in re societe generale securities litigation 08-cv-02495-first amended and consolidated
TRANSCRIPT
UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK
xIn re SOCIETE GENERALE SECURITIES : No. 08-CIV-02495 (GEL)
LITIGATIONx CLASS ACTION
FIRST AMENDED AND CONSOLIDATED COMPLAINT FOR VIOLATION OF THEFEDERAL SECURITIES LAWS
TABLE OF CONTENTS
Page
I. INTRODUCTION ...............................................................................................................1
II. JURISDICTION AND VENUE ........................................................................................12
III. PARTIES ...........................................................................................................................12
IV. CONFIDENTIAL SOURCES ...........................................................................................20
V. CONTROL PERSON ALLEGATIONS/GROUP PLEADING ........................................25
VI. BACKGROUND ...............................................................................................................27
A. The Kerviel Fraud ..................................................................................................29
B. The Subprime Fraud ..............................................................................................32
VII. DEFENDANTS' FALSE AND MISLEADING STATEMENTS ....................................36
VIII. THE TRUTH BEGINS TO COME TO LIGHT ................................................................63
IX. DEFENDANTS' SCIENTER ............................................................................................82
A. Defendants Knew of or Recklessly Disregarded Numerous Red FlagsIndicating that Kerviel Was Engaging in Unhedged Directional Trades andthat SocGen Lacked Adequate Risk Control Management Systems .....................82
B. Defendants Knew of or Recklessly Disregarded Numerous Red FlagsIndicating that SocGen's RMBS/CDO Portfolio Was MateriallyOverstated ..............................................................................................................88
C. The Government Investigations Pursued by U.S. and French GovernmentAgencies Further Support Plaintiffs ' Scienter Allegations ....................................97
1. The French Finance Minister Investigation ............................................... 98
2. The French Banking Commission Investigation ........................................99
3. The AMF Investigation ............................................................................102
4. The SEC Investigation .............................................................................103
5. The U.S. Attorney Investigation ..............................................................103
6. Mission Green Report ..............................................................................103
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Page
D. SocGen's Financial Restatement Further Evidences Defendants' Scienter ........105
E. Defendants' Insider Sales Also Support Plaintiffs' Scienter Allegations............105
1. The Percentage, Amount and Timing of the Individual Defendants'Class Period Sales Are Suspicious ...........................................................106
2. The Individual Defendants' Stock Sales Made Shortly AfterSocGen's Repurchasing of Company Stock Are Suspicious as Well......109
F. The Termination, Resignation and Reassignment of Key Members ofSocGen's Senior Management Team and Other Participants in the Fraud IsFurther Evidence of Defendants' Scienter ...........................................................110
G. SocGen' s Simultaneous Disclosure of Both Frauds Confirms Scienter ..............112
H. Defendants ' Participation in a Scheme to Defraud Shareholders ........................112
X. DEFENDANTS' MATERIALLY FALSE AND MISLEADING FINANCIALREPORTING DURING THE CLASS PERIOD .............................................................115
A. Applicable Accounting Standards ........................................................................116
B. Defendants ' Failure to Disclose and Record the Nature, Extent andFinancial Impact of the Kerviel Fraud Violated International FinancialReporting Standards .............................................................................................117
1. SocGen's Restatement of Its 2007 Financial Results ..............................118
2. SocGen ' s Specific Violations of IFRS in FY2007 Financial Results...... 122
C. Defendants' Failure to Disclose and Record the Nature, Extent, andFinancial Impact of the Subprime Fraud Violated International FinancialReporting Standards .............................................................................................124
1. Financial Statement Impact of the Subprime Fraud ................................125
2. SocGen's Lack of Disclosures Relating to the Subprime FraudViolated International Financial Reporting Standards .............................126
D. SocGen's Valuations of Its RMBS and CDO Financial InstrumentsViolated International Financial Reporting Standards .........................................130
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Page
1. Defendants Ignored or Recklessly Disregarded Information Knownby Them in Calculating the Fair Vale of SocGen's Portfolio ofSubprime Backed CDO and RMBS Financial Instruments .....................131
a. SocGen Knew in 2006 and 2007, Through TCW, ItsWholly Owned Subsidiary , that CDO and RMBS SecuritiesBacked by Subprime Loans Were Declining in Value andShould Be Avoided ......................................................................132
b. The ABX Index Experienced a Sharp Decline From Late2006 Into 2007 .............................................................................13 2
c. SocGen Knew From Its Own Trading Experience Duringthe Class Period that the Value of Its CDO/RMBS PortfolioHad Plummeted ............................................................................134
2. SocGen's Q4 Writedown - the Truth Begins to Emerge .........................136
E. Additional Violations of International Financial Reporting StandardsRelated to the Kerviel Fraud and the Subprime Fraud ........................................138
F. Defendants ' Failure to Disclose the Internal Control and RiskManagement Deficiencies Relating to the Kerviel Fraud and the SubprimeFraud Violated Financial Regulations of the AMF and the FrenchCommercial Code ................................................................................................142
XI. ADDITIONAL JURISDICTION ALLEGATIONS ........................................................145
A. SocGen's U.S. Operations ...................................................................................146
B. Defendants' False Statements Were Made, and Its Fraudulent ConductOccurred, in the United States .............................................................................149
XII. APPLICABILITY OF PRESUMPTION OF RELIANCE: THE FRAUD-ON-THE-MARKET DOCTRINE ..........................................................................................153
XIII. DEFENDANTS' INSIDER SALES DURING THE CLASS PERIOD ..........................154
A. Defendants' Insider Trading Scheme ...................................................................154
B. SocGen's Stock Repurchase Program Was Timed to Boost Share Prices toSupport and Benefit Defendants' Sales ...............................................................157
C. Details of Defendant Day's Insider Trading ........................................................160
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Page
D. Defendant Bouton ' s Illegal Insider Trading ........................................................164
E. Defendant Citerne' s Insider Trading ...................................................................167
F. Defendant Alix's Insider Trading ........................................................................170
XIV. LOSS CAUSATION/ECONOMIC LOSS ......................................................................171
XV. NO SAFE HARBOR .......................................................................................................174
XVI. CLASS ACTION ALLEGATIONS ................................................................................174
XVII. FIRST CLAIM FOR RELIEF .........................................................................................176
XVIII . SECOND CLAIM FOR RELIEF ....................................................................................177
XIX. THIRD CLAIM FOR RELIEF ........................................................................................180
XX. FOURTH CLAIM FOR RELIEF ....................................................................................181
XXI. PRAYER ..........................................................................................................................182
XXII. JURY DEMAND .............................................................................................................183
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I. INTRODUCTION
1. This is a federal securities class action on behalf of purchasers of Societe Generale
("SocGen" or the "Company") securities during the period August 1, 2005 to January 25, 2008 (the
"Class Period") seeking to pursue remedies under the Securities Exchange Act of 1934 (the "1934
Act" or "Exchange Act") and Rule lOb-5.
2. Defendant SocGen specializes in equity derivative securities, which includes
arbitrage and trading futures on the world ' s largest options exchanges , such as the U.S.-based ISE,
Eurex, Dax and FTSE. Arbitrage involves engaging in offsetting trades and then capturing the
difference in yield, which results in a small profit margin. With proper risk control management
systems in place, arbitrage activities should carry little risk. The essential key to this type of trading,
however, is risk management control.
3. This case concerns the concealment of a massive trading scandal at the Company, the
concealment of the extent and nature of the Company' s exposure to the U.S. mortgage market and
the lack of adequate risk controls at a company that is in the business of managing risk. At the same
time that SocGen was amassing billions in undisclosed losses due to a purported rogue trader, the
Company was sitting on billions in undisclosed losses related to its investments in sub-prime
Residential Mortgage-Backed Securities ("RMBS") and Collateralized Debt Obligations ("CDOs").
When the market learned the truth about the Company's trading losses, inadequate risk controls and
sub-prime losses, the price of SocGen securities declined dramatically. Throughout the Class
Period, insiders sold over €225,000,000 worth of their SocGen shares at ten-year stock price highs,
and, literally days before the disclosure of the true facts, a SocGen director, Defendant Day, dumped
more than €140,000,000 worth of his SocGen securities to the unsuspecting public - a sale of about
50% of his total holdings. Now, SocGen is subject to numerous international and U.S.-based
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regulatory and criminal investigations and the Company's reputation and credibility has been forever
tarnished.
4. SocGen's trading scandal has garnered international attention. Commencing in at
least August 2005, SocGen trader Jerome Kerviel ("Kerviel") engaged in un-hedged, directional
trades (bets on whether market will rise or fall) which exposed the Company to huge losses.
Throughout 2006 and into 2007, Kerviel's trading positions continued to increase and SocGen's
exposure to losses increased dramatically - at one point reaching € 50 billion in market risk, which
is and was more than SocGen's entire market capitalization. Kerviel's massive directional trades did
not go unnoticed at SocGen. SocGen's inadequate risk controls generated clear and unequivocal red
flags and other reports which highlighted to SocGen managers and executives certain aspects of
Kerviel' s trading positions . Yet, nothing was done and the risk of loss to SocGen continued to
increase, eventually reaching billions of euros.
5. To be sure, over an extended period of time, Kerviel was the "subject ofmore than 70
`alert' warnings." In March 2007, SocGen held internal discussions about Kerviel's use of fake
transactions (which made it appear as though his trades were properly hedged), which had been
discovered by one of the Company' s internal accounting committees . Such fictitious deals generated
an €88 million charge to the Company's profit and loss account. In an April 16, 2007 e-mail sent
from the director of the "middle results" department to Kerviel's superiors, several financial
controllers and the author's supervisor identified €94 million in fictitious transactions. The
recipients of the e-mail held an emergency meeting that day in which the fictitious transactions were
confirmed. Such deals continued, however, with the approval of the directors of SocGen's finance
department , resulting in a €2.2 billion accounting gap by late June-early July 2007.
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6. In addition, Kerviel's earnings from proprietary trades were grossly disproportionate
to both his trading authority and the earnings of fellow traders on the "Delta One" arbitrage desk
where he worked. As Kerviel himself explained, "I cannot believe my hierarchy was not aware of
the sums I was placing, [a]s it is impossible to generate that kinds ofprofit with smallpositions."
SocGen also knew that Kerviel had failed to take the required two-week continuous vacation time -
a key requirement in any risk control management system on a trading desk and critical to allowing
another trader to review and manage Kerviel's trades - but failed to take any action. In other words,
Kerviel's actions were either known to Defendants or Defendants were extremely reckless in not
knowing about them - there is simply no way that SocGen could not have known had it engaged in
grossly deficient risk management practices. The French Banking Commission reached the same
conclusion about SocGen's clearly inadequate risk control systems and imposed a €4 million fine -
the largest ever in its history.
7. While Kerviel was posting highly risky directional bets on the market, exposing the
Company to billions in losses, internal red flags were being ignored and fictitious trades were being
discussed internally but not disclosed - Defendants were publicly characterizing the Company's risk
controls as, among other things, "highly sophisticated control systems which have already proved
their worth in extreme situations." Defendants also told investors that SocGen had "sound risk
management" and that "risk is kept under control, under strong supervision and using our expertise."
Defendants' statements and characterizations of SocGen's risk management policies and controls
were materially false and misleading because they were not true and failed to disclose that the
Company lacked sufficient risk controls necessary to prevent a rogue trader from exposing the
Company to billions of euros in losses or that even if Kerviel were caught and identified, the
Company' s risk control procedures were not being implemented and followed as executives and the
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Company requested. SocGen's risk controls and policies were insufficient in that they failed to
identify, expose, prevent or correct obvious and repeated violations of the purported controls and
policies. Investors would have considered the lack of sufficient risk controls at SocGen to be highly
material information given the Company's purported risk control expertise and the importance of
risk control to the Company's business, particularly its equity derivatives trading.
8. The trading scandal also impacted SocGen's reported financial results, as the
Company has now restated its financial statements for each quarter in FY 2007. The restatement is
an admission that SocGen's reported financial results were materially false and misleading at the
time that they were issued. The magnitude of the restatement is staggering. SocGen was forced to
restate €1 .4 billion, an astounding 78% of its net income reportedly earned by the Company during
the three month period ended June 30, 2007. SocGen's CIB division was forced to restate 98% of its
originally-reported net income for the six month period ended June 30, 2007.
9. At the same time that Kerviel's trading was occurring, SocGen was becoming
increasingly involved in structuring, trading and investing in a variety of financial instruments,
including RMBS and CDOs, backed by U.S. residential subprime mortgages . This activity was
centered in SocGen's New York City offices . Beginning in 2005, SocGen took on undisclosed
positions in certain complex and risky RMBSs and CDOs. SocGen ' s subprime exposure arose from
two primary sources: large unhedged positions on senior tranches of "subprime RMBS" and large
unhedged positions on "super senior tranches" of "Mezzanine CDOs," which were backed byjunior
(BBB and sub-BBB rated) tranches of "subprime RMBS."
10. As the value of these securities declined, SocGen refused to acknowledge or
adequately account for the extent of losses on its positions. When analysts questioned the Company
about its exposure to the decline in the prices of RMBSs and CDOs, Defendants falsely downplayed
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the Company's exposure and understated the significance of the losses that the Company was
experiencing on its positions. Unbeknownst to investors, SocGen had accumulated and warehoused
massive amounts ofRMBSs and CDOs in anticipation ofrepackaging the securities and selling them
to investors as even more complex structured finance products. However, before they could follow
through on those plans, the market for these securities evaporated and the value of the securities
dramatically declined. In effect, the subprime party ended and SocGen was left holding billions in
impaired loans that it concealed from the market.
11. During the Class Period, investors were never told the full extent of the Company's
exposure to the sub-prime credit crisis and were caught completely by surprise when SocGen
announced losses of over €2 billion on its RMBS and CDO positions. Instead, Defendants
represented that the Company' s exposure was "low" or "negligible" and that the brewing credit
crisis would have only a "limited impact" on the Company's financial condition . Nothing could
have been further from the truth. Defendants knew, but failed to disclose, among other things, that
the Company was sitting on nearly €5 billion worth of toxic securities, that they had repeatedly
tested the value of these securities and determined that they were significantly over-valued on the
Company's books and that they had disbanded their New York-based operations, which had been
responsible for this line of business.
12. According to several former employees who worked at SocGen's New York
operations during the Class Period, as early as late 2006 (and certainly by early 2007), it was
abundantly clear that SocGen could not sell its CDO/RMBS securities, as the market for these
products had evaporated, and that the portfolio values of these products needed to be substantially
reduced. By the end of March 2007, SocGen had been forced to scrap a planned CDO offering, and
by the middle of 2007, SocGen had disbanded its New York-based CDO Group, which had
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specifically been created to structure and sell CDOs and other complex structured finance products.
A former employee who worked in SocGen's New York operations during the Class Period summed
it up best : SocGen's TGV initiative to underwrite CDOs was a "train wreck."
13. By the end of 2006, it was common knowledge at SocGen - primarily through
discussions at sales meetings held weekly in New York - that the Company's RMBS and CDO
portfolio values had nose-dived and that the market for those securities had become illiquid.
SocGen ' s management was aware that CDO/RMBS products were not selling. In fact, SocGen
received numerous calls from previous customers complaining about "the crap" CDOs that SocGen
had sold them earlier in the year. By March 2007, after acquiring and "warehousing" hundreds of
millions in assets for a planned CDO offering, SocGen realized that it would be unable to sell these
assets, as the market for them had completely dried up. SocGen had no choice but to cancel the
offering, leaving SocGen with millions of worthless CDOs. Senior management at SocGen's New
York operations viewed this failure as a clear sign that the RMBS/CDO market was shot.
14. By mid-2007, SocGen dissolved the New York-based CDO Group, which was
responsible for the purchasing and "warehousing" of mortgages that would ultimately be securitized
as CDOs. In this same time frame, SocGen could no longer obtain broker quotes for much of its
RMBS/CDO portfolio because the market for these products had become illiquid. In fact, the
situation became so dire that SocGen stopped using mark-to-market valuations and the ABX index,
which it had previously relied upon, to value its RMBS/CDO portfolios . Instead, in a desperate
attempt to buoy its RMBS/CDO portfolio values, SocGen switched to a "mark to model" valuation.
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However, these models never reflected realityl and it was clear that SocGen's RMBS portfolios
needed to be dramatically reduced
15. Between January 18 and 21, 2008, news began leaking into the market that SocGen's
RMBS/CDO portfolio was significantly overvalued and that writedowns were imminent. In reaction
to this information, SocGen's stock dropped 16% from €93 to €78.52.
16. Between January 21 and 23, 2008, SocGen was forced to unwind €50 billion worth of
positions placed by Kerviel. Although the market was still unaware of Kerviel 's trading , or even the
source of this massive sell-off, it triggered a worldwide collapse in share prices on January 21, 2008.
17. By January 24, 2008, SocGen shocked the market by revealing- contrary to its many
assurances concerning its internal controls and sophisticated risk control management systems - that
a 31-year old junior trader, Jerome Kerviel, had engaged in massive unhedged, directional trades on
the Eurex, Dax and FTSE, which resulted in SocGen having to book a €4.9 billion loss . In a blatant
attempt to hide behind the Kerviel fiasco, and to create "noise" in the market, SocGen also chose to
announce on January 24, 2008 that, contrary to its many statements that the subprime crises was
"under control," that the subprime market was "improving" and that SocGen had only "limited
exposure" in any event, it was taking an additional €2.05 billion writedown on its subprime assets,
including an additional €1.1 billion writedown on its RMBS/CDOportfolio - 10 times more than
it had announced two months earlier in November 2007. SocGen explained that the ABX index,
which it had stated in November 2007 was not a credible tool to value its subprime portfolio, now,
just weeks later, supported these writedowns. In response to this additional devastating news,
1 Despite SocGen's attempts to change the model's parameters (e.g., recovery rates, defaultrates and plugging in broker quotes), SocGen was never able to find a model that provided the valuesthat they were looking for. SocGen Paris, however, ignored these valuations, refusing to even beginwriting down these securities until November 2007.
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SocGen's stock dropped from €79.08 to €75.81 in a single day - losing €1.42 billion in market
capitalization. From January 17 to January 24, 2008, SocGen lost €7.49 billion in market
capitalization. In the days that followed these revelations, SocGen's stock continued to decline
significantly as the market learned that the risks due to SocGen's trading in equity derivatives and
subprime exposure were significantly greater than the Company had publicly represented during the
Class Period.
18. Throughout the Class Period, and before the fraud was disclosed, Defendants Day,
Bouton, Citerne and Alix (the "Individual Defendants") engaged in a fraudulent scheme to sell the
majority of their SocGen shares, while in possession of undisclosed, adverse, inside information, at
grossly inflated prices to unsuspecting investors. In fact, Defendants sold between 53% and 81% of
their total holdings at SocGen' s ten year share price highs. SocGen's Chairman and CEO,
Defendant Bouton, the leading proponent and advocate for increasing the Company's multi-billion
Euro share re-purchase program because shares were "cheap," sold over 65% ofhis holdings.
19. The scheme began with a program to spend €680 million in shareholder money to
repurchase outstanding SocGen shares. Indeed, SocGen ultimately spent over €1.1 billion in
repurchasing Company shares throughout the Class Period. However, after convincing shareholders
that its stock was undervalued, Defendant Day turned around and sold over 1.8 million of his
SocGen shares (53% of his total available SocGen holdings) for proceeds ofmore than €168 million.
Incredibly, Defendant Day sold 1.5 million of those shares for proceeds of €140 million between
January 9, 2007 and January 18, 2007, just days before SocGen announced its €2. 05 billion
subprime writedown and the Kerviel-related loss of€4.9 billion. Significantly, Defendant Day was
in a position to know that the subprime writedowns were coming, as he concurrently served as the
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Chairman of Trust Company of the West ("TCW"), SocGen's U.S. asset management subsidiary
specializing in CDOs, and a SocGen Director during the Class Period.
20. Defendant Bouton also took advantage of the artificial inflation in SocGen stock,
unloading 255,713 of his SocGen shares for proceeds of more than €30 million . These sales
constituted 65% of his total SocGen holdings. Likewise, Defendant Citerne sold 201,129 shares of
his SocGen stock (81% of his available SocGen holdings) for proceeds of at least €23 million, while
Defendant Alix sold 23,171 shares (81% of his available SocGen holdings) for proceeds of more
than €3.3 million. In all, while the Individual Defendants caused SocGen to spend €1.1 billion to
repurchase over 12.3 million shares of its stock, these same individuals collectively sold over 2.3
million of their personal SocGen shares, reaping more than €225 million in proceeds, all while in
possession of the adverse, non-public facts detailed herein.
21. SocGen's January 24, 2008 announcement sparked numerous government
investigations. The French Finance Minister, the French Banking Commission and the Autorite des
Marches Financiers ("AMF") (the French counterpart to the SEC) each conducted investigations into
the Kerviel fraud and SocGen's €4.9 billion derivatives trading loss. The French Finance Minister
found that "[v]ery clearly, certain mechanisms of internal controls of Societe Generale did not
function." The French Banking Commission likewise found "serious deficiencies of the internal
control system which go beyond the repetition of simple individual failures" and "systemic and
managerial shortcomings ." The Banking Commission found numerous violations of French
banking regulations and fined SocGen €4 million - the largest penalty it has ever imposed.
22. The AMF investigation is focusing on SocGen' s massive subprime-related writedown
and whether SocGen provided "complete, appropriate and reliable" information to the market. The
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AMF is also investigating Defendant Day's €140 million stock sales just prior to the Company's
January 24, 2008 announcement of the subprime writedown and Kerviel's trades.
23. In the United States, the SEC quickly launched an investigation in February 2008 into
Defendant Day's massive insider stock sales on the eve of SocGen ' s disclosures . The U.S. Attorney
for the Eastern District ofNew York also opened an investigation into SocGen's reported loss due to
Kerviel and into Defendant Day's insider sales.
24. The Company's General Inspection Department conducted its own investigation in
which it acknowledged risk control failures that allowed Kerviel to engage in unhedged, directional
trades. The Company has since invested €100 million in its internal controls.
25. In the wake of disclosing Defendants' massive fraud, SocGen made wholesale
organizational and personnel changes. In additional to terminating Kerviel's immediate supervisors,
in early February 2008, Luc Fra cios, head of global equities, the area in which the Delta One desk
operated and where Kerviel worked, left the bank. Likewise, Marc Breillout, head of fixed income,
currencies and commodities (the area that traded RMBS and CDO securities) and Paolo Taddonio,
head of SocGen's New York operations, also left the Company. By mid-April 2008, Jean-Pierre
Mustier, the head of the Company's investment banking division who is credited with building
SocGen into a global leader in equity derivatives trading and who was the heir-apparent to
Defendant Bouton as SocGen's CEO, was removed from the investment banking division and later
reassigned to SocGen Asset Management ("SGAM"). Defendant Bouton, who had been warned by
France's Banking Commission of issues with SocGen's derivative trading, was forced to turn over
his chief executive position to Frederic Oudea, the Chief Financial Officer. And Defendant Citerne,
Defendant Bouton's second in command with primary responsibility over SocGen's risk
management, was forced to give up his seat on the Board.
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26. The following chart graphically depicts Defendants' fraudulent scheme, key events
during the Class Period and the devastating impact of the fraud on the Lead Plaintiff and the Class:
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Soci t G n raleSOC I ETE
€160
€150
€140
€130
a) €120ICU
€1100
€100W
€90
€80
€70
€60
€50
03/16/07: SocGen '07 Reg Doc: "TheGroup organizes a monthly RiskCommittee meeting, chaired by theGeneral Management, at which theExecutive Committee defines theframework required to manage risk,reviews changes in the characteristicsand risks of Group portfolios, anddecides on any necessary strategicchanges. Additionally, the proceduresfor managing, preventing and evaluatingrisks are regularly analyzed in-depth bythe Board of Directors and, in particular,its Audit Committee"
^ n.
Philippe Citerne Didier Alix Robert DayDirector & Deputy CEO Deputy CEO Director
Defendants' Insider Trading:
Total Shares Sold: 2,366,199Total Proceeds : €224,776,016
--plus--$9,061,326
Didier AlixShares Sold: 23,171Proceeds: €3,3111,911% of Holdings Sold: 81.2%
Daniel BoutonShare Sold: 255,713Proceeds: €30,299,515% of Holdings Sold: 65.3%
Philippe CiterneShares Sold: 201,129Proceeds: €23,058,674% of Holdings Sold: 81.3%
Robert DayShares Sold: 1,886,187Proceeds: €168,095,917
-- plus --$9,061,326
% of Holdings Sold: 53.5%
05116/07 - 05/17/07:
Common Shares 02115107: Boutonsells 10,149shares @€144.20for €1,463,475
Bouton sells 10,149 shares • Alit sells 23,171 shares @ €142.93 for €3,311,910
€126.26 for €1,281,550
03115107: 06115107:
11/30/06 - 01/12/07: Bouton sells 10,149 Bouton sells 10,149 shares03/17/06 - 04112106: shares @ €114.22 • @4E135.35 for €1,373,700
mouton sells• Just a few days after SocGen's share repurchase, €1118.718.73--122..900 for€
7r7,399,045 for€1,159,1902snares
Bouton sells 92,794 shares @ €109.53-116.23 for • Citeme sells 108,102 shares @ ' 3/15107 Bouton€12,250,221 €121.12 far€13,093,873 Contemporaneous
• Day sells 3,657 shares @ $140.28 for $512,962 Day sells 290,202 shares @Sale Under §20A
• 04105106 Day Contemporaneous Sale Under §20A €123.09 and about $156 for• 04112106 Bouton Contemporaneous Sale Under €27,739,186 and $8,548,364§20A • 01/04/07 Day Contemporaneous
Sale Under §20A09129106 -10106106•
June 1, 2005 to March 31, 2008
03/09/06: 2006 Reg Doc states 05130/06: B•01/11/07 Day ContemporaneousSocGen conducts "constant
"
o se s Sale Under §20ABouton sells 12,906ou
shares @ €117.57 foranalysis of exposure and results ;"
• 01/12/07 Bouton Contemporaneousshares @ €l 14.76 €2 516 092Internal control is Partofa
, ,for E1,481,040 Sale Under §20A
strict regulatory frameworkapplicable to all banking 06130106 - 07/03/06:
0establishments and Group staff"; Bouton sells 12,906
and teams of independent risk shares @ €106.56
controllers "carry out daily for €1,446,845
reviews of all positions and • Citeme cells 93,027risks taken in the course of the\ shares @ €107.12
n It 21401t
Group's market activities."
08101105: SocGen rls: One of the most important aspects ofthis business is controlling our exposure to the differenttypes of risk, [and SocGen has] invested in a number ofhighly sophisticated control systems which havealready proved their worth in extreme situations... " 4
/ :VWV
1 11123/05: At conclusion of huge1 stock re-purchase, SocGen retires
7.1 million shares "to reduce the1 dilutive effect of...exercising of stock
options."
01/01/05 -11/23/05: SocGen repurchases8,600,000 shares for about E680,000,000
11111
Daniel BoutonFormer Chariman & CEO
• 6115107 BoutonContemporaneous SaleUnder §20A
09/07/07: CEO Bouton: the creditcrisis is under contror andreaffirms that it will have only alimited impact on the bank as ithas only marginal exposure to thesubprime market 09128107: Analysts
revise earningsestimates but report:"SG is not veryexposed to areas
diversification of the businesses portfolio,
currently at risk....1
05/10/07: CFOOud a: "risk is keptunder control, understrong supervisionand using ourexpertise."
06/27/07: Analysts repeat thatSocGen's "Exposure to high-risk(sub-prime) mortgages in theU.S. is limited as is exposure tosecuritization of these loans"
08102/07-08/03107: SocGen rls:n "The Group's cost of risk remained low... dueto both a still favourable credit environmentand factors specific to the Group: a policy of
improved risk management techniques andhedging of high -risk exposure. Moreover, theGroup has low exposure to the current creditmarket crisis."
"[Me believe that[SocGens] exposure is limited insize, closely monitored, collateralized, and rather safe in ourview."
A
-Analysts upgrade SocGen: We upgrade SocGen to Buy due to...little exposure to current credit marketjitters....[ijhe bank hasconfirmed that it has negligible exposure.... We have also nodoubt on the quality of internal procedure to highlight potentialweaknesses . The management detailed the small exposure ofthe bank to current credit crisis with its Q2 results."
11107/07: CFO Oud a: "[We have] significant experience inmarket risk management .... Regarding our small RMBSportfolio , it was marked down based on observable data andwill be valued on that basis going forward."
12/1ilimit
ed07:impact
Bouton:11123107: Analysts: "[We] anticipate Q4 to be a tough environment
"l
for CIB but with no further writedowns. Not exposed to US"mitprofitability from
t
assets except their CDOexposure that they seeasa'mistake' Thehe
management also does not anticipate to be forced to book^^ntsubpsi
.further write-downs on their Euro 4.8bn CDO exposure."
mortgage crisis. "
Class Period: 8/1/05 - 1/23/08
01124/08 thru 05108:• SocGen discloses mortgage-relatedexposure of €2 billion arising from largepositions on unhedged CDOs andsubstantial exposure to monoline insurers;
• €2 billion writedown is 1 Ox what executivestold shareholders just one month earlier;
• Executives blame junior trader Kerviel foradditional €4.9 billion writedown;
• U.S. Attorney's Office for the EasternDistrict of New York opens criminalinvestigation into Day's stock sales;
• French Finance Minister investigatesSocGen, states: "Very clearly, certainmechanisms of internal controls ofSociete Generale did not function, andthose that did were not always followed upwith appropriate changes";
• SEC announces its investigation ofinsider's sales;
• French Banking Commission investigatesSocGen, ultimately censuring the bank andimposing its largest fine ever,Euro$4MM, for "serious deficiencies ofthe internal control system which gobeyond the repetition ofsimpleindividual failures."
