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Fraud Updates
PCB News
Fraud Updates 2008
29 January
There have been a number of developments at Societe Generale which are of interest to its shareholders in recovering any losses they have suffered.
On 26 January, questions were raised as to how a single trader could hide losses of the amount suffered by the bank. These questions have since become more focused. If Mr Kerviel made a substantial sum of money for the bank last year, how could this have been done when his trading was supposed to be confined to low-margin arbitrage.
On 28 January, French investigators claimed that Eurex, Europe's leading derivative exchange, had raised the alarm regarding the trading activities of Mr Kerviel last year. It appears that following this warning, Mr Kerviel increased his suspect trading.
By 29 January, the first details of Mr Kerviel's defence were being disclosed. These included allegations that the bank had turned a blind eye towards illicit trading by its employees. It appears from other reports that the bank had previously questioned him in relation to earlier trades but that he had answered them by providing forgeries or claiming a mistake. It would appear that these explanations were sufficient to satisfy the bank that nothing was amiss. The balloon only went up when a counter-party was approached to verify a transaction on 19 January which it did not recognise.
Shareholders will be paying close attention to these developments so that they can decide which parties are responsible for their losses. Our experience in the shareholders' action that was brought against Shell fortified our view that the choice of jurisdiction in bringing any claims is critical to the prospects of successfully recovering damages. Whilst France may be the natural forum, the impact of the fraud is world-wide.
25 January
It is too early to say why the fraud at Societe Generale happened.
Those reasons will only be discovered during the microscopic examination that will inevitably take place internally at the bank and as a result of the proceedings that the bank and others are likely to face.
Shareholders may have claims against the company. In the case of Shell, in which PCB Litigation advised in the US proceedings, shareholders brought claims in both Europe and the US on the basis of what proved to be misleading statements as to the company's value. Without admitting liability, Shell settled the claims of the pan-European investors by making a payment of $352.6 million, plus administrative costs whilst a proportional sum is to be paid to US investors provided that the settlement is approved by the US Courts.
The bank will need to consider whether it may have claims against directors, auditors, those responsible for managing the trader. It has already indicated that it will pursue the trader, Jerome Kerviel. It will also need to consider what steps it may be required to take to be able to claim under any insurance policy.
Where there are claims of this scale it may be unrealistic to recover all the sums. However in the case of BCCI, there was a considerable amount of litigation brought to recover substantial sums, much of which was successful.
The bank may also face regulatory proceedings leading to fines and various reports in today's media have commented that the loss resulting from the fraud has made it vulnerable to a take-over. Under English law, there may be grounds for disqualification of some of the directors of the bank.
The fraud at Societe Generale highlights the fact that even the most sophisticated compliance programmes only work if they are properly administered.
17 January
The Supreme Court in America struck a blow for investor law suits on 15 January 2008 when it ruled a group of investors who had been defrauded by Charter Communications could not sue suppliers of the company.
It was alleged that Scientific-Atlanta had helped Charter Communications to inflate its revenues and thereby defraud investors. However, the Court considered that the investors had not relied on anything done by the supplier.
The ruling further protects accountants, lawyers and bankers in the Supreme Court, which, as investors are finding, is seemingly adopting a more business friendly approach.
It is to be contrasted with the position that is increasingly being taken by the English Courts of holding third parties to be accountable where they have assisted in a fraud.
2 January
The recipient of the proceeds of fraud can seek a contribution from third parties in meeting claims. This is what the Court of Appeal held shortly before Christmas in overturning a decision that the recipient should as a rule of law or practice bear 100% of the loss. The case applies where the recipient no longer retains the whole of the proceeds of the fraud.
Defendants to claims brought for "knowing receipt" should therefore consider whether there are third parties who may be liable to contribute to the damages. For example, the fraud may not have taken place but for the negligence of the Claimant's directors or auditors. Those directors or auditors may now be liable to contribute to any damages that the Defendant has to pay (or indeed had to pay in the previous two years).
The case is also consistent with the general increase in accountability of those parties who have allowed a fraud to be perpetrated.
| February 2008 | December 2007 |