SocGen Under Pressure Over Rogue Trade Warning

By Tim Hepher

PARIS (Reuters) - Societe Generale faces growing embarrassment after it emerged the French bank was warned last year about the suspect activities of Jerome Kerviel and its key fraud accusation against the 31-year-old trader collapsed.

Kerviel was freed under judicial supervision, resembling bail, after prosecutors failed to persuade judges to proceed with a full-scale fraud investigation following his massive stock market gambles that lost the bank 4.9 billion euros ($7.22 billion).

Kerviel, who has admitted breaking bank rules but accuses others of doing the same, was placed under formal investigation over accusations of falsification, computer abuse and breach of trust. Prosecutors said they would appeal against his release.

Being placed under investigation in France can lead to trial but does not immediately imply guilt and falls short of charges.

Kerviel's lawyers were jubilant.

"There is no fraud, sir. There is no fraud. The word fraud was used by (Societe Generale Chairman Daniel) Bouton numerous times," said Kerviel's lawyer Christian Charriere-Bournazel.

"Mr Bouton held this unfortunate man up for public vilification, threw him to the dogs ... and there was no substance to it," he told reporters late on Monday.

Day five of the world's biggest rogue trading scandal saw SocGen's (SOGN.PA) shares fall on concerns about its business franchise, its bosses attacked by French President Nicolas Sarkozy and its own version of the trading fiasco challenged by investigators.

The Paris prosecutor said that Eurex, a derivatives exchange owned by Deutsche Boerse (DB1Gn.DE), had questioned Kerviel's trading positions in November 2007, and that Kerviel had been able to sidestep questions from his employer.

"Eurex alerted Societe Generale in November 2007 about the positions taken by Jerome Kerviel. Questioned by the bank, he produced a fake document to justify the risk cover," he said.

SocGen, France's second-biggest bank, has said it only found out about the uncovered position on Jan. 18.

SARKOZY TARGETS CHAIRMAN

Sarkozy turned up the heat on SocGen, saying its top managers would have to accept their share of responsibility for the world's biggest trading scandal.

"When there is an event of this nature, it cannot remain without consequences as far as responsibilities are concerned," Sarkozy told reporters on Monday.

Tuesday's early newspaper editions had no doubts what he meant. "Sarkozy wants SocGen chief out," said Le Figaro.

Sarkozy is furious that neither bank chairman Bouton nor the Bank of France told him about the crisis when it was first unfolding, a source familiar with the matter said last week.

Bouton offered to quit but was asked to stay on by the board. He has said his resignation remains on the table, however, suggesting he may feel he has to go if criticism worsens.

The bank's next board meeting is on Wednesday.

Bouton traveled to London on Monday to start drumming up support for a 5.5 billion euro capital increase designed to compensate for the Kerviel losses and a separate 2.1 billion euro writedown related to the global credit crisis.

Kerviel ran up a huge position of 50 billion euros. Instead of protecting the bank's investment as he had told supervisors, he left it exposed to the risk that shares would fall.

Prosecutors said he had admitted concealing trades but had done so to enhance his reputation as a trader, not to steal.

Market traders have expressed disbelief that such huge rogue trades could have gone undetected for so long.

SocGen's shares tumbled on Monday after Citigroup said the French bank's franchise was "severely impaired." The shares fell up to 9 percent but closed 3.8 percent lower at 71.1 euros.

Adding to the bank's woes, a French lawyer acting for about 100 small shareholders said he had sued SocGen over the way it unbundled billions of dollars in share deals last week.

The bank was also hit by two complaints about the sale of a million shares by a SocGen director on Jan. 9-10. SocGen said director Robert Day had sold well before Kerviel was unmasked.