• French regulator, AMF, announcesinvestigation of SocGen, the bank'sfinancial communications regarding thesubprime mortgage crisis, and todetermine whether the information put outby SocGen was complete, appropriate andreliable; and the AMF launchesinvestigation into Day's stock sales.
01/09/08-01/18/08:Day sells almost 50% oftotal holdings, 1,602,477shares @ €84.28-89.77for€140,356,732•01118108 DayContemporaneousSale Under §20A
1111111111
for €9,964,801
I
v02/06: 4Q'05 shareholderletter says CIB "postedexceptional revenues in2005, [due to] thedivision 's recognizedexpertise in ... structuredfinance , [and] strongexpertise in themanagement ofriskslinked to derivatives."
remained veryfavourable...."
08103106: SocGen ds forQ2'06 affirms: "Verystrong growth: revenuesup 26.6% over Q2'05. Thecredit risk environment
02/14/07: Rls re '06 states t"[SocGen] improved fits) riskmanagement techniques andhedging of high-risk exposure.
03/08/07: Analysts repeat that/SocGen has "flJow exposure tocredit risk segments"; "givensome reassuring numbers on itsexposure to risky creditsegments (subprime, CDO, LBO,etc.)"; and no retail exposure inthe US, no direct exposure forTCW."
06/06: CEO Bouton states:"For the tenth quarter in arow, the Group's riskexpense remained verylow._"
05124106: SocGen announcesBoard approval of e4 billionplan to repurchase up to 10% ofoutstanding shares at prices upto 165pershare.
$45
$40
$35 0
0)
N
VCD
$30 >
$25
$20
$15
06/01/2005 10/21/2005 03/17/2006 08/11/2006 01/09/2007 06/06/2007 10/26/2007 03/26/200808/11/2005 01/04/2006 06/01/2006 10/23/2006 03/22/2007 08/16/2007 01/10/2008
II. JURISDICTION AND VENUE
27. The claims asserted herein arise under Sections 10(b), 20(a) and 20A ofthe Exchange
Act, 15 U.S.C. §§78j(b), 78t(a) and 78t- 1, and the regulations promulgated thereunder by the SEC,
including SEC Rule 1Ob-5, 17 C.F.R. §240.1Ob-5.
28. This Court has jurisdiction over the subject matter of this action pursuant to Section
27 of the Exchange Act and 28 U.S.C. § 1331.
29. Venue is proper in this District pursuant to Section 27 of the Exchange Act and 28
U.S.C. §1391. Many of the acts and practices giving rise to the violations of law complained of
herein, including the misrepresentations and schemes alleged herein, occurred in substantial part in
this District. Additional facts supporting this Court's jurisdiction are set forth below in Section XI.
30. In connection with the acts alleged herein, Defendants, directly or indirectly, used the
means and instrumentalities of interstate commerce, including, but not limited to, the mails,
interstate telephone communications and the facilities of the national securities markets.
III. PARTIES
Lead Plaintiff
31. Lead Plaintiff Vermont Pension Investment Committee, as detailed in the attached
certification, purchased or otherwise acquired SocGen common stock at artificially inflated prices
during the Class Period and suffered damages when revelation of the fraud caused a decline in the
value of Lead Plaintiff' s investment . Lead Plaintiff is a State of Vermont Government entity that
holds the combined investment assets of the State Teachers' Retirement System of Vermont, the
Vermont State Employees' Retirement System and the Vermont Municipal Employees' Retirement
System.
-12-
Foreign Plaintiff
32. Plaintiff Avon Pension Fund, Administered by Bath & North East Somerset Council,
as detailed in the attached certification, purchased or otherwise acquired SocGen common stock at
artificially inflated prices during the Class Period and suffered damages when revelation of the fraud
caused a decline in the value of Plaintiff's investment. Avon Pension Fund is the 7th largest local
authority fund in the UK and has a membership of over 60,000. At year-end 2007, the Fund value
was £1.4 billion.
Additional Plaintiffs
33. Plaintiff Boilermaker-Blacksmith National Pension Fund ("Boilermakers"), as
detailed in the attached certification, purchased or otherwise acquired Societe Generale common
stock at artificially inflated prices during the Class Period and suffered damages when revelation of
the true facts caused a decline in the value of Plaintiff's investment. In addition, as detailed in
Plaintiffs' Fourth Claim for Relief below, Boilermakers purchased shares contemporaneously with
Individual Defendants Bouton's and Day's illegal insider stock sales.
34. Plaintiff United Food and Commercial Workers Union Local 880 - Retail Food
Employers Joint Pension Fund ("UFCW 880 Funds"), as detailed in the attached certification,
purchased or otherwise acquired SocGen ADRs at artificially inflated prices during the Class Period
and suffered damages when revelation of the true facts caused a decline in the value of Plaintiff's
investment. In addition, as detailed in Plaintiffs' Fourth Claim for Relief below, UFCW 880 Funds
purchased SocGen ADRs contemporaneously with Individual Defendant Bouton's illegal insider
stock sales.
The Corporate Defendant
35. During the Class Period, Defendant SocGen operated in approximately 82 countries
and employed nearly 135,000 staff from 119 different nationalities.
-13-
36. SocGen ' s stock is traded under the symbol GLE on the Euronext Paris stock
exchange and trades in an efficient market. In the United States, SocGen ADRs are traded on the
over-the-counter market in New York, New York, under the symbol SCGLY. SocGen also trades on
the Tokyo stock exchange.
37. SocGen opened its first office in the United States in 1938, and, according to
SocGen's website, it is "one of the largest foreign banking organizations in the United States with
approximately 2,900 professionals working in 13 U.S. cities." Within the U.S., SocGen
"[O]perate[s] within two divisions to provide investor, corporate and governmental clients with a
complete array of financial services: Societe Generale Corporate & Investment Banking [and]
Societe Generale Asset Management subsidiary TCW."
38. Within the United States, Societe Generale Corporate & Investment Banking
("SGCIB") offers corporate banking and fixed income services and securities through its branch in
New York, as well as several other offices throughout the United States. SGCIB also provides
securities , investment banking and advisory services through SG Americas Securities , LLC, also
located in New York. SGAM provides, inter alia , asset management, brokerage, clearing and
execution , custody and issuer services through its branch in New York, as well as through other
offices located throughout the United States, including Los Angeles, California and Houston, Texas.
The Individual Defendants
39. Defendant Daniel Bouton was, at all relevant times during the Class Period, Chairman
and Chief Executive Officer ("CEO") of the Company. Defendant Bouton joined SocGen in 1991
and was appointed CEO in 1993. From November 1997 to May 2008, Defendant Bouton served as
Chairman and CEO of the Company. In May 2008 , Defendant Bouton stepped aside as CEO but
remained Chairman of the Company.
-14-
40. As detailed in 11108-166 below, during the Class Period, Defendant Bouton made
several false and misleading statements concerning the Company' s financial results, its risk control
management system and the value of its RMBS/CDO portfolio. In addition, Defendant Bouton
signed and certified SocGen's FY2005, FY2006 and FY2007 Registration Documents , which were
filed with the AMF (French Securities Regulator). The false and misleading statements contained in
press releases , conference call transcripts , news articles , Registration Documents and the Company's
reported financials contributed to the Defendants' presentation of a misleading picture of SocGen's
business and investment risks, which resulted in SocGen's stock trading at artificially inflated levels
throughout the Class Period.
41. As the CEO and Chairman of the Company, Defendant Bouton was responsible for
the strategic vision of SocGen, including the development and implementation of the Company's
risk control management procedures. Defendant Bouton's position as CEO and Chairman of the
Company placed him in a position to access any and all company information at his request.
42. During the Class Period, while in possession of material, non-public, adverse
information about SocGen, Defendant Bouton sold at least 255,713 shares of SocGen common stock
(65% of his total available SocGen holdings) for net proceeds of more than €30 million.
43. Defendant Robert A. Day was, at all relevant times , a director of the Company. In
1971, Defendant Day founded TCW, which SocGen acquired in 2001 for $1.3 billion in Company
stock. Defendant Day' s holdings of SocGen stock after the acquisition ofTCW "dwarf[ed]" that of
the other SocGen board members, making him one of the largest individual shareholders in SocGen.
Defendant Day is currently a SocGen director as well as the Chairman of TCW.
44. During the Class Period, while in possession of material, non-public, adverse
information about SocGen, Defendant Day sold at least 1.8 million shares of SocGen common stock
-15-
(53% of his total available SocGen holdings) for proceeds of more than €168 million. Of this total,
over 265,000 of these shares were sold on the New York Stock Exchange, including a sale of shares
placed in New York. As discussed more fully below, in Section XIH, the vast majority ofDefendant
Day's insider stock sales - approximately €140 million - were made over the 9 days leading up to
the Company's devastating January 24, 2008 disclosure regarding Kerviel's positions and the
Company' s massive increase in subprime-related writedowns.
45. Defendant Philippe Citerne, was, at all relevant times during the Class Period, a
director and Co-Chief Executive Officer of SocGen. In April 2008, in the aftermath ofthe Subprime
and Kerviel Frauds, Defendant Citerne resigned from SocGen's Board of Directors and announced
that he would be leaving the Company within a year. During the Class Period, Defendant Citerne
assisted Defendant Bouton in carrying out his function as CEO. Defendant Citerne was also
responsible for ensuring the overall consistency and efficiency of SocGen's internal control
management system. Defendant Citerne chaired SocGen's Internal Coordination Committee
("CCCI"), which met on a quarterly basis during the Class Period and was responsible for the
implementation and monitoring of SocGen' s internal controls management systems. Additionally,
Defendant Citerne is, and during the Class Period was, a director of TCW.
46. During the Class Period, while in possession of material, non-public, adverse
information about SocGen, Defendant Citerne sold 201,129 shares of SocGen common stock (81 %
of his total available SocGen holdings) for net proceeds of at least €23 million.
47. Defendant Didier Alix was Co-ChiefExecutive Officer of SocGen during most ofthe
Class Period . As Co-CEO, Defendant Alix assisted Defendant Bouton in carrying out his duties as
CEO. Defendant Alix began his career at SocGen in 1971. Prior to being named Co-CEO on
-16-
September 26, 2006, Defendant Alix was Chief Executive of SocGen's Retail Banking Division, a
position he held from 1998-2006.
48. During the Class Period, while in possession of material, non-public, adverse
information about SocGen, Defendant Alix sold at least 23,171 shares of SocGen common stock
(81 % of his total available SocGen holdings) for net proceeds of at least €3.3 million.
SocGen's Corporate Structure
49. SocGen is organized around three core businesses: Corporate & Investment Banking,
Global Investment Management & Services ("SGIMS"), and Retail Banking and Financial Services.
SocGen Corporate and Investment Banking
50. SGCIB groups together all capital market and financing activities for corporate
clients, financial institutions and institutional investors in Europe, the Americas and Asia Pacific.
SGCIB develops high value-added, integrated financial solutions in each of its three key areas of
expertise: derivatives, euro capital markets and structured finance.
51. SGCIB employs over 12,000 staff in 46 countries. The SGCIB group was modified
into three business divisions in Q1 2007 as part of SocGen's "Step Up 2010" initiative: Financing
and Advisory, Fixed Income, Currencies and Commodities and Equities . According to its website,
SGCIB issues and sells a significant part of the structured products, including debt and equity
products, equity derivatives and commodity derivatives, sold in Europe, the United States and Asia.
52. The Fixed Income, Currencies and Commodities ("FICC") division implements
SocGen's strategy of structuring, trading and distributing flow products, structured interest rate,
currency, credit and commodity products as well as securitization and treasury. The group covers
both integrated financial engineering and the distribution of flow and structured products relating to
fixed income, currencies and commodities . FICC operates both in Paris and the United States. In
the United States, FICC operates out of SocGen's New York office (under the name "FICC
-17-
Americas") and is responsible for the purchase, packaging, valuation and monitoring of SocGen's
CDO and RMBS portfolio. In 2006, Mustier, then CEO of SGCIB, set out to "establish a significant
presence in the U.S. markets for structured-finance products and asset backed-securities" in order to
"win a premium rating from investors." ("Pardon My French," Institutional InvestorAmerica, April
2006.)
53. The Equities division is responsible for the creation and implementation of cash
equity and equity derivatives products and services, as well as for equity research. A subset of the
Equities division is Global Equities and Derivative Solutions ("GEDS"). GEDS is further broken
down into several sub-divisions, including Arbitrage, which includes the Delta One Products Team.
Jerome Kerviel was a junior trader and market maker on the Delta One Products Team. The Delta
One trading desk focuses on program trading (trading a portfolio of stocks), index (the performance
of an entire stock market or a sector of the market) and quantitative trading (using mathematical or
statistical models).
54. The chart below depicts the relevant upper-level management structure within
SocGen at January 24, 2008:
Societe Generale Organizational Chart ( Pre-Fraud Announcement January 2008)
Philippe Citerne***** Daniel Bouton ** DidierAlix Frederick Oudea***Director, Co-CEO CEO/Chairman Co-CEO CFO
SGCIB GIMSPhilippe Collas
CEO
Jean Paul Mustier*** * Director TCW
CEO
SGAMAlain ClotCEO
FICC GEDSMarc Breillout* Christopher Mianne TCW
Gregoire Varenne" Luc Francois* Robert DayCo-Heads Co-Heads TCW Chairman/
SocGen Dir
FICC Americas Division GEDSW ham SonnebornPresident/CEO
PaoloTaddonio* Piet-Yves Modat*Head Head of Equity Trading
Arbitrage
Delta OneMartial Rouyere*Head of Delta One
Notes:
Eric Cordelle*Kerviel Immediate * No longer employed at SOGEN
Supervisor Stepped down as CEO*** Replaced Bouton as CEO**** Resigned in late May 2008
Jerome Kerviel _18-
***`* Stepped down from board
55. The Subprime Fraud was centered in SocGen's FICC Americas division in New
York. Employees ofFICC Americas were responsible for creating and analyzing market risk reports
for SocGen's RMBS/CDO portfolio, analyzing SocGen's Value at Risk ("VaR"), establishing values
for SocGen's RMBS and CDO portfolio, implementing SocGen's risk management policies and
origination of the RMBS and CDOs sold and held by SocGen.
56. During the Class Period, Paolo Taddonio was head of FICC Americas and reported
directly to SGCIB CEO Mustier. During the Class Period, FICC in Paris was headed by Marc
Breillout and Gregroire Varenne, who both reported directly to Mustier. Mustier reported to
Individual Defendants Citerne and Bouton.
57. Following the announcement of the Subprime Fraud (i) Taddonio stepped down as
head of FICC Americas to pursue other activities, and (ii) Marc Breillout and Gregoire Varenne
were removed from their respective positions and left the Company.
58. SocGen's derivatives operation (known today as Global Equities and Derivatives
Solutions or GEDS) was formed in the mid-1980s and was mirrored after the derivative houses in
the United States, namely Goldman Sachs, Citibank and Bankers Trust. Today, SGCIB's equity
derivatives platform is the largest in the world.
59. GEDS is a division of SGCIB. GEDS includes several sub divisions, each with its
own area of expertise, including Arbitrage, which includes Delta One, where junior trader Jerome
Kerviel worked as a trader. The Delta One trading desk focuses on program trading (trading a
portfolio of stocks), index trading (the performance of an entire stock market or a sector of the
market) and quantitative trading (using mathematical or statistical models). As a junior trader in
Delta One, Kerviel was an arbitrage trader.
-19-
60. During the Class Period, GEDS was headed by Christopher Mianne ("Mianne") and
Luc Francois ("Francois "). A month prior to the end of the Class Period , Mianne was promoted to
head of Global Markets, but returned to GEDS following the announcement of the losses attributed
to Kerviel and following the departure of Luc Francois. During the Class Period, both Mianne and
Francois reported directly to Mustier. Kerviel's immediate supervisors, Eric Cordelle, Martial
Rouyere and Piet -Yves Morlat were all terminated following the announcement of the trading
losses. In all, seven of Kerviel' s immediate supervisors and colleagues have been fired or have left
SocGen since the losses attributed to Kerviel was revealed . ("SocGen Replaces Mustier, " FT.com
May 30, 2008.) In May 2008, Mustier, the heir apparent to Bouton, was replaced as CEO of SGCIB.
IV. CONFIDENTIAL SOURCES
61. Numerous former SocGen employees have provided Plaintiffs with information
demonstrating Defendants' knowledge, or reckless disregard, of the falsity of their Class Period
statements. The confidential witnesses ("CW") include individuals formerly employed at the
Company during the Class Period, whose accounts corroborate one another and confirm facts now
admitted by the Company. The witnesses provided information to Plaintiffs on a confidential basis
and are particularly described by job description, title, and/or duration of employment, thereby
providing sufficient detail demonstrating that each was in a position to know the information
provided and that their accounts are reliable.
62. Confidential Witness 1 ("CW1") was a Vice President of FICC Analytics in New
York and was part of the "Front Office." CW1 worked at SocGen's New York office ("SocGen-
New York") from January 2006 to November 2007. CW1 reported to Director of FICC Analytics
Jean-Francois Flobert. CW1's responsibilities included creating and analyzing market risk reports
for Fixed Income products, including products in SocGen's RMBS/CDO portfolio, to insure the
numbers were consistent with those in the market. CW1 also conducted extensive analyses relating
-20-
to SocGen's VaR, "stress testing" and benchmarking. CW1 was responsible for determining the
degree of risk to which any particular investment portfolio was exposed. CW1 generated Daily
Reports, which s/he provided to SocGen-New York' s senior management . These Daily Reports
included various risk and performance analyses regarding Fixed Income products.
63. CW1 has information and knowledge regarding significant problems relating to the
RMBS and CDO markets and the liquidity problems experienced by SocGen with respect to its
RMBS/CDO portfolio. CW1 also has information and knowledge with respect to SocGen's
valuation of its RMBS/CDO portfolio.
64. Confidential Witness 2 ("CW2") was a Director of IT for Capital Markets (which
included the Fixed Income and Global Equities Derivatives Divisions) in New York. CW2 was
employed at SocGen-New York from April 2004 to January 2008, where s/he managed 20 to 40
subordinates. CW2 reported to Managing Director ofFICC Americas Paolo Taddonio, who reported
to SGCIB CEO Mustier. CW2 has information and knowledge regarding the Company's VaR
analysis (used to measure the potential market risk exposure for the Company's various investment
portfolios). CW2 also has information and knowledge regarding SocGen's Collateralized Debt
Obligation Group ("CDO Group"), its RMBS and CDO products and the liquidity of those products.
Additionally, CW2 has information and knowledge regarding the VaR and P&L reports that
SocGen-New York sent to SocGen's Paris operations on a daily basis.
65. Confidential Witness 3 ("CW3") worked at SocGen-New York in the Commercial
Mortgage Backed Securities ("CMBS") group from July 2007 to July 2008. CW3 reported to
CMBS Group Manager Preston Kibbe. When CW3 first joined SocGen-New York in July 2007,
CW3 worked in the CMBS group ' s loan origination and underwriting department, where s/he was
responsible for purchasing commercial mortgages, which would eventually be securitized and
-21-
offered on the market in financial instruments such as CDOs. However, after working at SocGen-
New York for only a couple of months, the loan origination and underwriting department in which
CW3 worked was disbanded "due to the credit crunch."
66. When the loan origination and underwriting department was disbanded, CW3's
position changed to that of Senior Analyst for the Real Estate Finance Group. CW3's new
responsibilities included analyzing the performance of existing CMBS loans. As part of this
analysis, CW3 monitored and evaluated the key performance metrics of the underlying commercial
loans, including cash flows, delinquency rates, loan repayment rates and loan terms. CW3 reported
his/her findings to Kibbe. Using the information that CW3 provided to him, Kibbe conducted a
variety of calculations to ascertain the potential risk from the CMBS assets. Kibbe then prepared
memoranda and reports documenting this risk, which he provided to the Investment Committee.
CW3 possesses information and knowledge regarding the performance of CMBS portfolios.
67. Confidential Witness 4 ("CW4") was Vice President of SocGen-New York's Middle
Office Group. CW4 was employed by SocGen-New York from March 2005 to April 2006. Initially,
CW4 reported to Anthony Pecarella. However, in late 2005, when Pecarella was transferred to
another department within SocGen-New York, CW4 began reporting to Mark Johnson. Both
Pecarella and Johnson reported to the Middle Office Managing Director, Sergio Leifert. During
his/her tenure at SocGen-New York, CW4 also worked with Middle Office Director Mike Mears,
Middle Office Manager of Fixed Income Products Don Orlando and FICC Analytics Representative
Jean-Francois Flobert.
68. CW4's responsibilities included ensuring that SocGen-New York was in compliance
with various internal and external policy and regulatory guidelines and requirements. CW4 was also
heavily involved with International Accounting Standards ("IAS") projects relating to interest rate
-22-
swaps and other hedging activities. CW4 was also involved with Basel 112 compliance initiatives.
CW4 also had Profit and Loss reporting duties relating to CDOs and RMBS products. On a regular
basis, CW4 prepared excel spreadsheet reports relating to CDO and RMBS Profits and Losses,
which s/he submitted to either Pecarella or Johnson (depending upon the time frame). Another of
CW4's responsibilities was to conduct valuation analysis for certain IAS-based products such as
swaps (i.e., loans such as zero coupon bonds that were hedged by derivative products).
69. The Middle Office, in which CW4 worked, was also responsible for implementing
and administering Risk Management functions for the Company's United States operations. This
included establishing and monitoring SocGen-New York' s internal controls and maintaining internal
policies and procedures designed to minimize credit exposure, including risk exposure related to
CDOs and RMBS. The Middle Office was also tasked with validating the market prices or "marks"
that the traders assigned to their trades.
70. CW4 has information and knowledge regarding significant problems with SocGen-
New York' s valuation of CDO and RMBS investments . CW4 also has information and knowledge
regarding control deficiencies regarding the data inputted into SocGen-New York' s General Ledger.
71. Confidential Witness 5 ("CW5") was a Vice President in the Structured Asset Group
at SocGen-New York from July 2006 to January 2007. CW5 reported to Robert Caliendo, Managing
Director of Fixed Income Sales and Trading. During the Class Period, CW5 was responsible for
Basel II is the second of the Basel Accords, which are the recommendations on bank lawsand regulations issued by the Basel Committee of Banking Supervision. The purpose of Basel II,which was initially published in June 2004, was to create an international standard that bankingregulators could use when creating regulations concerning the amount of capital that banks need toset aside to guard against the types of financial and operational risks that banks face.
-23-
selling synthetic CDOs structured by SocGen, as well as CDOs structured by other companies (e.g.,
Lehman Brothers) where SocGen provided financing.
72. CW5 has information and knowledge regarding the types of CDOs and RMBS sold
by SocGen-New York, including information and knowledge regarding how the different types of
SocGen CDOs and RMBS were sold. CW5 also has information and knowledge regarding how
poorly SocGen CDOs were selling during the Class Period, which s/he learned through his/her
participation in weekly "Sales Meetings." Additionally, CW5 has information and knowledge
regarding purchasers' dissatisfaction with the RMBS that they purchased from SocGen (due to the
RMBS's falling prices). CW5 also has information regarding SocGen's sale of the equity tranches
of its CDOs to the Magnatar hedge fund, as well as information regarding Magnatar's standard
practice of "shorting" the Mezzanine tranches that it bought equity in. Lastly, CW5 has information
and knowledge regarding Taddonio' s awareness of the problems occurring with SocGen's RMBS
platform.
73. Confidential Witness 6 ("CW6") worked at SocGen-New York from January 2007 to
March 2008 as a Senior Operations Specialist in the Whole Loan Administration Group. During the
Class Period, CW6 reported to Director of Operations Gean Augustine. CW6's responsibilities
included administering pools of loans and securitizing them.
74. CW6 has information and knowledge regarding the poor performance of subprime
mortgage loans during the mid to late 2007 time period. Additionally, CW6 has information and
knowledge concerning the losses suffered by SocGen-New York due to problems in the subprime
mortgage market.
75. Confidential Witness 7 ("CW7") worked at SocGen-New York as Vice President of
Fixed Income Trade Support Operations during the Class Period. CW7's responsibilities during the
-24-
Class Period included sponsoring and implementing the Calypso system, which is a computer
program designed to assign valuation to CDOs.
76. CW7 has information and knowledge regarding the valuation of SocGen-New York's
CDO/RMBS portfolios. CW7 also has information and knowledge regarding the Profits and Loss
reports that SocGen-New York sent to the Company's Paris operations on a nightly basis. Lastly,
CW7 has information and knowledge regarding Mustier's visits to SocGen-New York.
V. CONTROL PERSON ALLEGATIONS/GROUP PLEADING
77. By virtue of their positions as officers and/or directors of SocGen and its subsidiaries,
the Individual Defendants had access to undisclosed adverse information about SocGen, its business,
operations, operational trends, finances and present and future business prospects. The Individual
Defendants acquired this information through SocGen's internal corporate documents, conversations
and connections with other corporate officers, directors, bankers, traders, risk officers, marketing
experts, and employees, attendance at Board of Directors' meetings, including committees thereof,
and through reports and other information provided to them in connection with their roles and as
SocGen officers and/or directors.
78. For pleading purposes, it is entirely appropriate to treat the Individual Defendants
collectively as a group, and to presume that the materially false, misleading and incomplete
information conveyed to investors in SocGen's public filings, press releases and public statements,
as alleged herein, was the result the Individual Defendants' collective actions identified above. The
Individual Defendants, by virtue of their high-level positions within SocGen, were directly involved
in the day-to-day operations of SocGen at the highest levels, directly participated in the management
of the Company and were privy to confidential , proprietary information concerning SocGen, its
business, operations, prospects, growth, finances and financial condition, as alleged herein.
-25-
79. The Individual Defendants participated in drafting , producing , reviewing and/or
disseminating the materially false and misleading information alleged herein, and knew, or with
extreme recklessness, disregarded the fact that materially false and misleading statements were being
issued regarding the Company, and approved or ratified these statements in violation of federal
securities laws.
80. As officers and controlling persons of SocGen, the Individual Defendants each had a
duty to promptly disseminate accurate and truthful information with respect to SocGen's financial
condition and performance, growth, operations, financial statements, business, markets,
management, risk, earnings and present and future business prospects, as well as to correct any
previously issued statements that had become materially misleading or untrue. The Individual
Defendants' material misrepresentations and omissions during the Class Period violated these
specific requirements and obligations.
81. The Individual Defendants, by virtue of their positions of control and authority as
officers and/or directors of the Company, were able to, and did, control the content of the various
public filings, press releases and other public statements pertaining to SocGen during the Class
Period. The Individual Defendants were provided with, or had unlimited access to, copies of the
documents herein alleged by Plaintiffs to be false and/or misleading prior to, and/or shortly after,
these statements were issued and had the ability and/or opportunity to prevent the issuance of the
statements or cause the statements to be corrected. Consequently, the Individual Defendants are
responsible for the accuracy of the public reports and statements detailed herein.
82. Each of the Individual Defendants is liable as a participant in a scheme, plan and
course of conduct that operated as a fraud and deceit on Class Period purchasers of SocGen's
securities.
-26-
VI. BACKGROUND
83. This case is a story about two alarming and related frauds at one of the world's largest
financial institutions. With the exception of information relating to SocGen's impending subprime
writedowns leaking into the market between January 18, 2008 to January 21, 2008, both frauds
remained largely hidden from investors and analysts until January 24, 2008, when SocGen
simultaneously disclosed information about both frauds.
84. The first fraud, the Kerviel Fraud, involved massive losses from previously
undisclosed and unauthorized derivatives trading by Jerome Kerviel, a junior trader on SocGen's
Delta One trading desk. The second fraud, the Subprime Fraud, involved massive losses from
previously undisclosed exposure to United States residential subprime mortgages . Both the Kerviel
Fraud and the Subprime Fraud stemmed from SocGen's gross failures in risk control management
(to prevent misconduct and fraud within the Company) and its internal controls relating to market
risk.
85. SocGen intentionally deferred revealing the enormity of its subprime writedown until
it had to disclose its loss on Kerviel ' s trades. This decision to make simultaneous disclosure
illustrates the relationship between the Kerviel Fraud and the Subprime Fraud - they are both
examples of the unbridled and undisclosed risks that SocGen engaged in throughout the Class
Period. It also shows that SocGen's directors and officers were aware of the negative impact that
revealing each fraud would have on the market price of SocGen's securities and Defendants' intent
to defer revealing SocGen's exposure as long as possible. SocGen deliberately revealed both frauds
at the same time in order to create "noise" or confusion about which fraud could be said to have
caused the stock price decline.
86. The revelations of fraud at SocGen shattered the assumptions investors and analysts
previously had held regarding SocGen's internal controls and risk management systems. These
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assumptions were based on SocGen' s repeated assurances that it utilized highly sophisticated risk
controls and risk management systems and that its publicly-issued financial results were in
accordance with International Financial Reporting Standards.
87. During the Class Period, the price of SocGen's securities was highly sensitive to the
impact of equity derivatives trading and mortgage-backed securities exposure, as both of those
markets experienced unprecedented growth and increasing levels of risk. The simultaneous
disclosure of the Kerviel Fraud and Subprime Fraud led investors and analysts to revise substantially
downward their assessments of SocGen's future earnings prospects. These revisions coincided with
the steep decline in the price of SocGen securities.
