns related to the credit market turmoil have made SocGen, whose market capitalisation stands at over 30 billion euros, a possible bid target.

The latest person arrested in the trading scandal was working for a subsidiary of SocGen, the Paris prosecutor's office said.

A source close to the matter said the person being held works for SG Securities, the bank's share brokerage arm.

SocGen declined to identify the person or the division.

A spokeswoman for the bank said police had searched SocGen's trading room at its glass-fronted headquarters in the capital's La Defense financial district on Wednesday.

She confirmed one person was being held for questioning.

Europe 1 radio said the person arrested on Wednesday was one of Kerviel's friends listed on the Facebook Internet social networking site. The same person's profile on another networking site said he had worked at the bank since 2006.

The investigation has focused on whether or not Kerviel had any accomplices.

SocGen published an internal report on Feb. 20, which supported its view that Kerviel acted alone although it also highlighted flaws in SocGen's risk controls.

Kerviel Hearing

The fresh arrest comes ahead of a hearing on Friday on whether Kerviel should remain in custody.

Kerviel has been placed under investigation for breach of trust, computer abuse and falsification. He is being held in a Paris prison after a decision to grant bail was overturned.

Last month a Paris broker was questioned for 48 hours over his links to Kerviel but police accusations against him were dismissed by an investigating judge and he was released.

SocGen's trading losses shook France's political and financial establishment when the bank disclosed them on Jan. 24. Government leaders were furious they had not been warned in advance.

Class Action Lawsuit

U.S. law firm Cohen Milstein Hausfeld & Toll said on Wednesday its complaint, filed in the New York federal court, alleges that SocGen made false and misleading statements and concealed material adverse information regarding the bank's exposure to subprime loans, collateralized debt obligations and internal controls.

The lawsuit seeks to represent all purchasers of SocGen American Depository Receipts and all U.S. purchasers of the bank's shares on overseas exchanges between Aug. 1, 2005 and Jan. 23, 2008.

A SocGen spokeswoman in Paris said the bank had no immediate comment on the class action lawsuit. 

SocGen Chairman Daniel Bouton has offered to resign but has stayed on after winning the support of the bank's board. However, he has faced criticism from France's top politicians, including President Nicolas Sarkozy.

Bouton is determined to ensure that SocGen rides out the storm as an independent bank, despite persistent speculation that France's biggest listed bank BNP Paribas might bid for it. BNP narrowly failed to buy SocGen in 1999.

BNP has been quietly sounding out investors and politicians to gauge support for a combined bank that could be presented as a French champion, sources close to the matter say.

But it has yet to decide whether to launch a bid and is seen unlikely to go hostile again against its smaller rival, which this week concluded a 5.5 billion euro rights issue designed to repair its finances following the trading losses.

Despite the latest arrest and the U.S. legal action, SocGen shares tracked a rebound in global financial markets to close up 6.2 percent at 71.11 euros. At that price, SocGen has a market capitalisation of around 33 billion euros.

BNP Paribas closed up 2.3 percent, giving BNP a market value of around 54 billion euros.

Iris Finance fund manager Michael Sellam said that despite the continuing bid speculation which has supported SocGen shares, the bank still faced tough times ahead.

"Yes, there is some good news, but there's also uncertainty over the situation," said Sellam, who hold SocGen shares.