PwC’s SocGen Report – Nothing New To Report

We should not be surprised that the PwC-assisted preliminary investigative report on the Kerviel – SocGen trading scandal is a superficial treatment, supporting management’s theories and painting a picture of a bank generally “under control”, with some low level management that could have performed better. But the picture is essentially one of a bank victimized by a “rogue trader.” It’s as management wants it to be and that’s what PwC and the rest of the Big 4 get paid to accomplish.

The appointment of PwC, a non-independent party to the this mess, was done too quickly and the report comes to simpleminded conclusions too quickly, conclusions intended to scapegoat a poor working guy who just wanted to taste some of the French champagne and beluga cavier via a hard-earned and, it looks, deserved bonus. Watch for more subprime and other losses to come out of this bank once the Kerviel red herring has played out.

…An internal investigation by the bank, published by a three-member committee of inquiry, found that operating staff “did not systematically carry out more detailed checks” of Kerviel’s long-standing activities which only came to light on January 18. SocGen was alerted by European derivatives exchange EDurex to strange dealings by traders as early as last November and has been charged by the French government and the Bank of France with failing to follow up on these warnings or commit enough trained staff to handle risk management.

The 20-page “progress report” published by the committee headed by former Peugeot Citroën chief Jean-Martin Folz also pointed to “the absence of certain controls that were not provided for and which might have identified the fraud”. It comes on the eve of SocGen’s annual results which are provisionally expected to show a net profit of €947m after accounting for the €4.82bn loss engendered when the bank “unwound” Kerviel’s positions and a further €2.05bn losses related to the sub-prime crisis. Investors and analysts will scrutinise the figures to see if they indicate wider deficits, notably regarding the sub-prime related market and subsequent credit crunch.

SocGen has accused Kerviel, a 31-year-old back office administrator turned would-be star derivatives trader, of being a “fraudulent genius” who acted alone. But Kerviel, who is being held on remand in a Paris prison, has not been charged with fraud.

The report backs SocGen’s main argument that Kerviel acted alone. It says: “At this stage of the investigations there is no evidence of embezzlement or internal or external complicity (ie the existence of a third party who knowingly assisted the fraudster to conceal his positions).”…

It also suggested that “on the whole” the bank’s internal controls “were carried out in accordance with the procedures but did not make it possible to identify the fraud before January 18 2008”.

The report reiterated that Kerviel started building up unauthorised trading positions in 2005 and 2006 for “small amounts”, but they got bigger from March 2007 onwards.
The SocGen report reveals that Kerviel got a €60,000 bonus for 2006. He asked for a €600,000 bonus for 2007, after building up a €1.4bn profit but instead received half that. Leaked judicial documents suggest he had been sitting on a €2bn loss six months earlier. The report said Kerviel’s deception included rogue deals on warrants with a deferred start date and futures contracts.