88. SocGen's disclosures were an alarming example of a series of recent disclosures by
financial institutions regarding exposure to derivatives and mortgage-backed securities. The
disclosures were particularly shocking given SocGen's reputation for sophisticated risk management
of equity derivatives and mortgage-backed securities exposure. Indeed, during the Class Period, and
throughout the revelations of the impact of the crisis at other major financial institutions, SocGen
stood alone against the tide of bad news about derivatives- and mortgage-related losses. Throughout
the Class Period, as bad news emerged from other banks, SocGen's assurances that it had little, if
any, exposure led investors and analysts to believe it was different, and that because of its
sophisticated risk management systems SocGen had avoided major losses from derivative and
mortgage-backed securities.
89. As is now apparent, SocGen's representations about its risk management systems and
its risk were blatantly false. SocGen was different from other banks, not because it had superior risk
management systems, but because it falsely led investors and analysts to believe its internal controls
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and risk management systems had prevented massive losses from derivatives and mortgage-backed
securities, when in fact the opposite was true.
A. The Kerviel Fraud
90. First, consider the Kerviel Fraud. Beginning in 2005, SocGen trader Jerome Kerviel,
ajunior trader in SocGen's "Delta One" arbitrage division, used a range oftechniques to hide profits
and losses, and to disguise the risk of a complex derivatives trading strategy. Derivatives are
financial instruments whose value depends on some underlying instrument or index. The most
common forms of derivatives are options (rights to buy or sell securities) and futures (obligations to
buy or sell securities). The derivatives market was a multi-hundred-billion-dollar market throughout
the Class Period.
91. As a "Delta One" employee, Kerviel was tasked with trading derivatives as part of
SocGen's strategy to "arbitrage" certain securities and indices. Arbitrage is a riskless profit earned
from offsetting transactions. For example, one might find an arbitrage by purchasing some
individual German stocks on the German Dax Exchange, and then selling a German stock index
futures contract to another institution. If Kerviel could buy the German stocks for less money than
he could receive by selling the index futures, he could pocket the "arbitrage" difference on behalf of
SocGen. This arbitrage would be riskless, or close to riskless, because the prices of the German
stocks and the index futures should move together. Thus, if properly hedged, these trades carry little
risk. If Kerviel lost money on Germany stocks, he would make that up with profits on the index
futures, and vice versa. The key to an arbitrage strategy is these kinds of offsetting trades.
92. More specifically, SocGen was a leading seller of complex equity derivatives such as
knock-out options and turbo warrants. These derivatives included an unusual feature, which caused
them to be "deactivated" when a specified securities price reached a certain level. In other words,
SocGen's clients would purchase contractual rights to buy or sell securities, but those rights would
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expire if the securities' prices rose or fell by a specified amount. These derivatives generally are
known as "binary" or "digital" options due to their "off-on" features.
93. When SocGen sold these complex derivatives, it became exposed to the risk that its
clients would make money and that it would be obligated to buy or sell the underlying securities
from or to those clients at unfavorable prices. Moreover, SocGen's risk was non-linear, in that it
would expire at certain "on-off' price levels. SocGen developed models and trading strategies to
enable it to hedge these risks by purchasing other securities and derivatives in the market. Kerviel's
job as part of the "Delta One" group was to hedge these risks, and to lock in arbitrage profits for
SocGen.
94. As originally envisioned, these arbitrage strategies would involve low risk and low
expected return. SocGen, "Delta One" and Kerviel would expect to earn a small arbitrage profit
from offsetting trades, as described above, without taking on substantial directional risk.
95. Although Kerviel ' s trading began as essentially arbitrage, he soon took substantial
unhedged directional positions. SocGen did not disclose these "naked" positions, or the earnings or
risk associated with them. For example, in 2007, approximately €25 million of SocGen's earnings
were attributed to Kerviel's supposed arbitrage strategies based on competitors' turbo warrants.
However, the actual earnings generated by Kerviel's arbitrage trades amounted to just €3 million.
The remaining €22 million resulted from directional positions. In other words, the lion's share of
SocGen's earnings from this particular aspect of Kerviel's trading during 2007 were from unhedged,
risky, directional bets, not from arbitrage.
96. Overall, the portion of SocGen' s earnings attributable to Kerviel multiplied six times
from 2006 to 2007, as Kerviel took increasingly risky positions . In 2007, Kerviel' s earnings
represented 59% of the earnings of Delta One listed products revenues.
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97. If investors and analysts had known the size of Kerviel's actual positions and earnings
during the Class Period, they would have arrived at significantly lower valuations of SocGen's
securities based on this substantial additional market risk. Actual earnings on Kerviel's fraudulent
positions were highly volatile, from as low as a several billion dollar loss in mid-2007 to a billion
dollar-plus gain in late 2007. If investors had known about the volatility of SocGen's actual
earnings, they would have applied a higher discount rate to SocGen's expected future cash flows,
which would have caused SocGen's stock price to decline. Indeed, once Kerviel's unhedged,
directional trades were unwound in January 2008, SocGen was forced to restate much of its earnings
and revenue.
98. One key measure of SocGen's risk during the Class Period was its reported VaR, a
key statistical measure of market risk based on estimated likelihood of losses. VaR is a measure,
with a given degree of confidence, ofhow much one can lose from one's portfolio over a given time
horizon. VaR analysis assumes a kind of "grading curve" for investors. Just as a few students in a
class with a grading curve receive low grades, investors can expect that on a few trading dates of
each year they will lose money. VaR analysis assumes that investor returns for each day can be
arrayed along a bell-shaped normal distribution, like student grades. The trading dates with the
largest losses - like "D" and "F' grades - are grouped in the left-most tail of the distribution, and the
size of the losses in that tail are called the VaR. For example, of approximately 250 trading days in a
year, a VaR measure might describe the expected losses on the worst two or three days.
99. Despite SocGen' s assurances relating to its VaR calculation that its Risk Division
performed a "daily analysis of the exposure and risks incurred by the groups' market activities and
compar[ed] said exposures and risks with the limits set," SocGen reported the VaR metrics shown
below.
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2005 2006 2007 2008Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
EquitiesTrading VaR 11.9 13.4 9.9 9.0 13.1 19.4 27.2 25.6 40.4 42.4 32.8 28.0 22.9
Fixed IncomeTrading VaR 20.3 16.2 14.9 16.4 15.5 15.6 14.6 12.7 10.8 13.6 12.4 15.3 12.0
Total TradingVaR 19.8 24.4 17.6 16.2 20.3 21.8 31.7 25.1 36.4 40.8 47.9 46.0 33.7
As shown above, SocGen apportioned its total Trading VaR calculation to each of its different
trading activities, including Fixed Income (which included RMBS and CDOs) and Equities - the
classification in which Kerviel's trading activities were covered. SocGen reported VaR to the
market during every quarterly update and at year end in its Registration Documents.
100. These reported VaR metrics were false and failed to reflect the risk associated with
Kerviel's trading. If SocGen had reported an accurate VaR measure during the Class Period, to
account for the volatility of Kerviel' s positions , investors and analysts would have applied a higher
discount rate to SocGen's expected future cash flows to adjust for the increased risk associated with
Kerviel's trades.
B. The Subprime Fraud
101. Second, consider the Subprime Fraud. Beginning in 2005, SocGen took on similarly
unhedged and undisclosed positions in certain complex and risky mortgage-backed securities. As
with the Kerviel Fraud, SocGen failed to disclose the risks or exposure associated with these
positions. Finally, on January 24, 2008, at the same time it disclosed the Kerviel Fraud, SocGen also
disclosed its massive losses on subprime mortgage-backed CDOs and RMBS, totaling over
€2 billion.
102. SocGen's subprime exposure arose from two primary sources: (i) SocGen took large
unhedged positions on senior tranches of "subprime RMBS" and (ii) SocGen took large unhedged
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positions on "super senior tranches" of "Mezzanine CDOs," which were backed byjunior (BBB and
sub-BBB rated) tranches of "subprime RMBS."
103. SocGen's CDO exposure included unhedged and hedged positions. The hedged
positions exposed SocGen to further losses resulting from the default of the monoline insurance
companies who insured these types of CDOs.
104. Subprime RMBS refers to Residential Mortgage-Backed Securities in which the
underlying collateral consists of subprime mortgages. Subprime mortgages carry a significantly
higher default risk than prime mortgages due to the creditworthiness of the borrowers who take out
these loans. Essentially, an investment in subprime RMBS is an investment in a pool of subprime
home mortgage loans. When a financial institution makes a series of residential mortgage loans to
individual subprime borrowers, it pools those mortgage loans together and sells them to investors as
subprime RMBS. Mechanically, the financial institution and its advisors form a special purpose
entity to purchase the underlying home mortgage loans ; the entity then buys those loans and issues
new securities backed by the loans to investors. Those new securities are called subprime RMBS.
As shown in the chart below, the securities from a single securitization transaction are sliced into
senior and junior pieces or "tranches." The junior tranches are the riskiest because they bear the first
losses, whereas senior tranches are the least risky. Structuring the securities into different tranches
allows for the senior tranches ofRMBS to achieve high credit ratings (AAA, AA, and A) despite the
fact that the mortgage loans underlying these securities are subprime in nature and would never
otherwise qualify for such high credit ratings. The high credit ratings (AAA, AA, and A) make the
senior tranches of RMBS more attractive to a range of large institutional investors seeking
conservative fixed-income investments. Approximately 80%-85% of the securities offered in a
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subprime RMBS securitization are in senior tranches and have credit ratings of A, AA, or AAA.
The remaining securities bear the majority of the risk and are rated BBB or even sub-BBB.
Different Risk and Return for Different Investors
6orrowerc
Q. R
U
LowerExpected
Last Lois Lowezl Risk Yield
i
8 C}
I
Firsi Loss Highest Risk HigherExpected
Yield
105. Once subprime RMBS are created, they too can then be repackaged by pooling many
RMBS together and completing another securitization to form CDOs. If an RMBS is a "first-level"
pooling of mortgage loans, a CDO is a "second-level" pooling of RMBS. Just as the financial
institution that set up a special purpose entity to purchase the subprime mortgage loans and securitize
them into subprime RMBS, so too does a financial institution set up a special purpose entity to
purchase subprime RMBS, securitize them, and issue new securities - CDOs. Different tranches of
subprime RMBS can be pooled to create a CDO, but when only the junior tranches (BBB and sub-
BBB rated) are pooled together and securitized, the result is a "Mezzanine CDO." As shown in the
chart below, an investment in "Mezzanine CDO" securities is essentially an investment in a pool of
only the junior tranches of subprime RMBS. Therefore, the collateral underlying a Mezzanine CDO
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security consists of the riskiest of all tranches ofRMBS (BBB-and sub-BBB rated tranches), which,
in turn, are backed by the riskiest of all mortgage loans (those held by subprime borrowers).
Amazingly, financial institutions have found a way to turn these risky securities into what are
purported to be investment grade, i.e., AAA-rated securities . Just like a subprime RMBS, a
Mezzanine CDO can have several "tranches" of securities, ranging fromjunior to senior. Thejunior
tranches are again the riskiest because they bear the first losses, the senior tranches are less risky,
and a third class (known as "super-senior tranches") are the least risky. Structuring the risky
Mezzanine CDO securities into different tranches allows for the super senior tranches to achieve
high credit ratings (AAA, AA, and A) despite the fact that the junior tranches of subprime RMBS
underlying these securities have already been rated BBB and sub-BBB.
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106. By labeling Mezzanine CDO tranches as "super senior" and rating them AAA despite
the fact that all of the underlying collateral is actually the riskiest and lowest rated tranches of
subprime RMBS, the true risk of these CDO securities is masked. The nature and similarity of the
BBB and sub-BBB rated underlying collateral in a Mezzanine CDO increases the likelihood that all
tranches of the CDO will suffer at once, in which case, the super senior tranches are just as risky and
suffer the same losses as the lower tranches. The senior position matters little if all the collateral
gets wiped out. A typical BBB-rated tranche ofRMBS suffers losses if a mere 7% ofthe underlying
subprime mortgages default, and these junior tranches may be completely wiped out if cumulative
mortgage defaults reach just 10%. Therefore, while more than 85% of the RMBS tranches (A, AA,
and AAA) would not yet suffer any losses in this scenario (defaults of 10% of all underlying
subprime mortgages), a super senior tranche of a Mezzanine CDO would face catastrophic losses
because it consists of only BBB and sub BBB-rated RMBS tranches that were completely wiped out.
107. This type of scenario began to unfold in 2007 when analysts upped their estimates of
total losses related to the subprime mortgage crisis to loss levels that would wipe out most BBB and
sub-BBB-rated RMBS. As these junior tranches of RMBS were the sole underlying collateral of
AAA-rated Mezzanine CDOs, it was clear the seemingly safe, investment grade, AAA-rated CDO
securities were also at risk. As ratings agencies began to downgrade tranches of subprime RMBS,
the senior tranches of the Mezzanine CDOs were eventually hit. Moody's and Fitch slashed the
ratings on several senior tranches of various Mezzanine CDOs all the way from investment-grade to
junk (sub-BBB).
VII. DEFENDANTS' FALSE AND MISLEADING STATEMENTS
108. On August 1, 2005, in a quarterly shareholder letter published on SocGen's web site,
Defendants stated:
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One of the most important aspects of this business is controlling ourexposure to the different types ofrisk (market risk, credit risk, etc.) in order to limittheir impact on ourprofitability. Of course, all our risk management is conducted inclose conjunction with, and under the permanent supervision of the Group RiskDivision.
The risk of adverse movements in the financial markets is controlled at twolevels: Societe Generale's Board of Directors first defines a series of globalexposure limits that applies to the whole division. We then break this down into aseries of more specific limits for each business activity and agent. At the same time,we have invested in a number ofhighly sophisticated control systems which havealready proved their worth in extreme situations, notably in the aftermath of9/11.
109. SocGen's quarterly shareholder letter, published on SocGen's website in February
2006 similarly stated:
Banking risk covers a broad spectrum and can, for example, arise if a person defaultson a loan repayment or if there is a drop in the market value of a given security. Thatsaid, there is one important distinction: financial risks materialise much faster thanindustrial risk.
Hence the importance of risk management and the strict procedures itentails. At Societe Generale, the Risk Management Division is expected tocontribute as much to the Group's development as it is to the company 's bottomline . A key element in internal control, its role can prove to be a source of tensionamongst the operating divisions which is why, to ensure its complete impartiality, itreports exclusively to the General Management.
An inherently transverse function, its role is to both advise and audit. With aprimary remit that extends to the definition of suitable methods for the analysis,measurement, approval and monitoring of risks, the division subsequently worksalongside the Group's different business lines in defining commercial and productstrategies. Thirdly, given its entirely impartial position, the Risk ManagementDivision is called upon to monitor and approve the transaction proposals put forwardby the sales managers and, lastly, centralises all Group risk issues. In short, it is upto the Risk Division to ensure that the Group is in a position to take informeddecisions on the risks that it is prepared to assume in order to enhance itsprofitability.
110. With respect to SocGen's risk management, the SocGen shareholder letter stated:
Risk management - a broad gamut of expertise
When faced with a variety of risks, you need a variety of profiles. Indeed,our credit and market risk specialists that are on hand to advise on transactionsinteract on a daily basis with the operational teams from which they often
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originate . Moreover, within the research department, our economists often brushshoulders with consultant engineers. With a background in industry, the latter areoften in charge of assessing the quality of the industrial infrastructures of a givenborrower.
And last but certainly not least are the IT teams, there to provide the ever-demanding task ofrecalculating the risk on marketpositions each day . At the endof 2005, Societe Generale Group's Risk division employed around 1,900 members ofstaff.
111. With respect to SocGen's risk management expertise in derivatives, the shareholder
letter claimed:
If we rank as a leader in this field it is undeniably because we have looked todevelop our expertise therein for over 20 years now. That said, the growth ofthisactivity has only been possible, and more importantly, acceptable, thanks to theparallel development ofa strong expertise in the management of risks linked toderivatives.
At every step in its growth on these markets driven by the dynamism of thebusiness line teams, Societe Generale has always been careful to uphold theprinciples of prudence and rigour that have long applied to traditional bankingactivities. Furthermore, given the diversity of the risks at play, we have developed asystematic approach and procedures based on the simulation of various marketassumptions including extreme cases such as a stock market crash. We have thusbeen able to check that, even in extreme situations, the degree of risk remainsacceptable for the Group. As such, risk management is an integral part of ourderivatives activity.
112. Each of the above statements regarding SocGen' s risk management was false and
misleading, as SocGen's risk control management systems, necessary in order to detect unauthorized
derivatives trading, contained the following major deficiencies throughout the Class Period:
• Lack of supervision of the traders' nominal outstanding liabilities (contrary to thesupervision of the net positions that by definition only reveal a limited market risk);
• Lack of monitoring of vacations by traders;
• Lack of follow up of the cash flows (margin calls and payments, margin deposit, theresults obtained);
• Lack of controls over initial margin requirements and margin calls for listed futures;
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• Lack of any in-depth treatment of the information requests that would have beenaddressed to the bank by the Eurex clearinghouse;
• Lack of follow up of the cancellations and modifications of transactions coming froma single trader;
• Lack of adherence to the "Chinese Wall" between the front and the back office;
• Lack of security of the computer systems and protection of the access codes andpasswords;
• Lack of verification of confirmations of internal and external counterparts;
• Lack of documentation with respect to the terms and conditions of the operationscompleted with external counterparts;
• Lack of controls over canceled or modified transactions or over transactions with adeferred start date, or over transactions with technical counterparties, or overpositions with a high nominal, or over non-transactional flows over a given month;
• No settlement or delivery due to the cancellation of the transactions;
• No confirmation until five days before the value date for transactions with a deferredvalue date;
• No confirmation for internal transactions as these are reviewed in the context ofintra-group transactions;
• No margin calls with small counterparties that do not have any collateralizationagreements;
• No control over intra-month provision flows;
• No control over prices for transactions carried out with external counterparties;
• Failure to systematically extend internal controls beyond what was called for byprocedures;
• Lack of an escalation procedure for red flags arising as a result of control procedures;
• Deficient supervision of traders' activities;
• The fragmentation of controls between several units, with an insufficiently precisedivision of tasks, lack of a systematic centralization of reports and a feedback to theappropriate hierarchical level;
• Insufficient level of responsiveness for the implementation of the corrective actionsidentified as necessary by internal audit bodies;
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Lack of controls over canceled or modified trades; and
Deficiencies in monitoring and handling of anomalies and alerts.
113. In addition, SocGen's risk control management system contained the following major
deficiencies specific to Jerome Kerviel:
• Failure to conduct daily reviews and/or follow ups of Kerviel's activities, includingfailure to review unexplainable cash positions of the portfolios managed by Kerviel;
• Failure to audit information sent from Kerviel;
• Back Office and Middle Office were "insufficiently sensitized to the issues of fraudand misappropriation" even though the detection of fraud is an obligatory part oftheir assignments;
• Back Office and Middle Office ignored information that would have permitted themto identify that Kerviel's position were in violation of risk management rules;
• The internal procedures designed for the control of market risks were not welladapted to follow up on operational risk and made it possible for maneuvers ofconcealment to go undetected; and
• Risk Management systems failed to meet the requirement of Articles 5 and 32 set outby the Banking Commission, because SocGen failed to take into account operationalrisk and the risk of fraud.
(Banking Commission Report, June 20, 2008.)
• Failure to recognize the entry and then cancellation of fictitious transactionsconcealing market risks and earnings from unauthorized positions;
• Failure to recognize the entry of pairs of fictitious reverse transactions concerningequal quantities of the same underlying assets;
• Failure to recognize the booking of intra-monthly provisions used to temporarilycancel earnings;
• Front office allowed Kerviel to regularly take intraday directional position on indexfutures and on certain equities which were beyond Kerviel's level of authority;
• Delta One Trading Manager failed to analyze earnings generated by traders or oftheir positions;
• Prior to November 2007, Trading Manager at Delta One did not have writteninstructions regarding a clear definition of priorities and supervisory practices;
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• Failure to detect unusually high levels of cash flow, as well as failure to react to highcash borrowings once informed of positions;
• Failure to carry out in-depth analysis of high amounts of brokerage commissions atyear end;
• Tolerance of the taking of intraday directional position with the Delta One Deskwhich created atmosphere allowing traders to operate more freely;
• Failure to react to numerous alerts, which denotes a lack of sensitivity to the risk offraud at the front office level;
• Failure to implement additional risk controls in light of rapid growth in GEDS andnumerous signals revealing a deterioration in the Middle Office;
• SocGen's internal control procedures do not sufficiently describe the tasks of all theparties involved in risk control resulting in situations where risk control operators donot have the reflex to inform hierarchical superiors or front office superiors of theappearance of anomalies, even for high amounts of trading, if not specificallyidentified as part of the relevant procedures; and
• Middle Office does not have ability to carry out control over aggregate deposits peraccount.
(Mission Green Report, May 20, 2008.)
114. In a press release dated February 16, 2006, SocGen announced that the Company's
2005 results were "up sharply." The release stated, "[s]trong organic growth in revenues: +14.8%
vs. 2004," "[v]ery low cost of risk: 16 bp," and a "[v]ery strong fourth quarter 2005." The press
release also stated that the "credit risk environment remained favourable," enabling write-backs in
provisions for this risk, and that "[m]arket risk was lower."
115. On March 9, 2006, SocGen filed its 2006 Registration Document with the AMF
(French securities regulator). Among other things, the 2006 Registration Document assured
investors that SocGen engages in daily analysis "of the exposure and risks incurred by all the
Group's market activities and comparison ofthese exposure [sic] and risks with the limits set,"
"constant analysis of exposure and results ," and "daily limit monitoring for each activity, and
constant checking that appropriate limits have been setfor each activity."
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116. The 2006 Registration Document also contained a "Report of the Chairman on
Internal Control Procedures," which noted that "internal control is part of a strict regulatory
framework applicable to all banking establishments and Group staff," that risk management
procedures were defined at SocGen's highest management level and that 1,900 staff were dedicated
to reviewing and controlling risk exposures on a permanent basis. The 2006 Registration Document
also claimed that teams ofindependent risk controllers "carry out daily reviews ofallpositions and
risks taken in the course ofthe Group 's market activities," that any cases where limits have been
exceeded were highlighted, that market parameters used to calculate risks and results were
verified each day, that precise methods have been definedfor evaluating risks and that controls
werefurther reinforced through targeted action plans . Investors were also assured that compliance
was regularly monitored by SocGen's compliance, legal and tax departments, and that inspections
were carried out by the Internal Audit and General Inspection Departments.
117. Defendant Bouton signed a "Certification of the Person Responsible for the
Registration Document," affirming that he certified that the information in the 2006 Registration
Document was, "to the best of [his] knowledge, true and there are no omissions that could impair its
meaning."
118. Each of the statements identified above from SocGen's 2006 Registration Document
regarding its risk control management systems was false and misleading for each of the reasons set
forth above in ¶9[112-113, including specifically that SocGen lacked sufficient controls in the
following areas:
• Supervision of the traders' nominal outstanding liabilities (contrary to thesupervision of the net positions that by definition only reveal a limited market risk);
• An escalation procedure for red flags arising as a result of control procedures;
• Supervision of traders' activities; and
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Monitoring and handling anomalies and alerts.
119. On May 18, 2006, Defendants announced SocGen's first quarter 2006 results in a
press release entitled "[e]xcellent first quarter 2006." The release reported "[s]trong organic growth:
revenues up +18.2% vs. Q105," "[v]ery low cost of risk: 25 bp," "[g]roup net income: EUR 1,471m
(+20.0% vs. Q1 05)" and "[g]roup ROE [Return on Equity] after tax: 30.2%."
120. In his quarterly letter to shareholders, published on SocGen's web site in June 2006,
Defendant Bouton stated:
For the tenth quarter in a row, the Group 's risk expense remained very lowas a result of an ever-buoyant credit environment and the different measures takenby the Group: diversification of its portfolio of businesses and improvement of itsrisk management and hedging techniques.
121. Defendant Bouton's June 2006 statement in his quarterly letter to shareholders was
false and misleading as SocGen had not improved its risk management techniques. Its internal
controls and risk control management systems were deficient in each of the areas identified above in
99[112, 113, 118.
122. On August 3, 2006, Defendants issued a press release entitled "[e]xcellent second
quarter 2006." The release reported "[v]ery strong organic growth: revenues up 26.6% vs. Q2 05,"
"[c]ost of risk remains low: 21 bp," "[n]et income: EUR 1,320m (+37.9% vs. Q2 05)," "[g]roup
ROE after tax: 25.7%," and "[f]irst half results up sharply." The release stated that against a mixed,
but overall favorable, financial and economic environment for SocGen's business, "the Group
reported very good performances over the quarter, posting gross operating income of EUR 2,220
million, up 40.0% on Q2 05, and net income of EUR 1,320 million, up by a substantial 37.9%."
123. On November 9, 2006, Defendants issued SocGen's third quarter 2006 press release,
which stated : "Increase in revenues : +7.1 % vs. Q3 05," "[c]ost of risk remains low: 21 bp," "[n]et
income: EUR 1,272 million (+12.4% vs. Q3 05)," and "[g]roup ROE after tax: 23.6%." The release
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stated that against a backdrop of a mixed, but overall favorable, economic and financial
environment, "the Group reported higher levels of activity than in the third quarter of 2005, which
was already a strong comparative base: gross operating income was EUR 2,049 million for the
period, representing a rise of 8.7% on Q3 05, while net income amounted to EUR 1,272 million, up
12.4% on the previous year."
124. On February 14, 2007, Defendants issued a press release entitled "2006: Sharp
increase in results," which included SocGen's 2006 financial results. The press release stated:
"Strong organic growth in revenues: +15.7% vs. 2005," "[c]ost of risk low: 25 bp," "[g]roup net
income: EUR 5,221 M (+18.6% vs. 2005)," "[g]roup ROE after tax: 25.8%," "[e]arnings per share
EUR 12.33 (+15.2% vs. 2005)," and "[r]ecommended dividend: EUR 5.20 (+16.3% vs. 2005)." The
release also represented that SocGen "improved [its] risk management techniques and hedging of
high-risk exposure."
125. The statements above regarding SocGen's financial results for fiscal 2005, each
quarter of 2006, and fiscal 2006 were false and misleading and did not provide a fair presentation of
SocGen's true financial position for the following reasons:
(a) The results were prepared in violation of International Financial Reporting
Standards ("IFRS"). IAS 1 Presentation of Financial Statements clearly states that "the application
ofIFRS, with additional disclosure when necessary, is presumed to result infinancial statements
that achieve a fair presentation." As described at 919[310-320, SocGen violated various IFRS by
failing to disclose and record known risks, uncertainties, and exposures related to both the Kerviel
Fraud and the Subprime Fraud as of the time the statements, referenced above, were made.
(b) Under the IASB Frameworkfor the Preparation and Presentation ofFinancial
Statements, SocGen was also required to exercise prudence in the preparation of its financial results,
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including the statements referenced above. "Prudence is the inclusion of a degree of caution" in
such preparation "such that assets or income are not overstated and liabilities or expenses are not
understated."
(c) SocGen had not improved its risk management techniques, as its internal
controls and risk control management systems were deficient in each of the areas identified above in
9cJ[112,113,118.
126. The February 14, 2007 press release also stated:
Societe Generale Asset Management (SG AM) has a complete, high qualityoffering and its innovative capability is recognised by the market. In 2006, SG AMconfirmed its positioning ... as the leading player in the CDO market with TCW (thenumber one player in cash CDOs) and SG AM Al (number 2 worldwide in syntheticCDOs).
127. SocGen' s statements in its February 14, 2007 press release regarding its exposure to
subprime assets, including CDOs, were false and misleading for failing to disclose (i) SocGen's
actual and growing exposure to RMBS and CDO assets, and (ii) that the market for CDOs, offered
by SocGen, through its New York office, was becoming illiquid , and SocGen was unable to sell
much of its inventory of CDOs, as detailed herein and as explained more fully below (9[9[202-229)
and by CW5 (9[9[220-226) based on his/her participation in weekly sales meetings in SocGen's New
York office in which the need to sell RMBS/CDO products was discussed and based on his/her
review of inventory reports, received in connection with the weekly sales meetings, which discussed
these products. According to CW5 the inventory reports reflected that no sales activity had occurred
with respect to SocGen's RMBS/CDO products during this time period.
128. On March 16, 2007, the Individual Defendants caused the Company to issue its 2007
Registration Document, signed by Defendant Bouton . The 2007 Registration Document discussed
SocGen's risk management, stating:
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Given the diversity and ongoing evolution of its activities, the Group isexposed to a wide range of risks, which are generally grouped into fourcategories:
market risk: risk of loss resulting from changes in market prices and interestrates and in the correlation between these elements and their volatility ....
Risk management procedures are defined at the highest management level
The Group organizes a monthly Risk Committee meeting, chaired by theGeneral Management, at which the Executive Committee defines the frameworkrequired to manage risk, reviews changes in the characteristics and risks of Groupportfolios, and decides on any necessary strategic changes. The Group also has aMajor Risks Committee, which focuses on reviewing areas of substantial riskexposure (on individual counterparties or segments of a portfolio).
Lastly, the procedures for managing, preventing and evaluating risks areregularly analyzed in-depth by the Board of Directors and, in particular , its AuditCommittee.
