France's Banking Commission yesterday fined Société Générale (SocGen) €4 million ($6.3 million / Rs27 crore) for serious breaches in internal controls revealed by the French bank's €4.9 billion rogue trading loss.

The Banking Commission also reprimanded France's second-biggest listed bank for poor supervision that led to the unauthorised trades by Jerome Kerviel, the former SocGen trader blamed for the losses earlier this year.

After interviewing representatives of the bank on 20 June, the commission said it detected "grave deficiencies in the internal control system" that "made possible the development of the fraud and its serious financial consequences."

"The weaknesses brought to light in particular the deficiencies in hierarchical controls, carried on over a long period, throughout 2007, without being detected or rectified by the internal control systems," it said.

Société Générale declined comment.

The Kerviel scandal led to executive chairman Daniel Bouton splitting his job and transferring his chief executive position to Frederic Oudea, while Jean-Pierre Mustier, the head of the investment banking unit, was replaced.

Kerviel was freed from prison in March after an appeal against his detention, but he remains under formal investigation for breach of trust, computer abuse and falsification. He has said the bank must have been aware of his trading activities.

SocGen has published two internal reports on its own investigations into how Kerviel managed to bypass risk controls to build up a trading position worth €49 billion - more than SocGen's own market capitalisation.

Its second report published in March blamed weak supervision and poor control systems for the trading scandal. It painted a climate in which managers turned a blind eye to risks.

SocGen did not discover Kerviel's unauthorized trades until 18 January, even though the bank's internal reports showed that Kerviel had in 2007 raised alarms with derivatives exchange Eurex and been the subject of more than 70 "alert" warnings.

Kerviel turned himself in to police on 26 January, two days after the bank revealed the losses, and on 28 January was charged with breach of trust, fabricating documents and illegally accessing computers.

According to a psychologist's assessment of Kerviel, he said his managers knew of his dealings but kept silent as long as he was making good returns.

"There were emails sent to my bosses from controllers indicating fake transactions. To my mind, the fact that no one came to talk to me about it somewhat justified my position," he told the psychologist, referring to his dealings in early 2007.

"They knew that I was trading outside the bounds... Since it was profitable, they let it go by," Kerviel was quoted as saying.

The losses from the Kerviel scandal made SocGen vulnerable to a takeover bid from rivals such as BNP Paribas and forced the bank to raise €5.5 billion in capital to shore up its finances, already considerably weakened by sub-prime losses.

Details of the incident
Kerviel joined the middle offices in the bank Société Générale in the summer of 2000, working in its compliance department. In 2005 he was promoted to the bank's Delta One products team in Paris where he was a junior trader. Société Générale's Delta One business includes programme trading, exchange-traded funds (ETFs), swaps, index and quantitative trading.

Bank officials claim that throughout 2007, Kerviel had been trading profitably in anticipation of falling market prices; however, they have accused him of exceeding his authority to engage in unauthorized trades totaling as much as €49.9 billion, a figure far higher than the bank's total market capitalisation. Bank officials claim that Kerviel tried to conceal the activity by creating losing trades intentionally so as to offset his early gains.

According to the BBC, Kerviel generated €1.4 billion in hidden profits by the end of 2007. His employers say they uncovered unauthorised trading traced to Kerviel on 19 January 2008. The bank then closed out these positions over three days of trading beginning 21 January 2008, a period in which the market was experiencing a large drop in equity indices, and losses attributed are estimated at €4.9 billion.

The bank claimed Kerviel "had taken massive fraudulent directional positions in 2007 and 2008 far beyond his limited authority" and that the trades involved European stock index futures. Though bank officials say Kerviel apparently worked alone, skeptics question how unauthorised trading of this magnitude could go unnoticed. Kerviel's unassuming background and position have heightened the scepticism that he worked alone.
 
Some analysts suggest that unauthorised trading of this scale may have gone unnoticed initially due to the high volume in low-risk trades normally conducted by his department. The bank said that whenever the fake trades were questioned, Kerviel would describe it as a mistake then cancel the trade followed by replacing that trade with another transaction using a different instrument to avoid detection.

Kerviel's lawyers, Elisabeth Meyer and Christian Charrière-Bournazel, said that the bank's managers "brought the loss on themselves"; accused the bank's management of wanting to "raise a smokescreen to divert public attention from far more substantial losses in the last few months"; and said that Kerviel had made the bank a profit of $2 billion as of 31 December 2007.

Kerviel is not thought to have profited personally from the suspicious trades. Prosecutors say Kerviel has been cooperative with the investigation, and has told them his actions were also practiced by other traders in the company.

Kerviel admits to exceeding his credit limits, but claims he was working to increase bank profits. He told authorities that the bank was happy with his previous year's performance, and was expecting to be paid a €300,000 bonus. Family members speaking out say the bank is using Kerviel as a scapegoat to excuse its recent heavy losses.