Jerome Kerviel

Société Générale Chairman and Chief Executive Daniel Bouton said Thursday that the bank didn't know Mr. Kerviel's whereabouts, though it was still trying to mop up the path of destruction he had left behind.

Using what Société Générale co-Chief Executive Philippe Citerne described as "pure fraud," Mr. Kerviel dodged myriad elaborate computer-control systems and an army of 2,000 back-office supervisors to make huge bets on stock-index futures.

Société Générale said it lodged a legal complaint with French prosecutors against the trader. The complaint alleges Mr. Kerviel committed fraudulent falsification of banking records, fraudulent use of such records and computer fraud.

Mr. Citerne said the bank failed to notice the unauthorized trades until last week because the "smart" trader had an "intimate and malicious" knowledge of Société Générale's procedures and also knew the days in which they were conducted.

"Each time he took a position one way, he would enter a fictitious trade in the opposite direction to mask the real one," Mr. Citerne said. He said he was at a loss to explain the motivation of the trader, who didn't benefit from the alleged fraudulent trade. "He was mentally weak," Mr. Citerne said. "I have no idea why he did that."

Separately, the U.S. Federal Reserve remains comfortable with its decision to cut interest rates Tuesday in spite of news today that the preceding stock selloff may have been related to a rogue trader, a Fed official said. The official said the Fed didn't know of Société Générale's unwinding of positions when it cut rates. Nonetheless, the Fed remains as comfortable now with its decision as it was Monday night, when it was made, the official said.

Trader in 'Plain Vanilla' Futures

Mr. Kerviel, 31, joined Société Générale in August 2000 and was working as a trader on the futures desk at the bank's headquarters near Paris. He was in charge of futures hedging on European equity-market indexes, known as "plain vanilla" futures.

Though Société Générale says it first learned of what it termed "massive fraudulent directional positions" last Saturday, it waited until it could close out those trades before going public with the problem. Winding down the trades, the bank said, resulted in a €4.9 billion charge, making it potentially the largest loss ever from an alleged rogue trader.

The size of the loss also raised questions as to what role regulators are playing, and even whether they would ever be able to detect such a fraud.

Christian Noyer, the governor of the Bank of France, said an investigation was to begin immediately at Société Générale to figure out the origins and methods behind the fraud. "We will closely examine how the process malfunctioned and look into whether the internal controls were sufficient," he said at a news conference. Once the investigation is completed and the bank had "a complete vision of the methods used by the trader" it would decide whether any regulations or oversight needed to be tightened at France's banks. "We need to learn what happened at Société Générale to make sure this cannot happen again," he added.

Mr. Noyer rejected suggestions that the regulator hadn't been strict enough in its oversight. He said the Bank of France undertook 17 investigations onsite at Société Générale in 2006 and 2007 during the course of its regulatory activities. They examined the bank's models for evaluating risk, especially of its sophisticated financial derivatives and products, and its system of controls. But the alleged fraud actually took place on much simpler transactions, he pointed out. "I don't consider this a failure of our controls."

"We can't have a controller behind every trader at every bank in the country at every moment," he said. "Even the best laws and the best police can't always stop someone who is determined to defraud the system."

But that wasn't the only bad news Société Générale announced Thursday.

It also said it was taking a €2.05 billion write-down in assets related to subprime exposure. To help restore its credit rating, Société Générale said it would launch a capital increase of €5.5 billion in the "following weeks."

The write-down and losses related to the trading incident will lead the company to post a net profit of about €700 million for all of 2007.

The disclosure of the write-downs came as European markets were starting to bounce back after three days of massive selloffs as investors grow worry about global economic outlook.

Shares of Société Générale, which were suspended from trading at the market's opening, closed with a decline of 4.1%.

With a market capitalization of about €38 billion, nearly half of its market value has been wiped out since the crisis began six months ago. Société Générale is slated to report full-year figures Feb. 21.

Asian stocks also turned volatile following the news, as early gains in Hong Kong's Hang Seng Index were erased before the market's close on Thursday, and shares in India traded lower.

At a news conference, Mr. Bouton apologized to shareholders and said the bank won't offer staff stock options or bonuses for 2007. Neither Mr. Bouton nor Mr. Citerne will take a fixed salary through June, he said.

The size of the Société Générale incident stands to dwarf one of the most notorious "rogue trader" incidents in global corporate history, the more than $1.3 billion attributed to Nick Leeson in 1995, which bankrupted British bank Barings. Barings collapsed after Mr. Leeson, the bank's Singapore general manager of futures trading, lost £860 million -- then valued at $1.38 billion -- on Asian futures markets, wiping out the bank's cash reserves. The company had been in business for more than 230 years.

The fraud wasn't as big as the 1991 scandal that led to the demise of the Bank of Credit and Commerce International. Claims by depositors and creditors there exceeded $10 billion at the time. International bank regulators seized BCCI, which had headquarters in Luxembourg, London and the Cayman Islands, on July 5, 1991. They acted on auditors' reports that described huge losses from illegal loans to corporate insiders and from trading transactions.

In 2006, a 32-year-old trader named Brian Hunter at Amaranth LLC, a hedge fund, made a series of bad bets on natural-gas futures that led to losses of $6 billion. Crédit Agricole SA, one of Société Générale's French competitors, last August revealed a similar trading incident that wiped €230 million off third-quarter net profit.

Mr. Bouton said that Mr. Noyer, the Bank of France governor, and the French market regulator, AMF, were informed Sunday. "Everything happened this weekend; we had zero suspicions before Friday," Mr. Bouton said. He said four or five other staff will leave Société Générale, including Mr. Kerviel's immediate managers.

A senior government official said the office of President Nicolas Sarkozy was alerted about the debacle at Société Générale on Wednesday. "Suffice to say we would have appreciated an earlier warning," the official said.

Wall Street Journal