129. The 2007 Registration Document further discussed the Company's Risk Division:
An independent Risk Division, responsible for implementing an effectivesystem of risk management and for ensuring risks are monitored in a coherentfashion across the Group
The Risk Division is completely separate from the business entities andreports directly to the General Management. Its role is to contribute to thedevelopment andprofitability ofthe Group by guaranteeing a robust and efficientframework ofrisk management and overseeing all transactions carried out withinits businesses.
Accordingly, the Group Risk Division is responsiblefor identifying all risksborne by the Group, defining and validating the methods and procedures foranalyzing, measuring, approving and monitoring risks, ensuring risk informationsystems are adequate, managing riskportfolios, monitoring cross-disciplinary risksand anticipating levels of risk provisioning for the Group. Furthermore, it alsoassists in the appraisal ofrisks incurred on transactions proposed by the Group'ssales managers.
Procedures and organization
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Based on the monitoring framework defined by the Risk Committee, a set ofspecific procedures has been compiled for each type of risk.
Procedures for market risk:
• based on the Risk Division's recommendations, the Group Risk Committeedefines limits for each type of activity which are then submitted for approvalto the Board of Directors;
• teams of risk controllers who are completely independent from the front-office staff, carry out daily reviews of all positions and risks taken in thecourse of the Group's market activities;
• daily summaries of risk exposure are produced, highlighting any cases wherelimits have been exceeded;
• the market parameters used to calculate risks and results are verified eachday;
• precise methods have been defined for evaluating risks, and the Risk Divisionmust validate the valuation models used to calculate risks, results andprovisioning levels.
Theseprocedures and structures areprogressively adapted to accommodatechanges in regulations and the rapid growth of increasingly sophisticatedbusinesses. Some controls are further reinforced through targeted action plans.
130. The 2007 Registration Document also discussed SocGen ' s compliance control
systems:
The permanent supervision ofactivities at a local level by operational staffformsthe cornerstone ofongoing control within Societe Generale Group
This comprises all procedures implemented on a permanent basis toguarantee that transactions carried out at an operational level are correctlyhandled, secure and valid. The first level of responsibility for ongoing control lieswith the operational staff.
Permanent supervision comprises two elements:
day-to-day security: all operational staff are required to permanently complywith the applicable rules and procedures governing all transactions carriedout;
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formal supervision: management is required to make regular checks usingwritten procedures to verify that staff are complying with the rules andprocedures for processing transactions and for ensuring effective day-to-daysecurity.
In order to ensure this system functions correctly ... permanent supervisionprocedures are adapted for each Group entity according to their specific activities.
131. The 2007 Registration Document also described the Company' s Internal Audit
Departments:
Each Internal Audit Department regularly identifies the areas of risk to whichits division is exposed. It then defines an annual schedule of audits to make sure thatthe exposure is covered in full. Entities within the Group's Retail Banking Network,for example, are audited every 17 months, whilst in the Corporate and InvestmentBanking Division, highest-risk entities are audited around once a year.
In the course of their assignments, the auditors carry out controls to check thesecurity, compliance and efficiency of the division's activities, and evaluate thequality of the permanent supervision system in place. They then put forwardrecommendations based on their findings, and follow these up to check they areimplemented correctly. Any problems noted or recommendations put forward areentered into the recommendation monitoring system managed by the AuditDepartments and General Inspection.
132. The 2007 Registration Document also discussed internal controls governing
accounting and financial data, stating:
Accounting data are compiled by the back and middle offices andindependently from the sales teams, thereby guaranteeing that information is bothreliable and objective. These teams carry out a series of controls defined by Groupprocedures on the financial and accounting data:
daily verification of the economic reality of the reported information;
reconciliation, within the specified deadlines, of accounting and managementdata using specific procedures;
production of a quarterly analytical report on the supervision carried out,which is submitted to the management of the entity or division, and to theGroup Finance Department.
Given the increasing complexity of the Group's financial activities andorganizations, staff training and IT tools are reviewed on a permanent basis to check
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that the production and verification of financial and management accounting data areeffective and reliable.
133. Each of the above statements in SocGen's 2007 Registration Document regarding
SocGen's risk management was false and misleading, as SocGen's risk control management
systems, necessary in order to detect any unauthorized trading, contained the numerous deficiencies
identified above in ¶9[112, 113, 118, including the following:
• Failure on the part of the Back Office and Middle Office to investigatediligently the discrepancies that appeared several times in 2007;
• After automation of monthly controls in 2006, there was an absence ofexchange of confirmations with counterparties within the group and anabandonment of daily control of the flows;
• Failure to implement any interim structure for the monitoring of Kerviel'sactivities after Delta One lost its manager; and
• In March 2007, Kerviel was permitted to validate his own earnings.
134. In addition , by the time SocGen issues its 2007 Registration Document in March
2007, Kerviel had already amassed tens of millions of euros in fictitious counterparty trades and had
exposed the Company to significant market risk based on tens of millions of euros worth of
unhedged, directional trades.
135. At its meeting on May 10, 2007, the SocGen Board of Directors approved the results
for the first quarter of 2007. Its release, entitled "First quarter 2007: solid performances against a
high first quarter 2006," reported net banking income for SGCIB of €1,947 million and stated in
part:
The Group 's cost ofrisk was once again low (26 by ofrisk-weighted assets),due to both a continued favourable credit environment and factors specific to theGroup: a policy of diversification of the businesses portfolio, improved riskmanagement techniques and hedging ofhigh-risk exposure.
136. On May 10, 2007, the Company held a conference call with market analysts in which
SocGen's CFO Frederic Oudea stated:
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We are targeting an increase of risk rated assets between 10 and 15% peryear, maintaining the percentage of capital allocated to SG CIB to this samemaximum threshold than previously commented, while one-third of the capitalallocated. And risk is kept under control, under strong supervision and using ourexpertise . We've tried to illustrate that with a ratio of the NBI of market activity andgrowing NBI of fixed equities and fixed income commodities revenues; it does notinclude the financing revenues. Related to the stress test, you know, we have 26different stress tests, so we have taken the average of the worst stress test for SG CIBparameter. As you can see this ratio, it is in line with the average of 2005 for the lasttwo years. I think that shows that the relative risk level has not changed and let mejust point out that we release every year in our registration documents the results ofthis stress test on the 1st of December, 2006, for the group scope, covering not onlyfor SG CIB but also the other market activities in global investment management inretail banking outside France.
The increase in value-at-risk in particular this quarter is mainly due to achange in methodology which accounted basically for two-thirds of the increase ofthe equity VaR. The risk managementpolicy includes transaction selection basedon the application of very strict risk criteria, an active hedging policy, andincreased distribution ofrisk. And SG CIB clearly is favoring the development ofan originate and distribute model rather than a take and hold model.
137. SocGen's May 10, 2007 First Quarter 2007 release and statements by Frederic Oudea
during the Company's conference call with market analysts were false and misleading as its risk
management techniques had not improved and, in fact, were deficient for each of the reasons
identified in x[112, 113, 118, including the following:
• Failure to react to external alert signals from EUREX and SocGen'ssubsidiary FIMAT relating to trading activities;
• Failure to respond to inquiries from EUREX, even though direct hierarchicalline was notified in March and April 2007;
• Failure on the part of the Back Office and Middle Office to investigatediligently the discrepancies that appeared several times in 2007;
• After automation of monthly controls in 2006, there was an absence ofexchange of confirmations with counterparties within the group and anabandonment of daily control of the flows;
• Failure to implement any interim structure for the monitoring of Kerviel'sactivities after Delta One lost its manager;
• In March 2007, Kerviel was permitted to validate his own earnings; and
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• Failure to adequately analyze source of the profits posted by Kerviel, in spiteof the fact that these very favorable incomes seemed difficult to explain byKerviel, especially in light of his authority level and the market conditions inQ407.
138. In addition, by May 10, 2007, SocGen was already aware that Kerviel was engaging
in numerous fictitious party trades, totaling at least €94 million, as explained in an April 16, 2007
email from Marine Auclair, the director of the "middle results" department, to several financial
controllers , among others , as detailed below at 919[187-189.
139. The reported financial results were false and misleading because they fail to
incorporate the losses from unhedged trading positions related to the Kerviel Fraud as ofMarch 31,
2007. These losses were material during the first quarter of 2007, and SocGen was forced to restate
its financial results in accordance with International Financial Reporting Standards, as detailed at
¶J[287-297. Through the restatement, SocGen has admitted that its originally reported net income for
Q1 2007 was overstated by €64 million.
140. Additionally, the financial results as reported were false and misleading because they
failed to incorporate known losses related to the decline in fair market value of the Company's
portfolio of subprime-backed CDO and RMBS assets. As described below at 919[310-320, Defendants
failed to incorporate information known or recklessly disregarded by them during the first quarter of
2007 in the valuation of SocGen's RMBS and CDO portfolio, in violation of International Financial
Reporting Standards.
141. On June 27, 2007, European Equity Research reiterated SocGen' s statements that the
SGCIB division' s: "Exposure to high-risk (sub-prime) mortgages in the U.S. is limited as is
exposure to securitisation [sic] of these loans (<0.5% of CIB revenues)."
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142. SocGen's statement to market analysts repeated in the June 27, 2007 European Equity
Research report was false and misleading as SocGen's exposure to subprime mortgages was not
"limited" for the reasons set forth in 1127.
143. On August 2, 2007, the Company issued a release entitled "Strong growth in second
quarter 2007," which stated in part:
At its meeting of August 1st 2007, the Board ofDirectors of Societe Generaleapproved the results for the second quarter of 2007. The Group posted a very goodperformance in Q2 07 on the back of revenue growth in all its core businesses, withgross operating income of EUR 2,805 million, up +26.4% on Q2 06. Net incometotalled EUR 1,744 million, up +32.7% on Q2 06.
The Group's cost ofrisk remained low (25 bp ofrisk-weighted assets) dueto both a still favourable credit environment and factors specific to the Group: apolicy of diversification of the businesses portfolio, improved risk managementtechniques and hedging ofhigh-risk exposure....
Moreover, the Group has low exposure to the current credit market crisis.
Corporate and Investment Banking's net banking income for the secondquarter of 2007 amounted to EUR 2,077 million, up +16.7% (+16.9 % in absoluteterms) vs. Q2 06. NBI for the first half of 2007 came to EUR 4,024 million, anincrease of +10.9% (+10.1% in absolute terms) vs. a H1 2006 which represented ahigh comparison base. This performance confirms the success of SG CIE'sprofitable growth strategy focusing on its three key areas of expertise (derivatives,structured products and euro capital markets). SG CIB continues to make targetedinvestments in markets offering real and stable potential and allowing it to rapidlycapitalise on its areas of expertise (for example, SG CIB has rapidly established itselfas one of the leaders in warrants in Korea).
The Equities business enjoyed an excellent quarter, with NBI up +35.4% vs.Q2 06 (+37.9% in absolute terms) at EUR 1,044 million. NBI for the first half of2007 came to EUR 2,112 million, up +18.1% vs. H106 (+18.3% in absolute terms).Commercial performances were excellent, especially for the sale of structuredproducts in France and abroad.
(Footnote omitted.)
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144. On August 2, 2007, following SocGen' s announcement of its Q207 results, analysts
at European Equity Research reiterated that:
Little Exposure to CDOs and LBOs
According to SG, less than 1% of Investment Banking revenue comes fromsecuritisations [sic] and activities related with CDOs, and around 1% of theInvestment Banking lending portfolio is LBO financing. Hedge fund exposure isaround 1 % of total counterparty risk.
145. On August 3, 2007, Natixis Securities commented on SocGen' s second quarter 2007
earnings, concluding that SocGen had: "[l]ow exposure to credit risk segments." Natixis Securities
also highlighted the fact that SocGen "has given some reassuring numbers on its exposure to risky
credit segments (subprime, CDO, LBO, etc.)." Natixis Securities went on to comment:
The group has reassured on risk exposure (subprime, CDO, LBO ...), which isapparently very limited : no retail exposure in the US, no direct exposure for TCW (aleader in CDO management), LBO = 1 % of the loan portfolio in CIB, under 1 % ofCIB revenues coming from securitisation and CDO in the US ....
146. Based on SocGen's Q2 2007 results, which beat market expectations, Credit Suisse,
on August 2, 2007 maintained their outperform designation for SocGen.
Q2 Results: First Thoughts
Societe Generale (SG) published group net income of €1.74 bn versus ourforecast of €1.4 bn and consensus of €1.4 bn. Operating profit of €2.8 bn is 17%above ourforecast of €2.39 bn and compares with consensus of €2.37 bn.
Valuation has become more compelling, however, with a 2008E P/E of 8.8x as atclose of 1st August we believe that downside is very limited....
Given a compelling valuation, however, we believe the shares offer limited downside.Outperform rating maintained.
Outperform maintained: still 20% upside in our view
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We feel comfortable that the revenues and risks are contained enough to potentiallybe offset by other areas of growth such as the derivatives and rising spreads andmargins.
We believe that SG's shares will continue to benefit from good fundamentalsand could continue to be supported by consolidation expectations as we discussed inour recent publication "mid-summer thoughts", 20th July 2007. We maintain ourOutperform rating and have upgraded our SOTP-based targetprice to €155. Wesee about 20% upside from current level.
The Riskier Areas
We are optimistic with regards to BNPP and SG's ability to withstand thecurrent challenging credit environment because we believe that their exposure islimited in size, closely monitored, collateralized, and rather safe in our view.Additionally we believe that their CIB division should be able to benefit from thecurrent increasing volatility which increases demand for derivatives, their mainfranchise. Finally we note that with GDP world-wide still growing at 5% accordingto most economists, demand for financing should remain strong, even if the frothexperienced in 2006 and H1 2007 on some segments (M&A, LBO, securitization)may ease somewhat into H2.
The group tried to reassure ... with regards to its exposure to the currentcredit crisis and areas ofconcerns, such as subprime, LBOs, or hedgefunds.
147. Based on SocGen's Q2 2007 results, Deutsche Bank, on August 3, 2007, upgraded
SocGen from Hold to buy:
Upgrade Societe Generale to Buy ...
We are positive on French banks in a pan-European context: We confirm ourBuy on BNP Paribas and upgrade Societe Generale to Buy. Both banks trade on adiscount vs. the sector, 21% for BNPP and 14% for SocGen, they have littleexposure to current credit market jitters and offer positive business perspectives incurrent market conditions due to their leading franchises in derivatives. We haveupgraded our target price to Euro 149.6 for Socgen.
Little Exposure to Current Credit Crisis
SocGen shares have dropped as most European banks because of concernsabout credit risk, but the bank has confirmed that it has negligible exposure: no US
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retail activity, no risk-taking on managed assets of TCW, its US fund manager, andlow revenue sensitivity, 1 % of CIB revenues from securitization and CDO activity inthe US, 1 % of credit portfolio in LBO financing for a total amount of Euro 2.7 bnand 1 % of market counterparty risk in hedge fund.
Attractive Stock Price, TP Upgraded to Euro 149.6
SocGen trades on 9.4x 2008E adjusted EPS, a 14% discount to theEuropean average, and has dropped 9% since our initiation on June 21st. Weconsider that this level is notjustified and we upgrade our recommendation to Buy.Following the Q2 results, we also upgrade our target price to Euro 149.6 fromEuro 147.5, which leaves a 16% upside potentialfor the stock price.
Potential in French Bank Stocks
We upgrade Societe Generale to Buyfrom Holdfor the following reasons:
The stock is 20% off its year-high and has gone down 9% since June 21st.We consider that the 14% discount to European peers is now a goodopportunity to go long on the stock.
SocGen shares have dropped as most European banks because of concernsabout credit risk, but the bank has confirmed that it has negligibleexposure.
We were already positive on business trends of French banks and we havereinforced our views on BNPP and SocGen because of their leading expertisein derivatives which could drive up the revenues in current volatile marketswith good perspectives of future growth. We expect a 12% 06-09 EPSCAGR.
Small Exposure to Credit Crisis
We believe that the recent drop of the stock is due to its enrollment in currentcredit crisis as most European banks, but SocGen has low subprime and LBOexposure and should not be relevantly concerned by a potential slow down of thesemarkets. We have also no doubt on the quality ofinternal procedure to highlightpotential weaknesses. The management detailed the small exposure ofthe bank tocurrent credit crisis with its Q2 results.
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Societe Generale Reported Good Results in Q2 07
SocGen reported on 2 August Q2 net profit of Euro 1, 744m, versus ourforecast ofEuro 1,362m. The difference came from the strong performance ofCIB in equity; a Euro 235m of capital gain on Euronext shares and Euro 50m incomefrom the equity portfolio of the group. The bank has communicated reassuring newsfrom French retail. International retail and Asset Management & Services continueto deliver strong growth. Adjusted EPS was Euro 6.47 for H1 07, +5% YoY.
Surprising CIB
CIB has benefitedfrom a very good general environment to deliver strongresults in its equities activity (revenues +38% YoY). Globally, CIE's net incomeincreased by 23% YoY in Q2 07 vs. forecast of a flat activity YoY.
Estimate Changes
Following the Q2 07 set of results, we have upgraded our target price to euro149.6 from Euro 147.5. We have increased our 08E revenues by 1.6% and our 08Ecore earnings by 2.9%.
148. SocGen's statements made in its August 2, 2007 Second Quarter 2007 earnings
release and Defendants' statements to market analysts, repeated in the August 2, 2007 European
Equity Research report, the August 2, 2007 Credit Suisse report, the August 3, 2007 Natixis
Securities Report and the August 3, 2007 Deutsche Bank report were false and misleading as its risk
management techniques had not improved and, in fact, were deficient for each of the reasons
identified in 1137. In addition, by August 2, 2007, SocGen knew of numerous fictitious transactions
and unhedged, directional trades conducted by Kerviel, but failed to take any action. Such fictitious
trades were even approved by directors of SocGen's finance department. By late June-early July
2007, SocGen knew that the accounting gap -fictitious deals conducted by Kerviel with no
economic reality - had reached €2.2 billion.
149. SocGen's statement that it had "low exposure to the current credit market crisis" was
also false and misleading as it had significant exposure, as detailed below in 11202-229, which it
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failed to disclose in violation of International Financial Reporting Standards. See 919[298-309, below.
Further, according to CWs 1, 2 and 5, no viable market existed for CDOs by mid-2007. For
example, according to CW2, SocGen knew that its CDO valuation models "did not reflect reality" by
this time.
150. SocGen's reported financial results were false and misleading because it failed to
incorporate the losses from Kerviel's unhedged trading positions, as of June 30, 2007. These losses
were material during the second quarter and SocGen was forced to restate its financial results in
accordance with International Financial Reporting Standards, as detailed at 8287-297. Through the
restatement, SocGen has admitted that its originally reported net income for Q2 was overstated by
€1.4 billion.
151. Additionally, the financial results as reported were false and misleading because they
failed to incorporate known losses related to the decline in the fair market value of the Company's
RMBS and CDO portfolio. As described at 919[310-320, Defendants failed to incorporate information
known or recklessly disregarded by Defendants during the second quarter of 2007 in the valuation of
SocGen's RMBS and CDO portfolio.
152. On or about September 7, 2007, Defendant Bouton represented to Le Figaro
newspaper that the credit crisis was "under control" and reaffirmed that it would have only a
limited impact on France 's second biggest listed bank . As for the subprime crisis specifically,
Defendant Bouton stated that the Company only had marginal exposure to the subprime market.
153. Defendant Bouton's September 7, 2007, statements to Le Figaro that SocGen had
limited or marginal exposure to the credit crisis was false and misleading for the reasons set forth in
¶9[127, 149, above. According to CWs 1, 2, 3, 5 and 6, by August and September 2007, the market
for SocGen ' s RMBS and CDO products was illiquid and SocGen ' s New York loan origination and
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underwriting department was disbanded only two months into its operation, as detailed below at
19202-229.
154. On November 7, 2007, during the Company's third quarter 2007 earnings call,
Frederic Oudea made the following statements:
The solid resilient business model is based on, first of all, 63 diversified profitcenters, which help reduce fluctuations in results and increase the matching of rates.Secondly, significant experience in market risk management based on theprofessionalism of its teams and recognized ability in recycling risks . The thirdquarter of 2007 was marked by excellent client-driven activity, with a 65.4% increasein revenues versus last year and 40% increase if we look at the first nine monthscompared with last year.
Let's turn now to page 31 and look at the Fixed Income and Currencies &Commodities business. As I said here on the contrary, revenues are down sharply by78.2% versus last year. In a market which was seriously affected by the financialcrisis, the trading activities posted a negative contribution of €277 million. Thisperformance was due mainly to a negative €213 million impact on the differentpositions exposed to the US residential mortgage sector.
We subjected all our activities exposed to US residential mortgages to stresstest in order to measure the maximum potential losses at these activities. As we haveno retail banking activities in the US, our exposure is indirect via exposure tooriginators of subprime loan, RMBS securitization and CDO structuring andtrading activity.
Valuation of illiquid position in CDOs were based on a model using forward-looking scenario of $196 billion cumulative loss for the whole industry in the USresidential mortgage sector within the next three years. This scenario was applied tosubprime, Alt-A and prime loans rented in the different vintages in 2006 and 2007and then, again, applied also in a gradually reduced rate to produce generation ofloans.
For example, let me just give you a few of the figures that we took to buildthis scenario. For 2006 subprime loans production, the cumulative probability of lossis 14.6% that results from a 30% probability of default and a 49% loss given default.
Regarding our small RMBS portfolio, it was marked down based onobservable data and will be valued on that basis going forward. Overall that said wecame out with €230 million write-down, which was booked in the NBI. There is asite in our supplementary data detailing our exposure to US residential mortgage risk,as well as our stress test assumptions.
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[K MON KALAMBOUSSIS]: Hi. This is Kimon Kalamboussis from Citi.Two questions, if I may. First on the provisions, could you tell us how the €230million write-down is split between RMBS and CDO split? And also, how is theLBO write-down rate of 5% calculated, please? Second question is on Rosbankactually, could you update us on the case and when you plan to exercise the option?And also would you have to bid for the minorities, please? Thanks.
[OUDEA] : I'll answer your question on Rosbank, but first turn to Jean-PierreMustier to perhaps answer your first question on the 230 million and the LBOprovision . Jean-Pierre?
[MUSTIER]: Yeah. We don't give the split between the values -components of our write-down basically on our US residential mortgage exposure,which are disclosed on page 57 of the presentation. On the LBO side, we took apresent markdown of 5%, which we consider is probably too prudent in the sensethat we feel that at this stage a certain number of the loans we are underwriting likelyto syndicate at a better level. But we felt as for US residential mortgage that wewant it to be on the safe side for all the markdown we were taking our books.
[JEAN PIERRE LAMBERT]: Thank you very much. Can I have a follow-up question? Ifthe CDS has been structured in 2005 and why are they still in yourportfolio? Is it because using the valuable assets or is it because it 's difficultforyou to place them in the market? What is the explanationfor the presence ofthoseCDOs?
[MUSTIER]: I am not always in the mind of our creditors, but usuallywhen we keep assets on our books, it's because wefeel there is value in the booksbasically. So these assets have riskprofile at this stage the 2005 mezzanine CDOs,as I said, are under our conservative stress scenario, are very likely impacted by thestress. So in a way wefeel they are good assets. Another issue is that we have toclarify one thing and the difference ofwhat US banks could release in their 10-Q,we have released here all our exposure risk on our US residential mortgage onCDOs we have structured and CDOs on which we have participated but notstructured. So the parameter basically could be potentially wider. And on theCDOs here, we were participant but not structured on the mez `05 andmez `06 andwe were the structure on the A grade.
155. On November 7, 2007, the Company issued a release entitled "Third quarter 2007:
Good resilience of Q3 07 results." The release stated in part:
At its meeting of November 6th 2007, the Board of Directors of SocieteGenerale approved the results for the third quarter of 2007. Group net incometotalled EUR 1,123 million, down -11.5% on Q3 06 and ROE after tax came to18.0% (vs. 24.6% in Q3 06). For the first 9 months, the Group posted an increase in
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its results (Group net income ofEUR 4,298 million, or +6.3% vs. 9M 06) and a highlevel of profitability (ROE after tax 23.8% for 9M 07 vs. 27.5% for 9M 06).
Corporate and Investment Banking's net banking income amounted to EUR1,159 million in Q3 07 (-22.3% vs. Q3 06, -23.6% in absolute terms), in a veryunfavourable market environment. NBI for 9M 07 came to EUR 5,183 million, up+1.9% (+0.2% in absolute terms) vs. 9M 06, with client-driven revenues increasing+18.4% over the same period.
The good third quarter performance of Equities activities, which represent asignificant proportion of the division's revenues (44% in 2006 and more than 50% inH107), helped limit the effects of the crisis. Commercial performances were good inall the businesses (client-driven NBI +21.1% vs. Q3 06). The NBI of tradingactivities came to EUR -180 million in Q3 07, with negative NBI for Fixed Income,Currencies and Commodities trading activities, which were directly impacted by thefinancial crisis, and a positive contribution for Equities activities.
The NBI of the Equities business was up +13.4% (+11.5% in absolute terms)at EUR 679 million in Q3 07 vs. Q3 06. NBI for 9M 07 amounted to EUR 2,791million, up +18.4% (+16.6% in absolute terms) vs. 9M 06. The business lineproduced good third quarter performances in all its client-driven activities, whererevenues were up +65.4% vs. Q3 06: flow products rose +67% in Q3 07 vs. Q3 06;revenues generated from the sale of structured products were 67% higher than in Q306 and revenues from cash equities were 52% higher. Despite an adverse marketenvironment, Lyxor recorded positive net inflows in Q3 07 (EUR +530 million).
(Footnote omitted.)
156. SocGen's November 7, 2007 Third Quarter 2007 earnings call statements were false
and misleading as its risk management techniques had not improved and, in fact, were deficient for
each of the reasons identified above in 9[9[i 37, 148. In addition , by August 2, 2007, SocGen knew of
numerous fictitious transactions and unhedged, directional trades conducted by Kerviel, but failed to
take any action. Such fictitious trades were even approved by directors of SocGen's finance
department. By late June-early July 2007, SocGen knew that the accounting gap -fictitious deals
by Kerviel with no economic reality - had reached €2.2 billion.
157. SocGen's November 7, 2007 statements regarding its exposure to the credit crisis
were false and misleading for each of the reasons set forth above in 11127, 149, 153. In addition,
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Mustier' s statements in response to the question regarding the 2005 Mezzanine CDOs were blatantly
false. SocGen knew, but failed to disclose, that the 2005 Mezzanine CDOs remained in SocGen's
portfolio because SocGen was unable to sell them, as the market was illiquid, and that they should
have been immediately written down.
158. Defendants' Third Quarter 2007 earnings release statement was false and misleading
because the reported financial results failed to incorporate the financial impact of Kerviel's
unhedged, directional trading positions as of September 30, 2007. The financial impact was material
during the third quarter, and SocGen was forced to restate its financial results in accordance with
International Financial Reporting Standards , as detailed below at 19[287-298. Through the
restatement, SocGen has admitted that its originally reported net income for Q3 was misstated by
€1.7 billion.
159. Additionally, SocGen's Third Quarter financial results, as reported, were false and
misleading because they failed to incorporate known losses related to the decline in fair market value
of the Company's RMBS and CDO portfolio. As described below at 919[310-320, Defendants failed
to incorporate information known or recklessly disregarded by Defendants during the third quarter of
2007 in the valuation of SocGen's subprime-backed RMBS and CDO portfolio, in violation of
International Financial Reporting Standards.
160. On November 7, 2007, Marketwatch quoted CEO Defendant Bouton, stating that
"[a]lthough gradually improving , the [subprime] market environment has not at this stage returned
to normal."
161. On November 23, 2007, after meeting with SocGen' s management the day before,
Deutsche Bank made the following comments:
We met SocGen's management yesterday: they anticipate Q4 to be a toughenvironment for CIB but with no further write-downs. They also highlighted that
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they are not exposed to US assets except their CDO exposure that they see as a"mistake."
From their point of view, the crisis impact on CIB's business model will be anormalisation of cost of risk which was far too low last year, and the capitalmarkets' coming back to strong earnings growth will depend on the structured creditability to reinvent itself and find new way of disintermediation and more transparentproducts.
The management also does notanticipate to beforced to bookfurther write-downs on their Euro 4.8bn CDO exposure (Euro 230m markdown booked in Q3) ifmost ofexperts'final loss anticipations on 06 & 07 subprime vintages remain at amaximum of 15%. However they could change their assumption if conditionsactually deteriorate.
162. In a newspaper interview on December 19, 2007, Defendant Bouton reiterated that
"he saw `limited impact' on the profitability of France's bank from the current subprime mortgage
crisis."
163. SocGen's statements on November 7 and 23 and December 19, 2007, regarding its
exposure to subprime-related securities, were false and misleading, as its exposure was not
"limited," and, in fact, was significant as set forth below in ¶9[127, 149, 153. Further, although
required under International Financial Reporting Standards to fully disclose the nature, scope and
extent of its exposure to subprime-related securities, even if the Company deemed its exposure to be
minimal, SocGen failed to do so.
164. In addition, by November 7, 2007, Defendants knew that SocGen would have to
make significant additional writedowns of its hedged and unhedged RMBS and CDO portfolio, as
detailed below at 19[202-229. According to CW2, Defendants knew by Q107 that its subprime-
related portfolio was not valued correctly and needed to be significantly written down, as Carlos
Beneto (head of CDO structuring) and Arno Derries (head of RMBS), both of whom reported
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directly to Paulo Taddonio (head of FICC Americas), were feverishly changing parameters in their
valuation models (within the Calypso system) in order to artificially inflate the value of SocGen's
RMBS/CDO portfolio, thereby enabling SocGen to defer taking the necessary writedown of these
assets. According to CW2, based on meetings with Taddonio, Greg Condas, Dave Askin and
Richard Baksin, by mid-2007, SocGen knew that the valuation models used to value SocGen's
RMBS/CDO portfolio did not "reflect reality" and were not reliable. According to CWs 1 and 2, by
mid-2007, no viable market for CDO offerings existed.
165. SocGen's €230 million writedown of its RMBS/CDO portfolio in November 2007
was woefully inadequate, as SocGen's RMBS/CDO portfolio valuation failed to reflect (i) the ABX
Index, (ii) the illiquidity of such assets as experienced by SocGen's traders in its New York office
and (iii) the experience of SocGen ' s U.S. asset management subsidiary TCW which was managing
and servicing CDOs for its clients and understood their rapidly declining value. Indeed, only two
months later, SocGen wrotedown ten times this amount on its subprime exposure.
166. Each of SocGen's statements regarding the quality and sophistication of its internal
controls and risk control management systems, identified above, was false and misleading for the
reasons set forth in 9[137. In addition, Kerviel's trades alone ultimately exposed the Company to €50
billion ($73.5 billion) in market risk, shortly before they were unwound in January 2008 - more than
the entire market capitalization of SocGen. Any institution where a single, junior trader can bet the
company on movements in the market can not reasonably be said to manage market risk or to have a
sophisticated risk control management system.
VIII. THE TRUTH BEGINS TO COME TO LIGHT
167. By January 18, 2008 , rumors began circulating about significant writedowns at
SocGen and that its exposure to monoline insurers may be increasing. A BNP Paribas analyst
reported that the market believed that SocGen had significant monoline exposure. Another analyst
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estimated that significant additional writedowns of €1.3 billion on SocGen's unhedged CDO
portfolio were imminent. SocGen stock dropped 8.2% on January 18, 2008 and another 7.99% on
January 21, 2008, for a total drop of 16% over those two days, based on these market rumors. A
Santander analyst reported that this 16% drop "coincides with the impact on netprofit of2007E we
estimated in the event that SG were to book writedownsfor its CDOportfolio of€1.3bn, which we
think is a conservative figure."
168. On January 24, 2008, before the market opened, the Company issued a press release
which stated in part:
Societe Generale Group has uncovered an exceptional fraud in a sub-sectionof its market activities.
The Group expects its net income for 2007 to be in the range of Euro 0.6-0.8bn, including the loss resulting from this fraud and additional US residentialmortgage and monoline related write-downs. The Group intends to pay a dividendfor 2007 in line with its pay-out ratio target of 45 %.
As a result of this fraud and in order to strengthen its capital base, the Groupwill launch a capital increase of Euro 5.5bn, with Preferential Subscription Rightswhich has been fully underwritten by a bank syndicate.
Losses on a fraudulent and concealed position
Societe Generale Group (the "Group") has uncovered a fraud, exceptional inits size and nature; one trader, responsible for plain vanilla futures hedging onEuropean equity market indices, had taken massive fraudulent directional positionsin 2007 and 2008 beyond his limited authority.
Aided by his in-depth knowledge of the control procedures resulting from hisformer employment in the middle-office, he managed to conceal these positionsthrough a scheme of elaborate fictitious transactions.
There is no residual exposure in relation to these positions, which werediscovered and investigated on January 19th and 20th, 2008. It was decided to closethese positions as quickly as practicable in the best interest of market integrity andthe Group's shareholders. Given the combination of the size of the positions and thevery unfavourable market conditions encountered, this fraud has a negative impact ofEuro 4.9bn that the Group has decided to recognise in its 2007 pre-tax income.
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The trader's positions have been reviewed and a thorough analysis of all hisdepartment's positions confirmed the isolated and exceptional nature of this fraud.The employee who has confessed to the fraud has been suspended and a dismissalprocedure has been initiated. The individuals in charge of his supervision will leavethe Group.
Additional write-downs in relation to US RMBS CDOs and monoline insurers
The Group will post additional write-downs of Euro 2.05bn in Q4 07,comprising the following:
- Euro 1.1bn in relation to US residential mortgage risk;
- Euro 550mm in relation to exposure to US monoline insurers; and
- Euro 400mm unallocated additional provision in relation to the above-mentionedexposures.
US residential mortgage exposure
The Group's exposure to US residential mortgage risk mainly consists ofportfolio of unhedged super senior CDO tranches of RMBS. In light of theworsening of the US residential mortgage crisis, the Group will apply new write-downs of Euro l.lbn in Q4 07, consistent with the valuation levels of the ABXindices where they exist (see detailed assumptions and outcome in Appendices 1 to3). The consistency of the modelling and the parameters has been reviewed by theGroup's auditors. The subprime RMBS portfolio (Euro 550mm as of September30th, 2007), which is valued directly on the basis of market parameters, has beenhedged, amortised or sold. As of end 2007, residual exposure stood at around Euro35mm.
Exposure to US monoline insurers
Other assets on the Group's balance sheet benefit from credit enhancementssupplied by monoline insurers. Applying the same stress test methodology to theunderlying portfolio as to the assets underlying the unhedged CDO portfolios, theGroup will book a write-down of Euro 500mm in Q4 07 (see Appendix 4). Inaddition, a write-down of Euro 50mm has been taken to eliminate the whole of itsACA-related exposure.
169. As a result of these disclosures, artificial inflation was removed from the price of
SocGen securities, with shares of SocGen stock declining from €79.08 to €75.81 in one day.
170. On January 26, 2008, more details of Defendants' misconduct were revealed.
(a) In an article entitled "Socked, not gently," The Economist stated:
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[M]arket-watchers expressed disbelief that such huge positions, in instruments thatthe bank itself described as "plain vanilla," could have been built unnoticed.
(b) The Wall Street Journal published an article entitled "Societe Generale's
Damage Control - After Alleged Fraud, French Bank Strives To Save Reputation ." The article
stated in part:
Paris prosecutors have launched a preliminary criminal investigation into Mr.Kerviel's actions, though no charges have been pressed. Shareholders also havelaunched a complaint with Paris prosecutors.
171. On January 28, 2008, the press continued to cover SocGen with stories about the
magnitude of Defendants' fraud:
(a) The Financial Times (London) published an article entitled "Kerviel is just
part of a global rogues' gallery," which stated in part:
In addition, the bad news from SocGen last Thursday was not limited toMr. Kerviel. The same press release that blamed "one trader" for a €4.9bn lossdisclosed another risk management failure: write-downs of €2.05bn related to"unhedged super senior CDO [collateralised debt obligation] tranches" and othersubprime-related derivatives. A proper ranking of the losses SocGen announcedwould go: first, trading losses by management; second, CDOs; third, Mr. Kerviel.The leading rogue trader in history was a distant third on SocGen's list of bad newsthat day.
(b) The Globe and Mail published an article entitled "Exchange says it questioned
Kerviel's actions," which stated in part:
Societe Generale SA struggled yesterday to defend its stated assertion thatJerome Kerviel, the young trader the French banking giant accuses of massive fraud,acted entirely undetected for almost a year as his trading positions climbed to tens ofbillions of euros.
French investigators said Eurex, the European futures and options exchange,questioned trades by Mr. Kerviel, 31, in November....
"In November, 2007, Eurex said it was worried about a particular positionthat had been taken," said Jean-Claude Marin of the Paris prosecutor's office.
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172. Between January 29 and January 31, 2008, several articles discussing the SocGen
scandal were published:
(a) The Financial Times (London) published an article entitled "Kerviel `invented
contracts in quest for bonus."' The article stated in part:
Jerome Kerviel, the trader at the centre of the Societe Generale scandal, hadpreviously been the subject of internal investigations in his department, Frenchinvestigators said yesterday.
Prosecutors also revealed that Eurex, one of the derivatives exchanges onwhich Mr. Kerviel had traded, had flagged concerns about his activities lastNovember.
Mr. Kerviel has admitted to acting alone but claimed the practice of makingtrades for which he did not have permission was widespread.
"He said that, although his positions were large, other traders were acting ona smaller level," the prosecutor said. "He thinks that, for a long time, he generatedprofit and that he was tolerated to a certain extent."
(b) The Guardian (London) published an article entitled "Eurex exchange told
SocGen about rogue trader in November: Bank admits it was warned on more than one occasion:
Shareholders go to court over alleged insider dealing." The article stated in part:
SocGen faces intense criticism from its own shareholders. An enraged ColetteNeuville, head of Adam, a minority shareholders' lobby, has asked the AMF, theFrench financial services authority, for a formal inquiry into alleged insider tradingby a director and/or others at the bank.
She also wants the AMF to investigate whether the bank deliberately misledinvestors about the scale of its sub-prime losses in November last year when it putthem at euros 230m - only to announce a euros 2.05bn hit two months later.
"It appears to me hard to explain that between November and January thescale of the losses was multiplied 10 times," she said, "There are strong possibilitiesthat the information given to shareholders was incorrect, misleading."
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(c) The New York Times published an article entitled "French Inquiry: Bank's
Inaction Grows as Issue," which stated in part:
The credibility of Societe Generale's management came under fresh scrutinyMonday after Jerome Kerviel told French prosecutors that his fictitious tradingstarted as far back as 2005 - a year earlier than the bank had acknowledged.
(d) The Wall Street Journal published an article entitled "The Fallout at Societe
Generale: Tasks Mount for a Point Man - Explaining Scandal Is Latest Challenge On Mustier's
Plate." The article stated in part:
Even before the trading scandal, the bank was preparing to detail fresh losseson mortgage-related investments. For the fourth quarter, in a report overshadowedby the 4.8 billion euros trading loss, Societe Generale said it would take 2.05 billioneuros in write-downs, up from only 230 million euros in the third quarter. Morecould be coming: In a recent report, Citigroup bank analyst Kimon Kalamboussisestimated that Societe Generale might have to take an additional markdown of 1.5billion euros.
(e) The Los Angeles Times published an article entitled "Trader at bank quelled
suspicion, officials say; Societe Generale was warned of risky bets by Jerome Kerviel." The article
stated in part:
Executives at French bank Societe Generale were warned about risky betsbeing made by rogue trader Jerome Kerviel two months ago ... authorities saidMonday.
Internal bank audits also flagged Kerviel's actions, "but each time he
managed to explain them," prosecutor Jean Claude Marin said. Kerviel, he added,
thought bank officials didn't probe too deeply because he was pulling in profits for
the financial institution.
Also Monday, a group of bank shareholders filed a suit accusing Robert A.Day - founder of Los Angeles-based Trust Co. of the West - of insider trading inconnection with $126 million in stock sales Jan. 9 and 10, before Kerviel's tradeswere exposed.
Day, who became a Societe Generale director after the French companybought TCW in 2001, denied the accusation through a spokesman.
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(f) Business Week published an article entitled "SocGen Had Been Warned About
Kerviel," which stated in part:
Shares in Societe Generale (SOGN.PA) swooned nearly 4% in Paris tradingon Jan. 28, to [€]71 [$104.35], as speculation mounted over a possible breakup of thebattered French bank, while the Paris prosecutor cited evidence that SocGen hadreceived multiple warnings about unauthorized transactions by rogue trader [Jerome]Kerviel that ultimately cost the bank $7.1 billion [BusinessWeek.com, 1/24/08].
Prosecutor Jean-Claude Marin, who announced the filing of attempted-fraudcharges against Kerviel, told reporters the derivatives exchange Eurex had alertedSocGen last November about questionable trades by Kerviel. Separately, several ofthe bank's internal control units also had flagged some of his trades in recent months,Marin said.
In its most detailed public explanation of the scandal to date, SocGenacknowledged on Jan. 27 that the trading positions taken by Kerviel had reachedmore than $73 billion, far exceeding the bank's roughly $50 billion marketcapitalization, by the time the bank learned of the problem over the weekend of Jan.19-20. The bank said Kerviel took advantage of his knowledge ofthe bank's internalcontrol systems, gained during his five years in back-office jobs.
The bank's explanation, however, didn't mention the warning flags raisedearlier. According to prosecutor Marin, SocGen's middle office, accountingdepartment, and risk department had raised questions about Kerviel's trades in recentmonths, as had Eurex, the derivatives exchange operated jointly by Deutsche [Borse](DB1GN.DE) and the SWX Swiss Exchange stock markets.
(g) The Financial Times (London) published an article entitled "Watchdog probes
share deals," which stated in part:
The AMF, the French financial watchdog, on Tuesday said it had launched aninvestigation into share dealings in Societe Generale.
It emerged on Monday night that RobertDay, one ofthe richest men in theUS and a member ofSocGen's board since 2002, had sold €140m ($206m) worthofSocGen shares in the two weeks before it announced €7bn ofexceptional losses.
Mr. Day and his foundation sold €45.02m ofshares on January 18 - twodays before the SocGen board met to discuss a €2.05bn writedown on its exposureto US subprime mortgages and €4.9bn of losses from the alleged rogue trader.
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(h) The Financial Times (London) published an article entitled "SocGen to call on
outside audit team for probe," which stated in part:
The Societe Generale board is set to call in independent auditors to examineevents leading to the biggest rogue trading scandal in history, as directors seek tobolster Daniel Bouton, the increasingly vulnerable chairman, ahead of a crucialmeeting today.
But the fate of Jean-Pierre Mustier, SocGen's star executive, was hanging inthe balance ahead of the meeting, as the head of corporate and investment banking isset to be grilled on what he knew of an alarm raised by Eurex, Europe's topderivatives exchange, in November.
"Our previous assumptions have to be questioned," said a director. "If theEurex warning is confirmed then there is a lot more responsibility in the organisationthan we thought."
SocGen admitted it had received letters from Eurex at the end of last yearquestioning the strategy of Jerome Kerviel, the 31-year-old trader now accused ofexposing the bank to potentially fatal unauthorised futures positions.
(i) The Guardian (London) published an article entitled "Kerviel's defence,"
which stated in part:
Jerome Kerviel, the 31-year-old rogue trader, has accused his superiors atSocGen of deliberately "turning a blind eye" to his mammoth operations in equityderivatives trading and of being part of a culture of fear.
"I can't believe that my superiors were unaware of the amounts I wascommitting, it's impossible to generate such profits with small positions," he told thepolice after giving himself up on Saturday.
He claimed to have made a "profit" of euros 1.4bn (£lbn) by the end of 2007but to have taken steps to conceal this and instead declare one of euros 55m in thehope of winning a euros 600,000 bonus. "As long as we are winning and that's nottoo obvious, that itfits in, one says nothing," he added.
Kerviel, who insisted his techniques of concealment were "not at allsophisticated" and should have been picked up by correct controls, sums up thebank's culture as "Not seen, not taken. Iftaken, you're hanged."
(j) The New York Times published an article entitled "Beyond Bank' s $7 Billion
Loss, Fear of More," which stated in part:
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Jerome Kerviel's 4.8 billion euro trading loss ($7.1 billion) had a positiveeffect for Societe Generale, at least temporarily.
"The news at Soc Gen may have masked their subprime losses," saidRichard Batty, a fund manager at Standard Life Investments in Edinburgh, usingfinancial-world shorthand for the bank.
The same day Societe Generale said that Mr. Kerviel, a rogue trader, had costit billions, it announced one of the largest subprime-related write-downs by aEuropean bank. Societe Generale, based in Paris, said it would write off 1.1 billioneuros (now $1.62 billion) related to the United States housing market and 550 millioneuros ($813 million) related to American bond insurance companies. Only UBS hasannounced a larger write-down.
Mr. Kerviel's lawyers, Elisabeth Meyer and Christian Charriere-Bournazel,told Agence France-Presse that Societe Generale aimed to "raise a smoke screen thatwould distract the public's attention from far more substantial losses that it had madein recent months, notably in the unbelievable subprime affair."
(k) The Financial Times (London) published an article entitled "Esprit de corps
keeps workers loyal to SocGen," which stated in part:
[T]he banking establishment has voiced astonishment that warnings from Eurex, theGerman derivatives exchange, about suspicious trading activity by Mr. Kerviel lastyear had not led to the earlier discovery of his unauthorised positions.
Eurex wrote several letters to SocGen in late 2007 asking for informationabout the strategy behind Mr. Kerviel's transactions. "In my firm, if we got a callfrom Eurex, there would be absolute hell to pay," says an executive in equities at aUS competitor.
173. On February 5, 2008, The Globe and Mail published an article entitled "U.S.
investigates SocGen stock sales," which stated in part:
The U.S. Department of Justice is looking into stock sales by a member ofFrench bank Societe Generale's board shortly before the bank announced billions ofdollars in losses by a single trader, a source close to the investigation said yesterday."The U.S. Attorney for the Eastern District of New York is taking the lead," thesource said, referring to the investigation of Robert Day, a board member of SocieteGenerale and investment manager of U.S.-based Trust Co. of the West.
174. Also on February 5, 2008, The Wall Street Journal published an article entitled "SEC
Probes French Bank - U.S. Investigation Of SocGen Focues On Stock Sales," which stated in part:
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The U.S. attorney in Brooklyn, New York, has also opened a criminal proberelated to Societe Generale, according to a person familiar with the matter, althoughits precise focus wasn't immediately clear. A spokesman for Societe Generale saidthe bank's New York branch was contacted by the U.S. Attorney's Office for theEastern District ofNew York Jan. 25 regarding the trading losses announced Jan. 24.The bank is cooperating fully with the investigation.
175. On February 7, 2008, additional press coverage of the scandal was published:
(a) The Wall Street Journal published an article entitled "Tax Twist in the
Trading Scandal," which stated in part:
Societe Generale says it lost 4.9 billion euros ($7.17 billion) at the hands of 31-year-old trader Jerome Kerviel. Now, the embattled French bank could face anotherfinancial hit - this time from the tax man.
As they pore over the trades, financial books and mobile-phone records ofMr. Kerviel, Societe Generale officials have discovered that the trader booked a realgain for the bank of 1.4 billion euros by the end of last year, according to peopleclose to the bank.
That profit now "is subject to corporate tax," according to one person close tothe bank. "We will argue against it, but fiscal authorities will want their share," thisperson said.
The discovery doesn't alter the bank's reported 4.9 billion euros net lossannounced three weeks ago. However, the realization that Societe Generale wassitting on a 1.4 billion euros profit - enough to offset subsequent write-downs thebank announced for its exposure to U.S. subprime mortgages - and didn't notice islikely to raise further questions about the bank's internal control systems.
Already, an internal bank committee, French prosecutors and the FrenchFinance Ministry have been trying to figure out how Mr. Kerviel could engage in hisrisky trades for so long without being detected.
(b) The Financial Times (London) published an article entitled "SEC investigates
whether SocGen breached US securities laws," which stated in part:
The US Securities and Exchange Commission is looking at whether SocieteGenerale violated US securities laws as it unwound and revealed its €4.9bn loss fromJerome Kerviel's allegedly rogue derivatives trades, the Financial Times has learnt.
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News of the probe is another blow to SocGen's capital-raising plans. Thebank's board met last night to decide the timing and terms of its emergency €5.5bncapital increase, which could be launched as early as tomorrow. It is understood thatwhen the capital increase is complete, Daniel Bouton, chairman, could decide to stepdown, according to people close to the situation.
(c) The Financial Times (London) published another article, entitled "McCreevy
condemns SocGen's `abject' failure," which stated in part:
Societe Generale was accused last night of "abject carelessness " as EuropeanUnion regulators delivered a scathing attack on the French bank's failure to preventthe biggest rogue trader scandal in financial history.
Charlie McCreevy, the EU's internal market commissioner, said it wasinexcusable that SocGen had not heeded warningsfrom Eurex, one ofthe world'sleading derivatives exchanges, about transactions conducted by Jerome Kerviel,the bank employee blamedfor the scandal.
Mr. McCreevy's remarks in a London speech amounted to the strongestpublic condemnation by any regulator of SocGen's behaviour in the affair, whichcost the bank almost €5bn ($7.3bn, £3,7bn) in net losses.
He emphatically endorsed the opinion of risk control and fraud experts whohave criticised SocGen's internal control systems, and he said it underlined the need"to reinforce the supervision of major cross-border banking groups and financialconglomerates" in the EU.
"As far as treasury and proprietary trading risk is concerned, it seems to meamazing that, despite all the lessons about controls that should have been learnt froma sequence of multi-billion dollar losses clocked up by rogue traders in severalfinancial institutions around the world over the past decade, a top-class institutionhas once again been exposed as having fundamental control weaknesses," Mr.McCreevy said. "It is inexcusable that the entire market value of a financialinstitution can be placed at risk by such abject carelessness on the part of a leadingEuropean bank, that that institution failed to heed the warnings of a significantmarket counter-party and failed to learn the lessons that rogue traders have taught usabout the checks, balances and controls that must be in place for risk to be effectivelymanaged and controlled."
The commissioner was referring to warnings that SocGen received fromEurex last November about Mr Kerviel's activities and which the bank brushedaside.
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(d) The Daily Telegraph (London) published an article entitled "SocGen days
from rights issue," which stated in part:
Mr. Bouton suffered a further blow yesterday as a former inspector of tradingoperation from 2001 to 2004, Maxime Legrand, detailed the weak controls. He toldAgence-France Presse: "Since inspectors do not have enough power in the bank, weare not given the time we need, or the means to check things out. We pretend to havean inspection to please the banking commission. That's where the hypocrisy lieswith management: everyone knows about this."
(e) The Australian published an article entitled "French trader `carried away,"'
which stated in part:
Jerome Kerviel lost $8 billion but claims his employer made him a scapegoat.
Jerome Kerviel, 31, accepted that he had made mistakes but said that he hadbeen turned into a scapegoat by his employer, Societe Generale.
In his first interview since being placed under investigation in connectionwith the biggest rogue trader scandal in history, Mr. Kerviel sought to offload blameon to the bank itself.
"I assume my share of responsibility, but I will not be the Societe Generale'sscapegoat," he said.
176. On February 8, 2008, The Financial Times (London) published an article entitled
"How Kerviel exposed lax controls at Societe Generale," which stated in part:
Moreover, it has become clear that Mr. Kerviel's managers ignored multiplewarning signs that, if heeded, would have allowed them to stop the young trader longbefore he was able to do so much damage.
However, rival executives say Mr. Kerviel's ability to avoid detection foryears suggests several glaring shortcomings in SocGen's controls. For example, thebank was not monitoring the gross trading positions he was taking but looking onlyat his net exposure, which he manipulated through fake hedging contracts. Mr.Kerviel's technique of regularly cancelling trades, or claiming to have made amistake when challenged, should have alerted his superiors that something strangewas going on. SocGen also admits it did not change its computer passwordsregularly, as standard industry practice requires.
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But financial success, and the pressure to keep performing, combined toproduce an arrogant culture. Maxine Legrand, a former trading floor inspector wholeft the bank in 2004, this week complained to Agence France-Presse that SocGen'srisk controls were weak, traders were not punished for breaking rules and theinspection team was treated with disdain on the trading floor. SocGen dismisses hisclaims. Another former SocGen employee, who left the bank in 2002 after doingwork experience for a year, says a "lack of controls" allowed him to work on a bigdebt syndication that lost the bank several hundred thousand euros through a basicmistake. "In French banks there is much less control and more risk-taking thanAnglo-Saxon firms," says the trader, who now works for a mid-sized Europeanbrokerage.
Mr Kerviel's own testimony suggests his activities were founded on somefairly basic methods to fool his superiors. He created false e-mails by reproducingthe format and header of e-mails he had received from clients, to rebuff anyquestions from the bank's internal controls team. "The techniques I used later werenot at all sophisticated, in my view: any correctly carried out control is bound to haveuncovered these operations. There was nothing Machiavellian about my behaviour,"he told police.
By last July - when the US subprime mortgage crisis was deepening - Mr.Kerviel's unauthorised short-selling strategy was proving very profitable. He wassitting on $500m profit, about which he admits he startedfeeling intimidated: "Icannot believe my superiors did not know the amounts I was investing, as it isimpossible to make these kinds ofprofits with small positions." But he was notcaughtfor several more months.
Apart from deficiencies in its own controls, SocGen missed external warningsigns about Mr. Kerviel. Last March France's banking commission, after a series ofinspections, twice wrote to Mr. Bouton about the need to reinforce SocGen'scontrols, particularly in the equity derivatives team where Mr. Kerviel worked.Then, on November 7, a surveillance officer at Eurex, the derivatives exchange, e-mailed SocGen questioning Mr. Kerviel's purchase of 1,700 Eurostoxx futures and2,000 Dax futures.
Later that month, when SocGen's human resources department alerted Mr.Kerviel's boss that he had not been on holiday for eight months except for four daysin August, he was asked to take some leave. But Mr. Kerviel told them Decemberwas the anniversary of his father's death and he did not want to be alone, persuadinghis boss that he could wait until January. "With hindsight, this was a mistake,"admits Mr. Martineau. Most investment banks require traders to take at least twoconsecutive weeks' holiday a year, which limits the scope for concealing theirpositions.
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After consulting with regulators Mr. Bouton decided to close the €50bnposition built up by Mr. Kerviel as quickly as possible. It took one of the bank's toptraders three days to do so.
Before European markets opened on Monday, shares were falling sharplyacross Asia in reaction to worries about the stability of monoline bond insurers,which could trigger more big losses for the financial sector. That day, stock marketssuffered their worst fall since September 11, 2001.
"I was in front of my trading screen that morning and could not believe whatwas happening," says Erick Tripoli, proprietary trading manager at Van der Moolen,the Dutch market maker. "It was horrible. Someone was selling a massive positionby volume, not by price. When we heard it was SocGen, we just laughed, as notrader would do such a bad job."
Mr Kerviel told police his positions had still been profitable before marketsclosed that Friday, his final day of trading. He had switched his strategy since thestart of the year to taking long positions - betting on a rise in stock markets - as hewas "convinced the market was at a low point and would rebound."
However, SocGen says his positions by that stage were €2.7bn in the red. Byselling those positions into a falling market, the losses rose to €6.3bn. But when itreported the loss, SocGen subtracted the €1.4bn profit Mr. Kerviel had made in 2007- even though it subsequently claimed his unauthorised trading had made only a"small profit" that year.
177. On February 9, 2008, The New York Times published an article entitled "2nd Trader
Emerges In Inquiry In France," which stated in part:
French investigators said Friday that they were questioning a second trader inconnection with Societe Generale's 5 billion euro ($7.1 billion) loss, the worst inhistory caused by a rogue trader.
Legal experts said the revelation that Mr. Kerviel might not have been thelone operator suggested that oversight of Societe Generale's trading room might havebeen recklessly lax. That could put added pressure on Daniel Bouton, the bank'schief executive, and other top managers to explain more fully the circumstances thatled to the losses.
"It really suggests a higher-level failure of risk management than we thoughttwo weeks ago," when the bank initially disclosed its trading losses, said ChristopherMesnooh, an international business lawyer in Paris.
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"It's one thing to overlook one person," he added, "but if it's two people thenit begins to stagger the imagination."
178. On February 11, 2008, The Financial Times (London) published an article entitled
"SocGen is accused of complicity by Kerviel lawyer," which stated in part:
The lawyer for Jerome Kerviel - the man who allegedly masterminded thebiggest rogue trading fraud in financial history - yesterday accused his employer,Societe Generale, of complicity in the scandal that has cost the bank €4.9bn ($7. lbn).
"The question we ask is: can we really speak of fraud when it seems thateveryone knew what Jerome was doing?" said Guillaume Selnet. He insisted therewas "no Jerome Kerviel organisation. He is not at the head of some network,"implying that Mr. Kerviel had worked alone but suggesting complicity on the bank'spart because it was aware of his trades.
179. On February 11, 2008, The Financial Times (London) published an article entitled
"Internal threats need to become a security priority," which stated in part:
The staggering €4.9bn loss incurred by a rogue trader at Societe Generale hasrepercussions that extend far beyond the rarefied world of derivatives trading -notably concerning IT security issues that affect many organisations.
Richard Stiennon, an IT security consultant, says: "The SocGen case is aclassic internal one, carried out by a knowledgeable insider and, technically, it wouldhave been very easy to detect."
As Mr. Kerviel told the police himself: "The techniques I used were not at allsophisticated, and in my opinion, any correctly conducted control should have beenable to detect these operations."
180. On February 12, 2008, BusinessWeek Online published an article entitled "SocGen
Sinks on Stock Issue, Writedown: The bank's Feb. 11 announcement reveals another drop thanks to
the rogue trading a scandal and subprime-related losses." The article stated in part:
Societe Generale's already-battered shares fell more than 4% in Paris tradingon Feb. 11, to [€]74.59 [$108.22] a share, after the bank announced a heavilydiscounted $8 billion capital increase to help offset losses from a rogue tradingscandal and bad U.S. real estate investments. SocGen (SOGN) shares have fallennearly 50% over the past year but had risen slightly since the scandal was disclosedJan. 24 on speculation the bank could be a takeover target.
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"We offered attractive terms in a volatile market," SocGen Chief FinancialOfficer Frederic Oudea said in a conference call, explaining why existingstockholders will be able to buy additional shares for [€]47.50 [$68.91], a 39%discount on the Feb 8 closing price. Outside investors will have to buy additionaldividend rights that would raise the cost to [€]71 [$103] per share, the bank said.
Also on Feb. 11, SocGen disclosed it suffered an additional $871 million inlosses related to the U.S. real estate market, on top of $2.9 billion in subprime-relatedlosses disclosed earlier this year. Among European banks, SocGen now rankssecond in its subprime exposure, behind UBS (UBS) - though the Swiss bank'slosses of $18 billion are much higher [BusinessWeek.com, 1/30/08].
SocGen won't release official 2007 results until Feb. 21, but it is forecastingnet earnings of $1.3 billion, down from nearly $7.8 billion in 2006.
181. On February 15, 2008, the International Herald Tribune published an article entitled
"French trader's bets said to have generated alerts," which stated in part:
Someone deeply familiar with Societe Generale's trading controls said it was"inconceivable" that Jerome Kerviel's immediate supervisors were not alerted afterhis trades set off alarm bells at Eurex, the derivatives exchange based in Frankfurt.
The person, who requested anonymity because he was not authorized to speakto the media, lent credence to claims that Kerviel made during interrogation by thefinancial police that his superiors - experienced former traders - had received clearand repeated warnings that he was trading beyond his limits.
Separately, the French daily Le Parisien disclosed Thursday that the secondstockbroker caught up in the scandal over Societe Generale's $7.1 billion loss hadtold authorities that he knew Kerviel had a "problem" with supervisors.
"I knew that he had a problem with his bosses without knowing why,"Moussa Bakir, a 32-year-old broker at Societe Generale's futures brokerage,Newedge, told the police during questioning last week, according to Le Parisien.
The statement raised new questions about when Kerviel's superiors becameaware of the scale of his unauthorized bets, and whether those bets had been thesource of his problem with his bosses.
Kerviel told the police during his own interrogation in late January that hissupervisors in the derivatives trading office - known as Delta One - had been familiarwith his overreaching limits since April.
Those supervisors were Martial Rouyere, head of Delta One, and Rouyere'sdeputy, Eric Cordelle, according to lawyers with knowledge of the case.
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"The only thing that was said to me is to manage a way to straighten it out,"Kerviel said. "The other warnings that they get after don't make them react more."
Those warnings came in November, when the surveillance office at Eurex,the derivatives exchange, sent two e-mail messages to Societe Generale's compliancedepartment questioning transactions by Kerviel over the previous seven months.
According to the person familiar with Societe Generale's control procedures,Rouyere and Cordelle, Kerviel's superiors, would have been contacted bycompliance officers at Societe Generale following up on the Eurex messages.
"A question like that, coming from outside, is something unusual," thisperson said.
Rouyere has been questioned by the authorities. A lawyer for SocieteGenerale, Jean Veil, has said he expects Kerviel's "entire hierarchy" to bequestioned.
On at least one occasion in late 2006 or early 2007, the person familiar withthe trading controls said, Kerviel made a €500,000 profit on an unspecified one-waybet.
Kerviel's role on the trading desk did not allow him to speculate with thebank's money, and he was reprimanded by his bosses, who said his profit would notbe included in the tally used to calculate year-end bonuses, according to the personfamiliar with the bank's controls.
The incident would have been sufficient grounds to fire Kerviel, this personsaid, and normally he would have been watched closely afterward.
"They should not have let Kerviel continue to take risks," he said.182. On February 20, 2008, the "Progress report of the Special Committee of the Board of
Directors of Societe Generale" (the "Special Committee Report") stated in part:
- [T]he absence of certain control measures for which no provision was made andwhich would have been liable to identify the fraud, essentially within OPER;
No control exists over cancelled or modified transactions or overtransactions with a deferred start date, or over transactions with technicalcounterparties, or over positions with a high nominal, or over non-transactionalflows during a given month, all analyses which would probably have allowed thefraud to be identified.
3. MOTIVES AND POTENTIAL COLLUSION
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... [W]e have not identified any indication of embezzlement offunds. Itnevertheless appears that JK might have been able to take advantage of his fraudulentactivities in order to increase his "official" P&L and therefore to increase indirectlythe amount of flexible compensation that could be claimed by him for 2007.
(Emphasis in original.)
183. The Special Committee's progress report found that the Company had received
dozens of alerts as to Kerviel's conduct. Specifically, the report found that the Company received
six alerts between January 2007 and January 2008 regarding what were called "control of input."
These included a transaction that purportedly occurred on a Saturday, when the markets were closed.
The Company received 11 alerts between January and October 2007 regarding discrepancies in
Kerviel's "front-back spreads/buffer banks" that warned, for example, that Kerviel had failed to
supply the name of the broker for given trades. The Company received 13 alerts between March and
October 2007 regarding "gateways," which flagged, among other things, the high nominal value of
Kerviel ' s transactions . In February 2007, SocGen received an alert of a discrepancy in a trade
Kerviel claimed with FIMAT Frankfurt. The Company received four alerts between June 2006 and
August 2007 regarding problems with "settlement/delivery," reporting further discrepancies in
Kerviel ' s trades. In December 2007, SocGen was alerted to an unusually high commission (€1.2m)
related to one of Kerviel's trades. Between December 2006 and June 2007, SocGen was warned on
five occasions of cumulative discrepancies in Kerviel's trades in excess of €3.5 billion. The
Company received alerts seven times between January and December 2007 regarding tens of billions
of euros in discrepancies between various accounts related to Kerviel. In July 2007 and January
2008, SocGen was notified of anomalies regarding counterparty risk, including that Kerviel had
exceeded the Company's internal risk limits. Finally, SocGen generated 24 alerts between July 2006
and September 2007 regarding market risk, including that Kerviel's Delta One desk had exceeded its
stress test limit for risk.
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184. On February 20, 2008, The New York Times published an article entitled "Document
Says Trader's Rogue Bets Began in Summer," which stated in part:
New details about the actions of a former trader accused ofmaking billions ofdollars of unauthorized bets at the French bank Societe Generale showed that heexposed the bank to a significant trading loss in July, six months earlier than the bankhas acknowledged.
According to a French court document obtained by The International HeraldTribune, the trader, Jerome Kerviel, exposed the bank to a trading loss of 2.156billion euros ($3.16 billion) as of July 31, and a profit of 500 million euros a monthlater, on Aug. 31.
Societe Generale, which is preparing to release on Wednesday the findings ofits inquiry into the unauthorized trades, has revealed details of Mr. Kerviel's profitsand losses dating back only to Dec. 31. The bank has said it booked 1.4 billion eurosin profit in the fourth quarter from his unauthorized trades, and lost 4.82 billion eurosin January from unwinding his bets.
Melody Jeannin, a Societe Generale spokeswoman, declined to comment onany gains or losses linked to Mr. Kerviel's trading positions beyond what the bankhas already publicly disclosed. Ms. Jeannin also would not say whether thediscovery of the trading losses and gains for July and August might lead the bank torestate its financial results for the third quarter.
According to the document, Mr. Kerviel entered eight large transactions intothe bank's computers on Dec. 12, consisting of four purchases of unspecifiedfinancial instruments and four sales. It was the eventual unwinding of these eightoperations from Jan. 21 to Jan. 23 that led to the loss of 4.82 billion euros (more than$7 billion) announced last month.
The timeline indicates that Mr. Kerviel continued to place new unauthorizedbets after his supervisors were alerted to potential problems. Eurex, the Germanbourse, communicated with Societe Generale's compliance department from Nov. 7to Dec. 10 over the exchange's questions about Mr. Kerviel's trading activities.
Risk management experts said the futures markets where Mr. Kerviel wasactive were liquid, with daily trading volumes valued in the hundreds of billions ofdollars. This allows individual traders to assume very large positions withoutdrawing much attention. Still, a loss of the size that was on Mr. Kerviel's tradingbook in July would have been unlikely to escape notice in Societe Generale's backoffice, they said.
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"Large losses would have implied very large margin calls, which the bankwould have had to cover in cash," said Jean Dermine, a specialist in asset andliability management at Insead, a leading French business school.
185. On February 21, 2008, White Collar Crime Prof Blog posted an article entitled
"Societe Generale Isn't Too Hard On Itself Despite Losing $7.2 Billion," which stated in part:
When you are the victim of a $7.2 billion fraud perpetrated by an employee,one would think that there would be a fair measure of self-criticism for not detectingthe misconduct. French banking giant Societe Generale issued an [sic] progressreport ... on its internal investigation, called "Mission Green," into the losses causedby rogue trader Jerome Kerviel, based on the work of its General Inspectiondepartment - which sounds like the equivalent of the internal auditors - andreviewed by PriceWaterhouseCoopers. While Kerviel's unauthorized trades began in2005 or 2006, they increased substantially in size in March 2007, and wentundetected until mid-January 2008. That's nine months in which he tookincreasingly risky positions, estimated to total as much as 50 billion euros at thepeak.
The obvious question is how Kerviel could get away with trading such hugeamounts when he was a fairly low-level trader dealing in a narrow range of marketindexes. The progress report is not particularly critical, making Kerviel's trading theresult of what almost seems like just minor oversight glitch ....
Societe Generale may give itself only a B- in the internal controls department,but it's hard to see any oversight system that misses such a large amount ofunauthorized tradingfor nearly nine months as anything other than a [sic] abjectfailure. The bank continues to maintain that Kerviel acted alone, and to this point ithasn't identified any accomplices nor even any theft or personal enrichment from thetrading. Kerviel admitted his role in the transactions, but asserts that there werewarning signs about what he was doing that were ignored by his superiors, orperhaps even worse, they acquiesced in his conduct because at one point he hadgenerated profits for Societe Generale of over 1 billions [sic] euros.
IX. DEFENDANTS' SCIENTER
A. Defendants Knew of or Recklessly Disregarded Numerous Red FlagsIndicating that Kerviel Was Engaging in Unhedged DirectionalTrades and that SocGen Lacked Adequate Risk Control ManagementSystems
186. Based on numerous red flags that SocGen received throughout the Class Period,
SocGen either knew or recklessly disregarded that its traders were engaged in highly risky unhedged,
directional trades, well above their authority levels, and that its risk control management systems
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were seriously flawed. The failure of its risk control management systems allowed Jerome Kerviel -
a 31-year-old junior trader on the Delta One desk - to place €50 billion of unhedged, directional
trades, which, when ultimately unwound, resulted in a €4.9 billion loss for the Company. Indeed,
SocGen clearly knew about Kerviel's trades at least as early as February 2007, when it was notified
of an issue with certain Kerviel trades by the FIMAT Frankfurt. SocGen also received warnings
from more than one market exchange and the Bank of France beginning at least by March 2007.
However, because Kerviel's trading was highly profitable for SocGen up through 2007, the
Company refused to take any action.
187. Defendants knew or recklessly disregarded that their statements about SocGen's
internal controls, including its risk control management systems, were demonstratably false and
misleading based on an April 16, 2007 internal e-mail addressed to Kerviel's supervisors that
identified €94 million in fictitious transactions conducted by Kerviel. The April 16, 2007 email was
written by the Director of the "Middle Results" department, Maureen Auclair, and was addressed to
Kerviel's superiors. Auclair also sent a copy of the e-mail to several financial controllers, and
Auclair's supervisor, Maia Miori-Otai, was also informed. The e-mail includes the following:
This email is to inform you that we have a FO/CO difference of 88 mill Euros[between what is reported by the trader and the accounting value] on three June daxfutures of the gop 2A [products purchased on the German market - the Dax being theFrankfurt stock market index. The gop 2A is Jerome Kerviel's operating center] and6 mill Euros on a Forward [product that is negotiated over the counter] bookedagainst Click Option on 03/30/2007 . . . those futures/FWD [forwards] are"fictitious" transactions.
188. Shortly thereafter, the Company held an "emergency meeting" to discuss how to
account for transactions such as those identified in the Auclair e-mail which had no economic
reality. Attendees of this meeting included, inter alia , Auclair, Miori-Otai and Vincent Guyot, one
of Kerviel' s supervisors.
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189. At this emergency meeting, when Kerviel was asked to explain his trades, Kerviel
admits that he "invent[ed] a lie." In its report, the Green Commission, which was charged with
auditing SocGen after the Kerviel Fraud had been revealed, concluded that Kerviel's on-the-spot
explanation of the fictitious transactions was not credible. These fictitious trades created an
accounting gap that reached €2.2 billion by late June-early July 2007.
190. In March and April 2007, inspectors from the Bank of France sent two separate
letters to SocGen CEO Bouton, warning him that SocGen's risk control system/security procedures
for certain financial derivatives - the area in which Kerviel was trading - were "wanting" and
providing Bouton with its recommendations. (Feb. 5, 2008 Globe and Mail article entitled "Shape
Up.")
191. Also in 2007, both the derivative exchange Eurex and the SWX Swiss Exchange
specifically warned SocGen about Kerviel's trading activities. According to a Jan. 29, 2008
BusinessWeek article entitled "SocGen Had Been Warned About Kerviel," in November 2007,
SocGen received an unusual Eurex alert questioning trades by Kerviel:
The first e-mail message arrived in Societe Generale's offices on Nov. 7. Thesurveillance office at Eurex, one of the biggest European exchanges, alerted acompliance officer at the bank that for seven months a trader named Jerome Kervielhad engaged in not just one but "several transactions" that had raised red flags.
Societe Generale, taking its time, responded on Nov. 20, when another risk-control expert at the bank replied that there was nothing irregular. "The recentvolatility increase on the U.S. and European stock markets explain our new need forafter-hours trading," the bank official wrote about Kerviel's trades, according to e-mail messages reviewed by the International Herald Tribune and The New YorkTimes.
A second e-mail message from Eurex came on Nov. 26. Not accepting thebank's explanation, the bourse demanded more detail. Societe Generale provided iton Dec. 10 - and both Eurex and the bank's own risk managers let the matter ofKerviel's trades drop.
By the time Kerviel set off another alarm on January 18, five weeks later, it was toolate.
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192. Significantly, these were not vague or generalized warnings . Rather, as was
highlighted in a February 6, 2008 International Herald Tribune article entitled: "A suspicion in
France `That This Was Inevitable;' Culture of Risk Led Societe Generale to Neglect Warning Signs
from Traders," the Eurex was very specific in regard to Kerviel's trades:
Kerviel's method of entering trades was one red flag cited by Eurex in itsinitial warning, along with questions about two "large" positions - one net shortposition in DAX futures and one net long position in Euro Stoxx 50 futures. In thesame letter, they asked what his investment strategy was and why these transactionswere often entered through a London-based Societe Generale subsidiary calledFIMAT Futures Limited. Eurex even inquired whether Kerviel had entered thetransaction automatically or manually.
"Please explain the background for this procedure," two officials from Eurexwrote to Xavier de la Maisonneuve, a compliance officer at Societe Generale whohas been questioned by investigators.
Vincent Duclos, another compliance officer in the equity derivatives division,who has not yet been questioned by the police, provided the Nov. 20 and Dec. 10responses to Eurex. His replies in part were based on accounts provided by Kervieland his supervisor, as well as a compliance officer at FMAT, said Jean Veil, alawyer for Societe Generale. Kerviel's "supervisor had signaled that there was noanomaly whatsoever," Veil said.
193. SocGen also received a number of warnings from within the Company itself that, had
SocGen's risk controls been properly working as it publicly claimed, would have alerted SocGen's
management to Kerviel's trading. Indeed, as Kerviel himself has acknowledged, his failure to take
vacation time, as required by SocGen, should have been warning enough. According to a February
4, 2008 Associated Press article entitled "How to Lose $7.2 billion," Kerviel only took four days of
vacation in 2007. As Kerviel himself explained , "It is one of the first rules of internal controls: a
trader who doesn't take holidays is a trader who doesn't want his books to be seen by others."
194. SocGen subsidiary FIMAT, which is one of the brokerage houses that Kerviel used to
make his trades, also launched an investigation into the regulatory conformity of Kerviel's
transactions that, according to the May 20, 2008 Mission Green Report, should have led to SocGen
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to discover Kerviel ' s improper trading. FIMAT' s investigation suggested that SocGen should be
contacted in order to discuss the increase in execution volumes allowed by SocGen's Investment
Banking division.
195. Moreover, the sheer volume of Kerviel' s earnings between 2006 and 2007 alone
should have alerted Kerviel's supervisors to the magnitude of his trades. Indeed, Kerviel's direct
supervisors knew, on at least one occasion, that Kerviel had made €500,000 on an unspecified, one-
way (i.e., unhedged) trade. While Kerviel was reprimanded, he was permitted to keep trading.
According to the Mission Green Report, between 2006 and 2007, Kerviel's earnings increased
dramatically, eventually growing large enough to represent 59% of the earnings of Delta One desk
listed products. Additionally, Kerviel's weighted earning in proprietary trading grew from
representing 0% of Delta One's proprietary earnings in 2006 to representing 22% of Delta One's
proprietary earnings in 2007. However, because SocGen was profiting from Kerviel's trading
activity at that point in time, SocGen ignored the magnitudes of Kerviel's trades.
196. According to the Mission Green Report, an analysis of the cash flow of Kerviel's
principal operational center would also have revealed Kerviel's unusually high trading activities, as
the cash flow level did not correspond to the activity for which Kerviel had authorization. For
example, the equity derivatives division treasurer provided Kerviel with two €500 million loans.
This information was communicated to Kerviel's Delta One manager, yet no action was taken.
197. Notably, SocGen ' s Middle Office, accounting department and risk department each
raised questions about Kerviel's trades in the months leading up to the Company's €4.9 billion loss.
This is not surprising given that Kerviel, who made nearly 1,000 unauthorized transactions
beginning in 2005, had been the "subject of more than 70 `alert' warnings" at SocGen. (May 28,
2008 National Post's Financial Post & FP Investing article entitled "Investors boo, jeer SocGen.")
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Additionally, SocGen management tolerated Kerviel making "intraday" trades, "even though such
transactions were `unjustified' given his job assignment and experience level." Alarmingly, between
January and April 2007, Kerviel "was virtually unsupervised after his immediate manager resigned."
(June 2, 2008 Computer World article entitled "Inside Job Highlights IT and oversight failures at
bank.")
198. According to the February 20, 2008 Special Committee Report, the Company had
received dozens of alerts regarding Kerviel's conduct. Specifically, the report found that the
Company had received six alerts between January 2007 and January 2008 regarding "control of
input." These included a transaction that purportedly occurred on a Saturday, when the markets
were closed. The Company received 11 alerts between January and October 2007 regarding
discrepancies in Kerviel's "front-back spreads/buffer banks" that warned, for example, that Kerviel
had failed to supply the name of the broker for certain trades. The Company received 13 alerts
between March and October 2007 regarding "gateways," which flagged, among other things, the
high nominal value of Kerviel ' s transactions . In February 2007, SocGen received an alert of a
discrepancy in a trade Kerviel claimed with FIMAT Frankfurt. The Company received four alerts
between June 2006 and August 2007 regarding problems with "settlement/delivery," reporting
further discrepancies in Kerviel's trades. In December 2007, SocGen was alerted to an unusually
high commission (€l.2m) related to one of Kerviel's trades. Between December 2006 and June
2007, SocGen was warned - on five different occasions - about cumulative discrepancies in
Kerviel' s trades in excess of €3.5 billion. The Company received alerts seven times between
January and December of 2007 regarding tens of billions of euros in discrepancies between various
accounts related to Kerviel. In July 2007 and January 2008, SocGen was notified of anomalies
regarding counterparty risk, including that Kerviel had exceeded the Company's internal risk limits.
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Finally, SocGen generated 24 alerts between July 2006 and September 2007 regarding market risk,
including that Kerviel's Delta One desk had exceeded its stress test limit for risk.
199. As a former SocGen inspector of trading operations, Maxime Legrand, explained,
SocGen's management was aware that the Company's internal controls were woefully inadequate:
Since inspectors do not have enough power in the bank, we are not given thetime we need, or the means to check things out. We pretend to have an inspection toplease the banking commission. That's where the hypocrisy lies with management:everyone knows about this.
(Feb. 7, 2008 The Daily Telegraph (London) article entitled "SocGen days from Rights issue.")
200. Others have also suggested that SocGen must have been reckless in maintaining its
internal and risk controls. For example, legal experts have stated that the revelation that Kerviel
might not have been the lone operator suggests that oversight of SocGen's trading room may have
been recklessly lax. As Christopher Mesnooh, an international business lawyer in Paris, explained,
this revelation "suggests a higher-level failure of risk management than we thought two weeks ago,"
when the bank initially disclosed its trading losses. (Feb. 9, 2008 New York Times article entitled
"2nd Trader Emerges in Inquiry in France.")
201. Given the numerous external and internal red flags raised regarding Kerviel' s trading,
SocGen either knew or recklessly disregarded that its traders, like Kerviel, were taking much higher
risks than the Company was willing to publicly disclose.
B. Defendants Knew of or Recklessly Disregarded Numerous Red FlagsIndicating that SocGen's RMBS/CDO Portfolio Was MateriallyOverstated
202. Throughout the Class Period, Defendants were aware of, or with extreme recklessness
disregarded, information demonstrating that SocGen's CDO/RMBS portfolio was highly illiquid and
was materially overvalued. Despite their knowledge or reckless disregard of this information,
Defendants accumulated large concentrations of these risky, illiquid assets in direct contravention of
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their explicit statements to the market that SocGen followed "a policy of diversification of the
portfolio of businesses, improved risk management techniques and hedging of high-risk exposure,"
all as part of its "strict risk management policy." (2007 Reg. Doc.). In fact, Defendants continued to
accumulate CDOs/RMBS as late as summer 2007 in order to "stay in the game," even though
SocGen knew that there was no assignable value or market for these securities.
203. Confidential former employees of SocGen and its various subsidiaries, with whom
Plaintiffs conferred in drafting this Complaint, provided information confirming Defendants'
knowledge regarding problems in the subprime mortgage market during the Class Period.
204. CW 1, a SocGen-New York Vice President ofFICC Analytics who was employed by
SocGen-New York from January 2006 to November 2007, was primarily responsible for: (1)
creating and analyzing market risk reports for products in SocGen-New York's RMBS/CDO
portfolio and (2) analyzing SocGen-New York's VaR portfolio performance. According to CW1,
the purpose of these analyses was to assess the degree of risk to which these portfolios were (or were
foreseeably) exposed. CW1 recorded the results of his/her analyses in Daily Reports, which s/he
submitted via e-mail to executives, including CW1's immediate supervisor, Director of FICC
Analytics Jean-Francois Flobert or Delphine De-Chaisemartin (depending upon the time period), and
Director of FICC Americas Paolo Taddonio.
205. According to CW1, by mid-2007 at the latest, SocGen-New York began experiencing
significant problems relating to the CDO and RMBS markets. In particular, the value of underlying
RMBS loans began to decline rapidly, competitors began to announce write-offs for their CDO and
RMBS assets and credit rating agencies began downgrading the ratings for CDO and RMBS
products. According to CW1, as a result of these negative developments in the CDO and RMBS
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markets, trading of these products declined significantly, causing CDO and RMBS assets to
effectively become illiquid.
206. In mid-2007 (at the latest), in response to the deteriorating RMBS and CDO markets,
SocGen executives in Paris directed that the VaR analysis that had previously been conducted in
New York be undertaken, instead, by SocGen' s Paris operations . According to CW 1, this transition
occurred so that the executives in Paris could have "more control" over the VaR analysis.
207. According to CW1, another way that SocGen responded, in mid-2007 (at the latest),
to the declining RMBS and CDO markets was to transition from valuing these assets using the mark-
to-market valuation method to the mark-to-model valuation method. Prior to mid-2007, SocGen had
valued its CDO and RMBS assets using mark-to-market principles, under which the values ofCDO
and RMBS portfolios were determined and assigned based on existing market prices of securities
exchanged in global markets. However, according to CW1, as the market for CDO and RMBS
products began rapidly diminishing, SocGen adopted the mark-to-model valuation method in
instances where no viable and active market existed by which to monitor and determine values.
According to CW1, in this mid-2007 time frame, SocGen-New York's FICC division was having
"serious problems with liquidity" and was "not getting many quotes for many products."
208. According to CW 1, in mid-2007 (at the latest), SocGen also dissolved the New York-
based CDO Group, which was responsible for the purchasing and "warehousing" of mortgages that
would ultimately be securitized and offered on the market via various financial instruments. CW1
believes that the dissolution of this group was another indicator that the market for CDO and RMBS
products was no longer viable.
209. According to CW1, another change that occurred in mid-2007 (at the latest) was that
SocGen-New York's office stopped using the ABX Index as a tool for assessing how its RMBS
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portfolio was performing. The ABX Index tracks the performance of a variety of RMBS products
and serves as a barometer that allows investment banks to determine how other RMBS are
performing in the marketplace. The ABX Index also tracks the cost of buying and selling
"insurance" (in the form of credit default swaps) for RMBS products. According to CW1, this
tracking of the buying and selling of insurance for RMBS products was a critical indicator because,
if the cost for purchasing insurance for RMBS assets rose, this indicated that the market believed that
RMBS products were becoming riskier and more volatile . In mid-2007 (at the latest), as the cost of
this insurance began rising precipitously , which, according to CW 1, clearly showed that SocGen-
New York's RMBS valuations needed to be reduced, SocGen-New York abruptly discontinued its
prior practice of relying on the ABX Index as a tool for tracking the performance and value of its
RMBS portfolio.
210. Information gained from CW2 further demonstrates Defendants ' knowledge of the
problems in the subprime mortgage market during the Class Period. CW2 was employed by
SocGen-New York from April 2004 to January 2008 as Director of IT for Capital Markets (which
included the FICC and Global Equities Derivatives divisions). As IT Director, CW2 was responsible
for managing and implementing the IT systems in the Company's New York operations. During the
Class Period , CW2 reported directly to Chief Investment Officer Sergio Leifert. Leifert reported to
Director of FICC Americas Paolo Taddonio , who, in turn, reported to CEO of SGCIB Jean Paul
Mustier.
211. CW2, like CW1, recalls that during the Class Period SocGen executives in Paris
issued a directive to move the VaR process from New York to Paris.3 CW2, who was directly
3 While CW1 recalls that this transition occurred by mid-2007 at the latest, CW2 recalls, morespecifically, that it occurred in late 2006.
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involved in the transition process, corroborates CW1's belief that the transition of the VaR process
from New York to Paris occurred so that the Executive group in Paris could exercise more control
over the VaR analysis.
212. From March 2007 through the summer of 2007, CW2 participated in regular budget
meetings with Leifert and Taddonio to discuss the annual budget for IT. During a meeting in March
2007, CW2 recalls that additional funds were being allocated to the IT budget. However, CW2
recalls that in mid-2007, the IT budget was suddenly reduced by 20%. CW2 stated: "in the 30 years
I've been in the business, I had never seen such a dramatic drop off' in terms of budgets reductions.
Through CW2's conversations with other employees in the New York office, CW2 learned that the
drastic budget reduction for the IT department was not unique, but rather, reflected overall budget
reductions for all operating groups, which were being implemented throughout SocGen's North
American operations. According to CW2, it was widely known that the reason for these budget
reductions was based, at least in part, on the collapse of the United States residential mortgage
market.
213. CW2 also has pertinent information concerning SocGen-New York's CDO Group.
According to CW2, SocGen-New York only acquired CDOs through their underwriting (structuring)
activity. As CW2 explained, SocGen-New York's CDO Group, which consisted of approximately
100 employees, including Taddonio, Carlos Benito and Dansby White, acquired CDOs and bonds
(which were possibly mortgage-backed) through a third party and then warehoused those assets. The
CDO Group then packaged and structured the CDOs and bonds. Once the CDOs and bonds had
been packaged and structured by the CDO Group, they were sold to investors as SocGen-structured
CDOs. It was SocGen-New York's practice, however, to retain a portion of the CDOs from each
underwriting. In other words, according to CW2, SocGen-New York would not acquire or sell any
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CDOs via "proprietary trading" (i.e., simply buying or selling CDOs in the market). According to
CW2, while CDO underwriting was supposed to be a significant part of SocGen's "TGV" initiative,
"it turned out to be a train wreck," as it was clear that SocGen was late to the game.
214. CW2 further recalls that either late in the first quarter of 2007 or early in the second
quarter of 2007, the CDO Group had purchased and warehoused a substantial number of CDOs and
bonds that it intended to restructure and resell as its next CDO offering. However, according to
CW2, by mid-2007 at the latest, it was abundantly clear that the CDO Group would be unable to sell
any of these CDOs, as the market had completely dried up, rendering the CDOs virtually illiquid.
CW2 viewed this to be a very strong indicator that the CDO market was shot.
215. In this same time frame, CW2 recalls that Carlos Beneto, Head of CDO Structuring,
and Arno Denies, Head of RMBS, both of whom reported directly to Taddonio, issued an urgent
mandate that the IT department change the parameters of its valuation models (within the Calypso
system) in order to obtain a realistic valuation of the CDOs. According to CW2, for a two-week
period during the late Q1 early Q2 2007 time frame, the IT department worked around the clock,
running hundreds of different valuation models, in an attempt to obtain a proper valuation for the
CDOs. However, according to CW2, the IT department's efforts were to no avail because even
changing the model's parameters (e.g., recovery rates, default rates, and plugging in broker quotes)
did not allow SocGen to obtain an accurate valuation for the CDOs. In fact, CW2 recalls attending a
meeting, which was also attended by Taddonio, where the participants specifically discussed the fact
that none of the various valuation models that they had tried were working.
216. According to CW2, there was a lot of interaction between SocGen-New York and the
Company's Paris office. For example, CW2 recalled that SocGen-New York sent VaR and P&L
reports to the Paris office on a daily basis. Through these reports, SocGen Paris could see cash
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shortfalls and the deteriorating performance of the securities. CW2 also recalled that Mustier
typically visited the New York office once a month (and never visited the New York office less than
two times during any given quarter), primarily to meet with Taddonio.
217. According to CW2, during Mustier's visits to New York, Mustier held quarterly or
semi-annual "Town Hall meetings," which were attended by all personnel in the New York office.
During these meetings, Mustier discussed the performance, outlook and strategy for the North
American operations . During a November 2007 Town Hall Meeting , Mustier told the attending
employees that there was "no doubt that half of you ... should be fired and the other half should get
raises. " CW2 believed that Mustier' s comments concerned the various ways in which individuals
working within SocGen-New York's office had responded to the adverse economic conditions that
existed. During this same meeting, Mustier acknowledge that, given the negative economic
conditions that SocGen currently faced, he too might not have a job in 2008.
218. CW3's recollections further confirm Defendants' knowledge of problems in the
subprime market during the Class Period. CW3 worked at SocGen-New York from July 2007 until
July 2008 in the CMBS group and reported to CMBS Group Manager Preston Kibbe.
219. When CW3 first joined SocGen-New York in July 2007, s/he worked in the CMBS
group's loan origination and underwriting department, where s/he was responsible for purchasing
commercial mortgages, which would eventually be securitized and offered on the market in financial
instruments such as CDOs. However, according to CW3, after working at SocGen-New York for
only a couple of months, the loan origination and underwriting department in which CW3 worked
was disbanded "due to the credit crunch."
220. Information obtained from CW5 further bolsters Plaintiffs ' allegation that Defendants
knew of problems in the subprime market during the Class Period. CW5 was employed by SocGen-
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New York from July 2006 to January 2007 as a Vice President in the Structured Asset Group. CW5,
who reported to Managing Director of Fixed Income Sales and Trading Robert Caliendo, was
primarily responsible for selling RMBS and synthetic CDOs structured by SocGen, as well as CDOs
structured by other companies where SocGen provided the financing.
221. According to CW5, during the Class Period, investors/customers were typically
unwilling to buy the top (super senior/AAA tranch) or middle (Mezzanine tranch) pieces of
SocGen's CDOs until the bottom and most risky piece, the equity tranch, was sold. However, as
CW5 explained, as 2006 progressed, SocGen, as well as other arrangers, had greater difficulty
finding investors/customers who were willing to purchase these risky equity tranches. Equity
investors increasingly wanted to short the deals simultaneously.
222. CW5 believes that, in order to deal with this problem, SocGen engaged in a short sell
scheme that made it appear as though a willing investor had purchased the equity tranch of the CDO
unconditionally. CW5 explained that this would have allowed SocGen to then sell the remaining
tranches of the CDO to its investors/customers. CW5 believes that SocGen had an agreement with
Magnetar, or a similar Wall Street hedge fund, whereby Magnetar agreed to purchase the equity
tranch of the CDO on the condition that Magnetar would then be allowed to "short" the CDO via a
credit default swap (CDS). As CW5 explained, SocGen would then sell the remaining tranches of
the CDO to its investors/customers . According to CW5, the heads of SocGen-New York, including
Taddonio and Randy Fairhurst, would surely have been aware of this scheme.
223. CW5 also explained that by the end of 2006, it was common knowledge within
SocGen that CDO and RMBS assets had become illiquid. According to CW5, s/he attended weekly
sales meetings , which were held at the beginning of the week. CW5 recalled that while his/her
product manager, Abner Figueroa, ran these sales meetings, both Taddonio and Dansby White
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sometimes attended. According to CW5, during these meetings Figueroa always told the sales staff,
including CW5, that they needed to sell the CDO and RMBS products . However, according to
CW5, it became increasingly difficult to sell these products because the market was showing signs of
an imminent collapse.
224. CW5 recalled that at these sales meetings, or by e-mail prior to the meetings, the sales
staff would receive inventory reports showing which RMBS and CDO products needed to be sold.
CW5 remembered that the inventory reports also showed which assets had been sold, at what price,
class, rating , etc. According to CW5, the turnover of RMBS and CDO products decreased
dramatically throughout 2006. CW5 recalls that the other sales staff repeatedly told Figueroa that
the RMBS and CDOs were "crap."
225. CW5 explained that another way in which SocGen was aware of the deteriorating
value of its CDOs was through the monthly cash reports that it received. According to CW5, these
monthly cash reports showed how much cash was being received on the CDOs that SocGen held in
its portfolio. CW5 explained that by the end of 2006, it was clear that defaults had increased
dramatically.
226. CW5 also recalled that during the Class Period s/he received many complaints from
investors/clients who had purchased SocGen RMBS and were upset the RMBS were falling in price.
227. CW6, who worked at SocGen-New York from January 2007 to March 2008 as a
Senior Operations Specialist in Whole Loan Administration Group, also provided Plaintiffs with
additional information evidencing SocGen' s awareness of problems in the subprime mortgage
market during the Class Period. According to CW6, during the Class Period, s/he was primarily
responsible for administering and securitizing pools of subprime loans.
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228. CW6 recalled that as early as mid-2007, s/he recognized that "things were not going
well" with SocGen-New York' s securitized subprime loans. According to CW6, when SocGen-New
York acquired subprime loans from mortgage companies, it insisted upon a contractual term
whereby the mortgage company that sold SocGen-New York the loan agreed to repurchase the loan
if the pool of subprime loans that it had sold to SocGen-New York failed to perform according to the
parties' previously agreed upon expectations. CW6 explained that in the mid-2007 time frame,
CW6's group sent out numerous claim letters to mortgage companies asking them to repurchase
subprime loans that were underperforming . However, according to CW6, these companies refused
to repurchase the subprime loans, claiming that they lacked the funds to do so.
229. According to CW6, in late 2007, even though SocGen was fully aware that subprime
loans were performing poorly and that the RMBS market was becoming increasingly illiquid,
SocGen-New York continued to securitize these loans. CW6 explained that SocGen-New York
continued to securitize these loans - "but [it] knew there was no market" - because SocGen was
determined to "stay in the game" by keeping up the appearance of having an active underwriting
operation . In CW6' s opinion, acquiring and securitizing loans under the macroeconomic conditions
that existed in late 2007 was "the most insane thing [s/he'd] ever heard." According to CW6, the
Whole Loan Administration Group in which s/he worked was ultimately shut down because it
"sustained a lot of losses in subprime."
C. The Government Investigations Pursued by U.S. and FrenchGovernment Agencies Further Support Plaintiffs ' ScienterAllegations
230. Following SocGen's January 24, 2008 press release announcing the fraud, a number
of governmental agencies in both France and the United States initiated investigations of the
Company. The agencies that have launched investigations include, the French Finance Minister, the
French Banking Commission, the AMF, the SEC and the U.S. Attorney for the Eastern District of
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New York. The various investigations concern events relating to the Kerviel and Subprime Frauds.
In addition SocGen also authorized the General Inspection Department to investigate the Kerviel
Fraud.
1. The French Finance Minister Investigation
231. French Finance Minister Christine Lagarde conducted a seemingly cursory
investigation into SocGen's misconduct relating to the Kerviel Fraud. However, even Lagarde's
report, which was published merely eleven days after the Company' s announcement , faulted
SocGen's internal controls. The Lagarde report made the following findings regarding Kerviel's
trades:
• The operator carried out unauthorised operations beginning in 2005.
• In 2006, these operations remained marginal. However, during 2007, theseoperations increased precipitously, reaching approximately €30 billion by theend of the year.
• In November 2007, Eurex questioned SocGen about the trades made by "theoperator in question."
• In January 2008, the real positions reached €50 billion on futures onEurostoxx, €30 billion, Dax, €18 billion and FTSE 100 €2 billion.
• The question has to be asked whether, given the exceptional nature of theevents, the Government should have been informed before the morning ofJanuary 23, 2008.
• Given the exceptional nature of the situation and the consequences that itcould have had for the stability of the financial system, it would, withoutdoubt, have been advisable for the Government to have been informed beforeWednesday, January 23, 2008.
• In the future, it would be appropriate to clarify the communication betweenthe authorities and the Government in this type of situation to avoid alluncertainty on the method of information, the timing of this information andthe rules of absolute confidentiality which are necessary.
(Feb. 4, 2008 Times Online article entitled "The Lagarde Report: Key Findings.")
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232. After delivering her report to the French Prime Minister, Lagarde publicly stated:
"[v]ery clearly, certain mechanisms of internal controls of Societe Generale did not function, and
those that did were not always followed up with appropriate changes." (Feb. 5, 2008 Washington
Post article entitled "French Official Scolds Bank; Report Criticizes Internal Controls Not
Management.")
2. The French Banking Commission Investigation
233. After concluding its investigation of SocGen, the French Banking Commission fined
the Company €4 million for serious failings in its internal controls - the largest fine ever imposed by
the Commission for such breaches. Indeed, the fine "reflects the scale of systemic and managerial
short-comings identified" by the commissions' investigators. (July 5, 2008 FT. coin article entitled
"French Regulator Fines SocGen €4M.") Moreover, the "regulator reprimanded SocGen
management for allowing the failings in its controls systems to persist for so long despite numerous
internal warning signs." Id.
234. The French Banking Commission ' s investigation also revealed a number of violations
of French Banking and Financial Regulation Committee amended regulation 97-02. According to
the Commission, "serious failures have taken place in the follow-up and the control of the first
level." Commission Report at 1. In discussing the profits that Kerviel's trading initially garnered in
2007, the Commission pointed out that "there was not an adequate analysis of the source of the
profits posted by [Kerviel], in spite of the fact that these very favorable incomes seemed difficult to
explain by the only operations that he was authorized to carry out, especially in the market
conditions that prevailed in the 4th quarter of 2007." Id.
235. The Commission next noted that "the internal procedures , designed for the control of
market risks, were not well adapted to the follow-up of operational risk and have made it possible for
maneuvers of concealment to go undetected." Id. at 2. SocGen' s "insufficient taking into account of
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the operational risk and in particular of the risk of fraud" led the Commission to conclude that
SocGen "did not meet the requirements contemplated by" articles 5 and 32 of Regulation 97-02. Id.
SocGen also violated article 7-1, according to the Commission, as "the operators of the `Delta One'
desk benefited from broad rights to create, modify and delete operations in the data processing
application." Id.
236. Notably, the Commission also discovered that an internal SocGen report received by
management revealed that "the measures dedicated to the permanent control were insufficient in
both qualitative and quantitative terms, with regard to the necessity of preventing operational risk."
Id. at 3. Attempting to assign the blame for its inadequate risk controls on budget constraints,
SocGen's internal report stated that "`the relaxation of the budgetary constraints in 2007 should have
been prolonged over several years in order to sustainably reabsorb the under-sizing of these
functions ."' Id. Accordingly, as the Commission determined, SocGen clearly violated article 9-1 of
Regulation 97-02.
237. The Commission also found a violation of article 14a of Regulation 97-02, which
requires SocGen to "periodically evaluate the level of security of the data processing systems and
undertake , when appropriate , the necessary corrective actions." Id. The Commissions investigation
revealed that SocGen discovered major flaws in the security of its data processing system, but failed
to correct them in a timely manner . Id. And while the investigation revealed that SocGen had "a
plan" to correct the weaknesses at the Delta One desk that permitted Kerviel to continue his
activities, the plan was never implemented. Id.
238. The Commission further found that SocGen's activities also violated articles 32-1 and
34 of Regulation 97-02, which requires SocGen to perform a regular review of its "systems of risk
measurement and of determining the limits so as to verify the relevance with respect to the evolution
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of their activity." Id. Accordingly, SocGen was required to equip itself with systems to ensure that
the procedures and limits described in article 32-1 were properly monitored. Id. In finding that
SocGen violated both articles 32-1 and 34, the Commission determined "that the limiting mechanism
supervising the `Delta One' desk was poorly adapted to the follow-up of the operational risk, in
particular because of the absence of limits on the gross positions and on the intraday positions." Id.
According to the Commission, the purported limits established by SocGen operated "more as alert
indicators than as imperative limits which the regulations require." Id.
239. Finally, while SocGen continues to assert that Kerviel was nothing more than a rogue
employee whose misconduct shocked the Company, the Commission disagreed with the Company's
assessment, concluding that there were "serious deficiencies" in SocGen's internal control systems
that went "beyond the repetition of simple individual failures." Accordingly, the Commission
refused to allow SocGen to place the blame on Kerviel without taking responsibility for its own
failures:
That the fact that these lapses were not known by management, who thus could notremedy them, cannot be invoked by SOCIETE GENERALE to exonerate itself fromits responsibility as regards [to] the banking regulations; that thus SOCIETEGENERALE has infringed several essential provisions of the applicable regulationsin matters of internal control. Id. at 3-4.
240. In sum, the Commission found that the following deficiencies in SocGen's internal
controls allowed Kerviel to engage in unauthorized trading: (1) Failure to conduct daily reviews
and/or follow ups of Kerviel's activities, including the failure to review unexplainable cash positions
of the portfolios managed by Kerviel; (2) Failure to respond to inquiries from EUREX, even though
the hierarchical line at SocGen was notified in March and April 2007; (3) Failure to adequately
analyze the source of the profits posted by Kerviel, in spite of the fact that these very favorable
incomes seemed difficult to explain by Kerviel and in light of market condition in Q407; (4)
SocGen's Back Office and Middle Office were "insufficiently sensitized to the issues of fraud and
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misappropriation" even though the detection of fraud is an obligatory part of their assignments; (5)
Back Office and Middle Office ignored information that would have permitted them to identify that
Kerviel's positions were in violation of risk management rules; (6) Failure to implement or have
available a global vision of the pending or anomalous operations by a particular "desk" or activity
center; (7) the internal procedures designed for the control of market risks were not well adapted to
follow up on operational risk and made it possible for maneuvers of concealment to go undetected;
and (8) After automation of monthly controls in 2006, there was an absence of exchange of
confirmations with counterparties within the group and an abandonment of daily control of the
flows. These deficiencies prompted the Commission to conclude that SocGen's Risk Management
systems did not meet the requirements of articles 5 and 32 of Banking Regulation 97-02.
241. Ultimately, the Commission censured SocGen and imposed a C4 million fine on the
Company. "[T]he penalty is the biggest imposed by the Banking Commission for breaches of its
risk control regulations and reflects the scale of systemic and managerial short-comings identified by
its investigators." (July 5, 2008 FT. com article entitled "French Regulator Fines SocGen €40
million").
3. The AMF Investigation
242. While investigations by the Finance Minister and the Banking Commission focused
on the activities surrounding the Kerviel Fraud, the AMF's investigation, which is ongoing, is
concentrating on the Subprime Fraud. Specifically, "[t]he goal of the [AMF] investigation is to
determine whether the information put out by [SocGen] on the subprime crisis in recent months was
`complete, appropriate and reliable."' (Securities Law 360, July 18, 2008.) The AMF is also
investigating Defendant Day's unloading of more than €140 million in SocGen stockjust prior to the
January 24, 2008 announcement. Id.
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4. The SEC Investigation
243. In early February 2008, the SEC announced that it too was investigating the timing of
Defendant Day's stock sales. Defendant Day, who sold more than €140 million in SocGen stockjust
days before SocGen's January 24, 2008 announcement , is the founder and Chairman of TCW, a
SocGen subsidiary responsible for managing a large amount of SocGen's mortgaged-backed
securities . The SEC' s investigation of Defendant Day's stock sales is ongoing.
5. The U.S. Attorney Investigation
244. On January 25, 2008, the U.S. Attorney's Office for the Eastern District ofNew York
contacted SocGen-New York to inform it that the U.S. Attorney had opened a criminal investigation
into SocGen. According to media reports, the investigation focuses on at least two separate issues:
(1) The loss SocGen incurred from Kerviel' s trades, and (2) Defendant Day's stock sales prior to the
Company's January 24, 2008 announcement . The U.S. Attorney' s investigation is ongoing.
6. Mission Green Report
245. In addition to the government investigations, following the announcement of the
Kerviel losses, SocGen authorized its General Inspection Department to investigate the Kerviel
matter in order to determine how Kerviel was allowed to engage in unauthorized trading. The
General Inspection Department, on May 20, 2008, issued its Mission Green Report outlining
deficiencies in SocGen's internal controls. Similar to the findings of the Commission, the General
Inspection Department, concluded that SocGen's internal controls were deficient.
246. The Mission Green Report concluded that, specific to Kerviel, SocGen's internal
controls suffered from the following deficiencies: (1) Failure to recognize the entry and then
cancellation of fictitious transactions concealing market risks and earnings from unauthorized
positions; (2) Failure to recognize the entry of pairs of fictitious reverse transactions concerning
equal quantities of the same underlying assets; (3) Failure to recognize the booking ofintra-monthly
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provisions used to temporarily cancel earnings; (4) the Front Office allowed Kerviel to regularly take
intraday directional position on index futures and on certain equities which were beyond Kerviel's
level of authority; (5) Failure to implement any interim structure for the monitoring of Kerviel's
activities after Delta One lost its manager ; (6) In March 2007, Kerviel was permitted to validate his
own earnings; (7) Delta One Trading Manager failed to analyze earnings generated by traders or of
their positions; (8) Prior to November 2007, the Trading Manager at Delta One did not have written
instructions regarding a clear definition of priorities and supervisory practices; (9) Failure to detect
unusually high levels of cash flow, as well as failure to react to high cash borrowings once informed
of positions; (10) Failure to carry out in-depth analysis ofhigh amounts ofbrokerage commissions at
year end; (11) Tolerance of the taking of intraday directional position with the Delta One Desk
which created an atmosphere allowing traders to operate more freely; (12) Failure to implement
additional risk controls in light of rapid growth in GEDS and numerous signals revealing a
deterioration in the Middle Office; (13) Failure to react to external alert signals from EUREX and
SocGen's subsidiary FIMAT relating to trading activities; and (14) Middle Office does not have
ability to carry out control over aggregate deposits per account.
247. The Mission Green Report also found that as a whole, SocGen ' s internal controls
suffered from the following deficiencies: (1) Failure to react to numerous alerts, which denotes a
lack of sensitivity to the risk of fraud at the front office level; (2) SocGen's internal control
procedures do not sufficiently describe the tasks of all the parties involved in risk control resulting in
situations where risk control operators do not have the reflex to inform hierarchical superiors or front
office superiors of the appearance of anomalies, even for high amounts of trading, if not specifically
identified as part of the relevant procedures; and (3) SocGen did not have internal control procedures
to review cancelled or modified trades, over trades with a deferred start date, over trades with
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technical counterparties, over positions with a high nominal value, or over non-trading flows during
any given month.
248. The Mission Green Report concluded that if these deficiencies had not existed,
Kerviel would have been unable to engage in unauthorized trading.
D. SocGen's Financial Restatement Further Evidences Defendants'Scienter
249. SocGen' s restatement of its fiscal Q1 through Q4 2007 financial statements,
announced May 13, 2008, detailed herein at 19[288-294, provides further evidence of Defendants'
scienter. Under international accounting standards, a restatement is an admission of the falsity of
previously reported financial results and that the Company knew or should have known of that
falsity, based on facts existing at the time. Here, SocGen has admitted that it restated its fiscal 2007
financial statements due to "errors" contained in those statements. Importantly, SocGen's fiscal
2007 financial statements were not erroneous due to mathematical errors, honest misapplication of
accounting standards or simple oversight. Rather, SocGen was required to restate its fiscal 2007
financial statements because they contained false and misleading information, of which SocGen was
aware at the time it publicly disseminated the statements. Defendants' naked admission - through
their issuance of a restatement - that they were aware (or could reasonably have been expected to be
aware) that the Company's financial statements contained false and misleading information at the
time they were issued further evidences Defendants' scienter.
E. Defendants' Insider Sales Also Support Plaintiffs' ScienterAllegations
250. During the Class Period, while in possession of material, adverse, non-public
information and while Defendants were issuing false and misleading public statements, the
Individual Defendants, at times intended to maximize their personal benefit, illegally unloaded large
blocks of their total SocGen stock holdings for millions of euros in profits. The Individual
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Defendants' Class Period trades are suspicious due to the large percentage of shares sold, the huge
amount of profits gained and the opportunistic timing of the sales. Because the Individual
Defendants' trades are suspicious , they further bolster Plaintiffs' scienter allegations.
1. The Percentage, Amount and Timing of the IndividualDefendants ' Class Period Sales Are Suspicious
251. The percentage, amount and timing of the Individual Defendants ' Class Period stock
sales are suspicious, which lends further support to Plaintiffs' scienter allegations. During the Class
Period, the Individual Defendants collectively sold over 2.3 million of their SocGen shares for more
than €225 million . Even more astounding is that, during the Class Period, the Individual Defendants
unloaded 53% to more than 81% of their total SocGen holdings.
252. Defendant Day sold 1,886,187 SocGen shares (53% of his total available SocGen
holdings) for a huge amount of proceeds (more than €168 million ) during the Class Period.
Moreover, the opportunistic timing of the majority of Defendant Day's stock sales magnifies their
suspicious nature. From January 9, 2007 through January 18, 2007 - just days before SocGen's
blockbuster disclosures concerning the Company's massive fourth quarter 2007 sub-prime write-
down and billions of euros of trading losses - Defendant Day unloaded approximately 1.5 million
shares of SocGen securities for proceeds of more than €140 million.
253. Importantly, throughout the Class Period, Defendant Day concurrently served as a
member of SocGen ' s Board of Directors and as Chairman of TCW, a United States subsidiary of
SocGen.4 By virtue of his dual roles as a SocGen director and Chairman of TCW, Defendant Day
4 Despite SocGen's post Class Period attempts to distance Defendant Day from the Companyby describing him as a "non-executive" director due to Defendant Day's dual role as both Chairmanof TCW and a SocGen director during the Class Period, the Company classified him as a "non-independent" member of its Board of Directors.
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was certainly in a position to know both the extent of SocGen's CDO exposure, as well as the
adverse affect such exposure would have on SocGen's financials.
254. In early January 2008, when it became clear to Defendant Day that SocGen could no
longer continue to down-play its subprime exposure and had no choice but to write-down an
additional €2 billion of subprime-related assets, including €1.1 billion of its RMBS and CDO
portfolio, Defendant Day, and foundations related to him, began selling off millions of shares of
SocGen stock at artificially inflated prices. On January 9, 2008, less than two weeks before SocGen
intended to publicly disclose the Company's €1.1 billion sub-prime write-down, Defendant Day sold
more than 901,486 shares of SocGen stock for proceeds of more than €85 million . The following
day, on January 10, 2008, two foundations linked to Defendant Day, the Robert A. Day Foundation
and the Kelly Day Foundation, collectively sold more than 100,000 shares of SocGen stock for a
profit of more than €9.5 million.
255. Incredibly, just over a week later, Defendant Day and foundations related to him sold
more than 500,000 shares of SocGen securities for proceeds ofmore than €45 million on January 18,
2008, the very same day that SocGen claims it discovered Kerviel's trades and the lastpossible day
to sell before the Company intended to publicly disclose its €1.1 billion subprime write-down.5
256. Given that the huge amounts and opportunistic timing of these stock sales is highly
suspicious, both the U.S. Attorney for the Eastern District of New York and the SEC are
investigating Defendant Day's January 2008 trading activities.
5 SocGen planned to publicly disclose its enormous sub-prime write-down on Monday,January 21, 2008. However, according to SocGen, when it discovered Kerviel's fraudulent trades onFriday, January 18, 2008, the Company decided to delay disclosure of the write-down untilJanuary 24, 2008, so that it could have time to unwind Kerviel's trades and then make bothdisclosures simultaneously.
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257. Defendant Bouton ' s sales throughout the Class Period also support Plaintiffs' scienter
allegations, as they too were suspicious in percentage, amount and timing. During the Class Period,
while in possession of material, adverse, non-public information, Defendant Bouton sold 255,713
shares of SocGen securities (more than 65% of his total available SocGen holdings) for at least
00,299,515 in proceeds. The timing of Defendant Bouton's sales is suspicious as well, as his Class
Period sales occurred when SocGen's stock price was near its zenith. See Insider Sales Chart at
1388. Moreover, as the CEO and Chairman of SocGen and a director at TCW, Defendant Bouton
was clearly in a position to know, at the time he made these Class Period sales, about the financial
exposure SocGen was facing as a result of the United States subprime meltdown.
258. Defendant Citerne's Class Period sales were suspicious as well . During the Class
Period, Defendant Citerne sold at least 201,129 shares of his SocGen common stock for more than
€23 million in proceeds . In total , Defendant Citerne unloaded an astronomical 81% of his available
SocGen holdings during the Class Period. As with Defendant Bouton, Defendant Citerne's Class
Period sales were highly unusual and were timed to take advantage of the near all-time stock price
highs. See Insider Sales Chart at 1394. Defendant Citerne, as a director and Co-CEO of SocGen and
a director of TCW, had access to information showing the Company' s subprime exposure and risk
control problems at the time that he made his Class Period sales.
259. The percentage, amount and timing of Defendant Alix's Class Period trades was also
suspicious. During the Class Period, Defendant Alix sold 23,171 SocGen shares for proceeds of
0,311,911 in proceeds. Defendant Alix, like Defendant Citerne, unloaded an incredible 81% of his
available SocGen shares during the Class Period. In addition to being suspicious in percentage and
amount, the timing of Defendant Alix's sales is also suspicious, as Defendant Alix's two Class
Period sales were made within nine months of his becoming Co-CEO of SocGen and of his learning
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about the risk SocGen was facing due to its CDO and RMBS exposure. Defendant Alix's Class
Period sales are suspicious for the additional reason that they were executed when SocGen stock
price was at its peak. See Insider Sales Chart at 1401.
260. While the Individual Defendants profited, SocGen investors who had no insider
knowledge purchased SocGen securities and suffered damages when the Company' s securities
dropped after it disclosed a massive write-down and huge losses stemming from Kerviel's
undisclosed trades.
2. The Individual Defendants' Stock Sales Made Shortly AfterSocGen's Repurchasing of Company Stock Are Suspicious asWell
261. Throughout the Class Period, the Individual Defendants engaged in a massive stock
repurchasing or "buy-back" program that was calculated to prop up SocGen' s share price so that the
Individual Defendants could unload their personally-held SocGen shares for the maximum amount
of personal profit.
262. From 2005 through 2008, the Individual Defendants insisted that buying back
SocGen stock was the best investment of the Company' s shareholders ' money because SocGen stock
was a good bargain. However, in reality, the Individual Defendants caused SocGen to spend
hundreds of millions of euros repurchasing SocGen shares throughout the Class Period, not because
they were a good investment, but rather, because the Individual Defendants wanted to maintain the
Company's stock price so that they could sell their own personally-held SocGen shares at the highest
possible price. The Individual Defendants' scheme worked. By the end of the Class Period, the
stock buy-back program engineered by the Individual Defendants enabled them to reap hundreds of
millions of euros in personal profit from their insider selling, while costing SocGen shareholders
more than €1 billion.
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263. As detailed with more specificity in Section XIII.B., below, the Individual
Defendants' pattern, throughout the Class Period, of selling their own personally-held stock shortly
after SocGen's repurchase of shares propped up the Company's stock price demonstrates that the
Individual Defendants' Class Period sales were calculated to maximize the Individual Defendants'
personal benefit.6 Because the Individual Defendants' insider sales were timed to maximize their
personal benefit, they are suspicious on their face, and provide further evidence of Defendants'
scienter.
F. The Termination , Resignation and Reassignment of Key Members ofSocGen' s Senior Management Team and Other Participants in theFraud Is Further Evidence of Defendants' Scienter
264. Following SocGen's January 24, 2008 announcement of Kerviel's €4.9 billion trading
loss and massive writedown of assets, including its €1.1 billion writedown of its RMBS and CDO
portfolio, the Company terminated and/or forced the resignations of several high level employees,
including Defendant Bouton, who was stripped of his role as CEO. The departure and reassignment
of so many top-level SocGen employees further demonstrates the depth ofthe fraud, which provides
additional evidence of Defendants' scienter.
265. As early as February 1, 2008, SocGen began to make major personnel changes.
Certain of these changes were described in a February 1, 2008 "Risk" article:
Top management at Societe Generale has been reshuffled in the wake of thelosses. Mianne, who had been promoted to head of global markets in December, wasparachuted back into head the global equities and derivatives division. His formerco-head of global equities and derivatives, Luc Francois,7 who took sole charge of
° Indeed, there is no other rational explanation for why the Individual Defendants would selltheir personally-held stock during the very time periods when they were causing the Company torepurchase SocGen stock because it was purportedly such a good bargain.
7 Luc Francois was the head of the Global Equities department, and oversaw the Delta Onedesk where Kerviel worked.
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the division after Mianne's promotion, has left the bank, as has Marc Breillout,8 headof fixed income, currencies and commodities. Olivier Khayat, formerly co-head ofcapital raising and financing, succeeds Breillout, while the other co-head of capitalraising and financing, Jean-Luc Parer, will now take sole charge of the division.
266. On April 17, 2008, SocGen announced another set ofkey personnel changes affecting
the Company's top-level executives. The International Herald Tribune reported on April 19, 2008,
that SocGen CEO/Chairman Defendant Bouton was forced to "hand over the chief executive's job to
Frederic Oudea." Moreover, Defendant Citerne, Defendant Bouton's second in command, was
forced to give up his seat on SocGen's board of directors when his mandate ended in May 2008, as
the Company decided to replace him with an independent board member. Id. The International
Tribune article explained:
Oudea's rapid rise to the chief executive's suite also signifie[d] a sharp turnin the fortunes of Jean-Pierre Mustier, the head of Societe Generale's investmentbanking division, who until the trading scandal had been widely considered to beBouton's heir-apparent.
Mustier ... helped to create Societe Generale's derivatives trading businessin the mid-1980s, building the bank's reputation as a global leader in [the] area. Butit was his division that employed Kerviel, and Mustier's star ha[d] been waning sincethe trading scandal was disclosed, according to board members and other bankinsiders.
267. In an effort to distance itself from Kerviel's activities, SocGen's executive
management also terminated and/or forced the resignations oflower-level management who worked
directly above Kerviel. According to a May 24, 2008 Wall Street Journal article:
[T]he bank has also started dismantling the chain of command that existed over Mr.Kerviel. Two executives have already left, while Mr. Kerviel's two most immediatesupervisors are in the process of being dismissed, people familiar with the situationsaid.
° Marc Breillout was the co-head of FICC, the area that traded and valued SocGen'sRMBS/CDO portfolio.
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268. The "two-executives" referred to in the Wall Street Journal article were Luc Francois
and Pierre-Yves Morlat, and the two "immediate supervisors" were Eric Cordell and Martial
Rouyere, who headed the Delta One desk.
269. As further fallout from the RMBS and CDO writedowns , in September 2008, the
Company announced that Liz Hogan and Jerome Jacques would become co-heads of FICC
Americas, replacing Taddonio, who had run the United States division during the time frame when it
was forced to writedown over €2 billion in assets.
G. SocGen's Simultaneous Disclosure of Both Frauds Confirms Scienter
270. As further evidence of Defendants ' scienter , Defendants caused SocGen to defer any
disclosure of the Subprime Fraud until it disclosed the Kerviel Fraud. Defendants understood that
disclosing these frauds separately would more negatively impact SocGen's stock price than
revealing the two frauds simultaneously. Therefore, Defendants intentionally delayed disclosing the
Subprime Fraud, even though it was clearly material to investors. By disclosing both frauds at the
same time, Defendants also intended to create "noise" or confusion in the market about which fraud
actually caused the stock price decline. In short, by disclosing both frauds simultaneously,
Defendants sought to avoid accountability under the U.S. federal securities laws.
H. Defendants' Participation in a Scheme to Defraud Shareholders
271. During the Class Period, each of the Individual Defendants (senior executives and/or
directors of SocGen) were privy to confidential and proprietary information concerning SocGen and
its operations.
272. Because of the Individual Defendants' positions with the Company, they each had
access to adverse, undisclosed information about its business, operations, products, operational
trends, financial statements, markets and present and future business prospects via access to internal
corporate documents, conversations and connections with other corporate officers and employees,
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attendance at management and board of directors meetings and committees thereof and via reports
and other information provided to them in connection therewith.
273. Defendants received both VaR and P&L reports from SocGen-New York on a daily
basis. Through their review of these daily reports, Defendants were able to monitor cash shortfalls
and the deteriorating performance of the Company' s RMBS/CDO portfolio.
274. Defendants also directed that the VaR analysis that had previously been conducted by
SocGen-New York be moved to SocGen's Paris offices so that Defendants could have control over
the VaR analysis.
275. Defendant Day, who concurrently served as the Chairman ofTCW -- a United States
subsidiary of SocGen with over $52 billion of CDOs under management - and a director at SocGen,
was privy to information regarding the extent of SocGen's CDO exposure, as well as the adverse
affects such exposure would have on SocGen's financials. Defendant Day utilized this inside
information when trading SocGen stock during the Class Period. See Section XIII.C., below.
276. Defendant Bouton, as the CEO and Chairman of SocGen and a director ofCDO giant
TCW, had access to any and all Company information at his request, including information
regarding the extent to which the United States subprime residential meltdown was adversely
affecting the value SocGen's RMBS/CDO portfolio. Defendant Bouton also had access to
information relating to the Kerviel Fraud, as he was responsible for developing and implementing
SocGen's risk control management procedures. Moreover, in March 2007, France's Banking
Commission notified Defendant Bouton - on two separate occasions - about the need to reinforce
SocGen's internal controls, particularly with respect the equity derivatives area in which Kerviel
worked. Defendant Bouton used this inside information when trading SocGen shares during the
Class Period. See Section XIII.D., below.
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277. Defendant Citerne, similarly , had insight into two problematic areas for the Company
- subprime exposure and risk control . As a director at TCW, information regarding the United
States subprime residential meltdown and its affect on the value of SocGen's RMBS/CDO portfolio
was certainly available to Defendant Citerne. Moreover, as the Co-CEO of SocGen, Defendant
Citerne was also in a position to understand how the decreasing value of the Company's
RMBS/CDO portfolio would adversely affect SocGen's financials. As Chairman of SocGen's
Internal Coordination Committee, which met on a quarterly basis and was responsible for the
implementation and monitoring of SocGen's internal control management systems, Defendant
Citerne also had access to information relating to the Kerviel Fraud. Defendant Citerne used this
inside information when trading SocGen stock during the Class Period. See Section XIII.E., below.
278. Defendant Alix, as the Co-CEO of SocGen, was aware that the Company was
dangerously exposed due to its risky involvement in Mezzanine grade CDOs and other high-risk
mortgage-backed securities. Defendant Alix used this inside information when trading SocGen
securities during the Class Period. See Section XIII.F., below.
279. During the Class Period, Defendants directly and indirectly engaged and participated
in a continuous course of conduct to misrepresent the results of SocGen's operations and to conceal
adverse material information regarding SocGen's operations as specified herein. Defendants
employed devices, schemes and artifices to defraud, and engaged in acts, practices and a course of
conduct as herein alleged in an effort to increase and maintain an artificially high market price for
the securities of the Company. This included the formulation, making, and/or participation in the
making of untrue statements of material facts, and the omission to state material facts necessary in
order to make the statements made, in light of the circumstances under which they were made, not
misleading, which operated as a fraud and deceit upon Plaintiffs and the other members ofthe Class.
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280. The Defendants are liable, jointly and severally, as direct participants in the wrongs
complained of herein. Defendants had a duty to promptly disseminate accurate and truthful
information with respect to the Company' s operations , business and future business prospects, to
correct any previously issued statements from any source that had become untrue, and to disclose
any trends that would materially affect the present and future financial operating results of SocGen,
so that the market price of the Company's publicly-traded securities would be based upon truthful
and accurate information.
X. DEFENDANTS' MATERIALLY FALSE AND MISLEADING FINANCIALREPORTING DURING THE CLASS PERIOD
281. SocGen's publicly issued financial results during the Class Period were materially
false and misleading and in violation of International Financial Reporting Standards and French
financial regulations for the following reasons:
(a) SocGen materially misrepresented its financial position by: failing to disclose
the nature, scope, risks and exposures related to the Kerviel Fraud (in violation of IAS 1, IFRS 7,
IAS 10, IAS 30, IAS 34, and the IASB Framework); failing to record the material financial statement
impacts resulting from the Kerviel Fraud (in violation of IAS 1, IAS 39, IAS 10, IAS 32, IAS 34,
and the IASB Framework); and failing to disclose the internal control and risk management
deficiencies relating to the Kerviel Fraud (in violation of AMF Regulations and the French
Commercial Code);
(b) SocGen materially misrepresented its financial position by: failing to disclose
the nature, scope, risks and exposures related to the Subprime Fraud (in violation of IAS 1, IFRS 7,
IAS 10, IAS 30 IAS 34, and the IASB Framework); failing to record adequate and timely
writedowns and losses to reflect the decline in fair value of its portfolio of financial instruments
backed by U.S. subprime mortgages (in violation of IAS 1JAS 39JAS 10, IAS 32, IAS 34, and the
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IASB Framework); and failing to disclose the internal control and risk management deficiencies
relating to the acquisition and valuation of its portfolio of financial instruments backed by United
States subprime mortgages (in violation of AMF Regulations and the French Commercial Code);
(c) SocGen materially misrepresented its financial position by including, in its
Class Period financial results, Defendant Bouton's false written representations that the Company's
financial results had been prepared in accordance with International Financial Reporting Standards,
and gave a fair view of the Company's assets, liabilities, financial position, and profit or loss; and
(d) SocGen materially misrepresented its financial position by including, in its
Class Period financial results, false written representations and assurances that the Company
maintained a system of adequate and effective disclosure controls, financial reporting controls and
risk management controls that ensured that the Company' s financial results were prepared and
presented accurately.
282. As a result of the above accounting improprieties and violations of International
Financial Reporting Standards and French financial regulations, SocGen's publicly issued financial
results were materially false and misleading during the Class Period.
A. Applicable Accounting Standards
283. IFRS are those principles adopted by the International Accounting Standards Board
("IASB") and recognized by the accounting profession as the conventions, rules and procedures
necessary to define accepted international accounting practices at a particular time. IFRS are
promulgated by the IASB (formerly the Board ofthe International Accounting Standards Committee
("IASC")). Narrowly, IFRS refers to the numbered series of pronouncements currently being issued
by the IASB, as distinct from the IAS's numbered series of pronouncements issued by its
predecessor. Broadly, IFRS refers to the entire body ofIASB pronouncements, including IFRS and
IASs, as well as interpretations of those standards as approved or adopted by the IASB (including
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interpretations of the International Financial Reporting Interpretations Committee of the IASB, and
the Standing Interpretations Committee of the IASC). In addition to the numbered pronouncements,
IFRS provides other authoritative pronouncements including, inter alia, the IASB Framework for the
Preparation and Presentation of Financial Statements ("Framework").
284. SocGen's compliance with IFRS and all statements describing the fair presentation
of its financial results were covered by IAS 1, which states:
An entity whose financial statements comply with IFRSs shall make anexplicit and unreserved statement of such compliance in the notes. FinancialStatements shall not be described as complying with IFRSs unless they comply withall the requirements of IFRSs.... The application of IFRSs, with additionaldisclosure when necessary, is presumed to result in financial statements that achievea fair presentation.
285. As a publicly traded company, SocGen was required by the EU Commission,
Regulation (EC) No. 1606, Article 4 to issue financial results in accordance with International
Financial Reporting Standards.
286. In addition to IFRS requirements, as a publicly traded company in France, SocGen
was required to comply with all accounting and financial regulations of the AMF and the French
Commercial Code. The AMF, the French equivalent to the SEC, was created by the Financial
Security Act of August 1, 2003.
B. Defendants' Failure to Disclose and Record the Nature, Extent andFinancial Impact of the Kerviel Fraud Violated InternationalFinancial Reporting Standards
287. In January 2008, SocGen announced that it was recording €4.8 billion in losses
relating to the Kerviel Fraud. However, far earlier than January 2008, SocGen' s senior management,
as pled herein, knew or recklessly disregarded that the Company faced substantial risks and loss
exposures from traders, such as Kerviel, who were engaged in directional, i. e., unhedged, trades and
who were exceeding their trade authorization limits. By failing to fully disclose the nature, extent,
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risks and exposures it faced as a result of these unhedged trading positions, as well as failing to
record the material financial statement impact of these unhedged trading positions, SocGen's
publicly issued financial results during the Class Period were materially false and misleading and in
violation of International Financial Reporting Standards, specifically IAS 1 Presentation of
Financial Statements , IFRS 7 Financial Instruments : Disclosures ; IAS 10 Events After the
Reporting Period; IAS 30 Disclosures in the Financial Statements ofBanks and Similar Financial
Institutions; IAS 32 Financial Instruments: Disclosure and Presentation; IAS 34 Interim Financial
Reporting; IAS 39 Financial Instruments: Recognition andMeasurement; and the IASB Framework
for the Preparation and Presentation ofFinancial Statements.
1. SocGen' s Restatement of Its 2007 Financial Results
288. As a result of the Kerviel Fraud, SocGen was forced to admit that its financial results
issued during 2007 were false and misleading, were not prepared in accordance with IFRS and could
no longer be relied upon. On May 13, 2008, SocGen announced that:
Reported 2007 historic quarterly results have been restated for the fictitiousoperations recorded on unauthorized and concealed market activities. The quarterlyresults at March 31st 2007, June 30th 2007, September 30th 2007, and December31st 2007 ... have been adjusted to restate the accounting consequences of thefictitious operations recorded in 2007 and 2008 on unauthorized and concealedmarket activities discovered in January 2008.
289. The financial impact of the Kerviel Fraud, as evidenced by the restatement of the FY
2007 financial results shown below, caused SocGen's financial results to be materially false and
misleading when originally issued during the Class Period . For example, of the €1.7 billion in
"Group" net income reportedly earned by the Company during the three-month period ended June
30, 2007, SocGen was forced to restate €1.4 billion, or 78% of all net income recorded during that
time. The effect of the restatement was even more profound for SGCIB's division, a key business
segment which was a significant growth driver for SocGen and closely watched by the market.
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According to the restatement, SGCIB's originally reported Q1 net income was overstated by 11%,
and previously reported Q2 net income of€721 million was, in reality, a net loss of€641 million. In
total, SGCIB was forced to restate 98% of its net income recorded for the six-month period ended
June 30, 2007.
290. The table below reflects SocGen ' s restatement as a result of the Kerviel Fraud.
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SOC GENRESTATEMENT OF 2007 RESULTS
01
% Overstatement/
Reported Restated (Understatement)
SG Corporate and Investment BankingOperating Income € 895 € 798 12%Net Income € 666 € 602 11%
Societe Generale GroupOperating Income € 2,156 € 2,059 5%Net Income € 1,431 € 1,367 5%
Q2% Overstatement/
Reported Restated (Understatement)
SG Corporate and Investment BankingOperating Income € 996 € (1,068) 193%Net Income € 721 € (641) 212%
Societe Generale GroupOperating Income € 2,619 € 555 372%Net Income € 1,744 € 391 346%
Q3% Overstatement/
Reported Restated (Understatement)
SG Corporate and Investment BankingOperating Income € 407 € 2,931 -86%Net Income € 310 € 1,976 -84%
Societe Generale GroupOperating Income € 1,775 € 4,299 -59%Net Income € 1,123 € 2,778 -60%
Q4% Overstatement/
Reported Restated (Understatement)
SG Corporate and Investment BankingOperating Income € (6,056) € (6,419) 6%Net Income € (3,918) € (4,158) 6%
Societe Generale GroupOperating Income € (4,748) € (5,111) 7%
Net Income € (3,351) € (3,589) 7%
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291. Through this restatement , the Company has admitted that its financial results for
FY2007 were false and misleading and in violation of IFRS. Restatements of previously issued
financial results are covered under IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors which states, in relevant part:
Prior period errors are omissions from, and misstatements in, the entity'sfinancial statements for one or more prior periods arisingfrom afailure to use, ormisuse of, reliable information that:
(a) was available whenfinancial statements for those periods were authorizedforissue; and
(b) could reasonably be expected to have been obtained and taken into account inthe preparation and presentation of those financial statements.
Such errors include the effects of mathematical mistakes, mistakes inapplying accountingpolicies, oversights or misinterpretations offacts, andfraud.
[A]n entity shall correct materialpriorperiod errors retrospectively in the first setof financial statements authorized for issue after their discovery by:
(a) restating the comparative amountsfor the priorperiod(s) presented in which theerror occurred; or
(b) if the error occurred before the earliest prior period presented, restating theopening balances of assets, liabilities and equity for the earliest prior periodpresented.
Material omissions or misstatements of items are material if they could,individually or collectively, influence the economic decisions that users make onthe basis ofthe financial statements.
292. SocGen's restatement of its previously issued financial results is an admission that: (i)
its financial results originally issued during the Class Period and its public statements regarding
those results were materially false and misleading because they contained material omissions
and/or misstatements and (ii) its financial results issued during the Class Period were incorrect
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based on misuse of information available to the Defendants at the time the results were originally
reported.
293. The restatement of previously issued public financial statements is a serious and
meaningful event. The accounting rules governing correction of errors or fraud in previously issued
financial statements do not allow a company any discretion or election in deciding whether or not to
retroactively restate previous financial results. IFRS, specifically IAS 8, only permits (and requires)
restatements of previously issued financial results for a change in accounting policy, change in
accounting estimate or to correct "errors" resulting from mathematical mistakes, mistakes in
applying accounting policies, oversights or misinterpretations of facts (that existed at the time the
financial results were prepared) and fraud. Restatements cannot be used to make any adjustments to
take into account subsequent information that did not and could not have existed at the time the
original financial results were prepared.
294. In this case, SocGen has admitted that its restatement was done solely to correct
"errors, " and not as a result of a change in accounting policies or accounting estimate. Additionally,
as alleged herein, it is clear that the type of "error" correction contained in the announced
restatement at issue was not due to a simple mathematical error, honest misapplication of an
accounting standard or oversight; rather, it was due to intentional misuse of the facts that were
known at the time the previous financial results were disseminated to the public. The type of
restatement at issue in this case is an indicator of Defendants' knowledge or reckless disregard of
the Kerviel Fraud.
2. SocGen' s Specific Violations of IFRS in FY2007 FinancialResults
295. The FY2007 financial results required restatement due to Defendants' improper
accounting practices and violations of IFRS, including SocGen's failure to record the material
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financial statement impacts resulting from the Kerviel Fraud and failure to disclose the risks and
exposures that the Company faced as a result of the Kerviel Fraud.
296. By not recording the financial statement impact of the Kerviel Fraud, SocGen
violated IAS 1 Presentation ofFinancial Statements and IAS 39 Financial Instruments: Recognition
and Measurement. In addition to the general requirements discussed at 1332, SocGen violated the
IAS 1 requirement that:
All items of income and expense recognised in a period shall be included inprofit or loss unless a Standard or an Interpretation requires otherwise.
In addition to the other requirements of IAS 39 discussed herein, SocGen violated the basic IAS 39
requirements that:
An entity shall recognize a financial asset or a financial liability in itsstatement of financial position when, and only when, the entity becomes a party tothe contractual provisions of the instrument.
An entity shall remove a financial liability (or a part of a financial liability)from its statement of financial position when, and only when, it is extinguished - iewhen the obligation specified in the contract is discharged or cancelled or expires.
297. In addition to IAS 1 and IAS 39, by not disclosing and recording the nature, scope,
risks, exposures and financial statement impact of the Kerviel Fraud, SocGen also violated:
IFRS 7 Financial Instruments : Disclosures including the requirements discussed at191305-306;
IAS 10 Events After the Reporting Period including the requirements discussed at91331;
IAS 30 Disclosures in the Financial Statements of Banks and Similar FinancialInstitutions as including the requirements discussed at 91309;
IAS 32 Financial Instruments: Disclosure and Presentation including therequirements discussed at 91308;
IAS 34 Interim Financial Reporting including the requirements discussed at 91330;and
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The IASB Frameworkfor the Preparation and Presentation ofFinancial Statementsincluding the requirements discussed at 1334.
C. Defendants' Failure to Disclose and Record the Nature, Extent, andFinancial Impact of the Subprime Fraud Violated InternationalFinancial Reporting Standards
298. As alleged and discussed in greater detail herein, during the Class Period, Defendants
caused the Company to take positions in CDOs and RMBS whose values were linked to inherently
risky loans, primarily United States residential subprime mortgages . In fact, unbeknownst to
investors, SocGen's exposure was amplified because of the type of subprime-backed investments
and financial instruments that SocGen took positions in. SocGen held billions of dollars worth of
high risk Mezzanine CDOs - financial instruments that were particularly susceptible to the decline
of the subprime mortgage market. The Mezzanine CDOs held by SocGen were backed by nothing
more than the lowest rated and highest risk tranches of RMBS. These risky RMBS collateralizing
the Mezzanine CDOs (as well as additional RMBS investments held by SocGen) were, in turn,
backed almost exclusively by U.S. subprime mortgages as shown below:
Unhedged CDOs Exposed to US Subprime Residential Mortgage Risk(in millions)
Mezzanine MezzanineCDO 1 CDO 2
Balance at 12/31/07 € 1,401 € 1,717% of underlying subprime collateral 89% 74%
299. The various repackaging of risks -from individual subprime mortgages to RMBS and
from RMBS to Mezanine CDO - compounded SocGen's risk and made SocGen even more
susceptible to a catastrophic loss, even at relatively benign stages of what would become the
subprime financial crisis. Due to the nature and similarity of the BBB-rated and sub-BBB-rated
RMBS collateral underlying SocGen ' s Mezzanine CDOs, SocGen was exposed to the increased
likelihood that its investment would suffer losses even if the subprime mortgage default rate
remained relatively low. Because a Mezzanine CDO is backed solely by the lowest-rated and
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riskiest tranches of RMBS, the entire Mezzanine CDO can be wiped out even if the default rate of
the underlying subprime mortgages only reaches 10%.
Despite the risks and exposures that SocGen assumed through its €5 billion portfolio of these
risky financial instruments, SocGen failed to disclose these risks in its publicly issued financial
results during the Class Period. In addition to the failure to disclose the risks and exposures inherent
in taking these positions, SocGen failed to record, in its publicly issued financial results, adequate
and timely writedowns and losses to reflect the decline in fair value of these subprime-backed
financial instruments.
1. Financial Statement Impact of the Subprime Fraud
300. Like the Kerviel Fraud, the Subprime Fraud had a material impact on SocGen's
financial statements. As shown in the chart below, losses related to the Subprime Fraud ultimately
totaled over € 3.6 billion.
Summary of Societe Generale 's Recorded Writedowns on US Subprime Mortgage - RelatedInvestments:
Residential MortgageBacked Securities(RMBS)
Collateralized DebtObligations (CDOs)
Additional CDO losses(due to exposure tomonoline insurers)
Involvement in PACESIV (StructuredInvestment Vehicle)
TOTAL
2007 2008Q1 Q2 Q3 Q4 Q1 Q2 Total
€8 €29 €63 €325 €43 €15 €483
€ 5 € 37 € 167 € 1,250 € 350 € 20 € 1,829
- - - € 947 € 203 € 98 € 1,248
- - - €61 €12 -
€13 € 66 € 230 € 2,600 € 596 €133
€ 73
€ 3,633
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301. As set forth herein, the Subprime Fraud involved two distinct types of IFRS
violations, which resulted in materially false and misleading financial results being issued during the
Class Period. These IFRS violations included: (i) failing to make the required disclosures regarding
the nature, scope, risks and exposures the Company faced relating to its RMBS and CDO financial
instruments; and (ii) failing to accurately value CDO and RMBS financial instruments at their true
fair value to avoid recording material writedowns and losses. As a result of these IFRS violations,
the Company's financial results issued during the Class Period were materially false and misleading.
2. SocGen's Lack of Disclosures Relating to the Subprime FraudViolated International Financial Reporting Standards
302. As shown above, SocGen recorded small writedowns to its RMBS and CDO
investments and financial instruments as early as Q1 and Q2 2007; however, these writedowns were
not disclosed in the financial results issued during those periods (the writedowns were later shown
along with other historical data in the Company's Q2 2008 financial results ). In fact, SocGen failed
to disclose any information relating to its portfolio of subprime mortgage-backed financial
instruments prior to Q3 2007. SocGen also failed to disclose the type of financial instruments it
held, the balance of each type of financial instrument, the credit ratings of these financial
instruments, the sensitivity of these financial instruments to market risks, etc.
303. Along with the International Financial Reporting Standards regarding the valuation
of these financial instruments discussed at 1312 below, SocGen was required to comply with specific
disclosure requirements including IFRS 7 Financial Instruments: Disclosures, IAS 30 Disclosures in
Financial Statements ofBanks and Similar Financial Institutions , IAS 32 Financial Instruments:
Disclosure and Presentation , IAS 10 Events After the Reporting Period, IAS 34 Interim Financial
Reporting and the IASB Frameworkfor the Preparation and Presentation ofFinancial Statements.
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304. IFRS 7 requires disclosures to enable users of the financial statements to evaluate the
significance of financial instruments to an entity's financial position and performance, the nature and
extent of risks arising from financial instruments to which an entity is exposed and how the entity
manages those risks. IFRS 7 required SocGen to report, in its publicly issued financial results,
critical information to allow investors to view SocGen's portfolio of subprime backed CDO and
RMBS financial instruments "through the eyes of management." Clearly, if management felt that
these financial instruments were required to be written down in Q1 and Q2 2007 (albeit the
writedowns were small due to the Company' s flawed valuation methods discussed at Section D
below), then information regarding the nature, scope, balances, exposures, sensitivity, and risks of
these financial instruments was certainly required to be disclosed in the Company' s financial results
during these periods and all periods in which the same financial instruments were held by the
Company. Specifically SocGen failed to comply with the following requirements of IFRS 7:
An entity shall disclose information that enables users of its financialstatements to evaluate the nature and extent of risks arising from financialinstruments to which the entity is exposed at the end of the reporting period....These risks typically include, but are not limited to, credit risk, liquidity risk andmarket risk.
For each type of risk arising from financial instruments, an entity shall disclose:
(a) the exposures to risk and how they arise;
(b) its objectives, policies and processes for managing the riskand the methods used to measure the risk; and
(c) any changes in (a) or (b) from the previous period.
Entities [are required] to provide disclosures in their financialstatements that enable users to evaluate:
(a) the significance or financial instruments for the entity'sfinancial position and performance; and
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(b) the nature and extent of risks arising from financialinstruments to which the entity is exposed during the periodand at the end of the reporting period, and how the entitymanages those risks.
305. IFRS 7 also required SocGen to disclose the sensitivity of its results to movements in
market risks as a consequence of these subprime-backed RMBS and CDO financial instruments.
Clearly, SocGen ' s reported results were entirely sensitive to these risky RMBS and CDO financial
instruments , as demonstrated by the enormous losses that were ultimately recorded by the Company
in Q4 2007 and Q1 and Q2 2008. Without these key required disclosures in earlier periods
throughout the Class Period, SocGen was blatantly misrepresenting its exposure to the subprime
mortgage crisis . In Q4 2007 and Q1 and Q2 2008, when the losses were recorded and the
disclosures finally revealed, investors and analysts were blindsided since SocGen had, in violation of
IFRS, failed to disclose and concealed its exposure to the subprime crisis throughout the Class
Period.
306. In addition to violating IFRS 7, as discussed above, SocGen's lack of disclosures
regarding its RMBS and CDO exposures during the Class Period also violated lAS 32 Financial
Instruments : Disclosure and Presentation and lAS 30 Disclosures in Financial Statements ofBanks
and Similar Financial Institutions.9
307. Specifically SocGen failed to comply with the following requirements of lAS 32
Financial Instruments: Disclosure and Presentation:
Transactions in financial instruments may result in an enterprise's assumingor transferring to another party one or more of the financial risks described below.The required disclosures provide information that assists users of financial
9 lAS 30 was superceded by and lAS 32 was amended by the issuance of IFRS 7. Thereferences to lAS 30 and lAS 32 herein, refer to the versions in place prior to the effective date ofIFRS 7.
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statements in assessing the extent of risk related to both recognized andunrecognized financial instruments:
(a) Price risk - There are three types of price risk: currency risk, interest rate riskand market risk.
(iii) Market risk is the risk that the value of a financial instrument willfluctuate as a result ofchanges in marketprices whether those changes arecaused byfactors specific to the individual security or its issuer orfactorsaffecting all securities traded in the market.
(b) Credit risk - Credit risk is the risk that one party to a financial instrument willfail to discharge an obligation and cause the other party to incur a financial loss.
(c) Liquidity risk - Liquidity risk, also referred to as funding risk, is the risk thatan enterprise will encounter difficulty in raising funds to meet commitmentsassociated with financial instruments. Liquidity risk may result from an inability tosell a financial asset quickly at close to its fair value.
For each class of financial asset, financial liability and equity instrument,both recognized and unrecognized, an enterprise should disclose: (a) informationabout the extent and nature of financial instruments, including significant terms andconditions that may affect the amount, timing and certainty of future cashflows....
308. SocGen failed to comply with the following requirements of IAS 30 Disclosures in
Financial Statements ofBanks and Similar Financial Institutions:
A bank should disclose any significant concentrations of its assets,liabilities and off balance sheet items . Such disclosures shall be made in terms ofgeographical areas, customer or industry groups or other concentrations ofrisk... .
A bank discloses significant concentrations in the distribution ofits assetsand in the source of its liabilities because it is a useful indication ofthe potentialrisk inherent in the realization of the assets and the funds available to the bank.Such disclosures are made in terms of geographical areas, customer or industrygroups or other concentrations ofrisk which are appropriate in the circumstancesofthe bank.
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309. Additionally, SocGen violated lAS 1 Presentation ofFinancial Statements, lAS 10
Events After the Reporting Period, lAS 34 Interim Financial Reporting, and the IASB Framework
for the Preparation and Presentation ofFinancial Statements as described at 99[330-334 below.
D. SocGen's Valuations of Its RMBS and CDO Financial InstrumentsViolated International Financial Reporting Standards
310. As shown in the chart above, in its Q3 update in November 2007, SocGen recorded a
€230 million writedown on its subprime backed assets and stated that the writedown was based on a
"worst-case forward-looking scenario" of the subprime mortgage crisis . Earlier, in Q1 and Q2 2007
(although completely undisclosed to investors at the time) the writedowns were even smaller -
totaling just €79 million, or less than 2% of the total exposure the Company faced related to its
portfolio of subprime backed CDO and RMBS financial instruments. SocGen arrived at these
relatively small writedowns after valuing its subprime-backed CDO and RMBS financial instruments
using internally-generated valuation models that relied on variables and forward-looking estimates
supplied by SocGen's own management. Consistent with the lack of key disclosures described
above, SocGen ' s inflated valuations allowed the Company to hide its true subprime exposure and
avoid recording large writedowns and losses. In calculating these inflated CDO and RMBS
valuations, SocGen ignored the true substance of fair value accounting, as prescribed by IFRS
specifically lAS 39, which defines fair value as "the amount for which an asset could be
exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length
transaction."
311. Under lAS 39, SocGen was required to measure its CDO and RMBS financial
instruments at fair value at each balance sheet date and to record the gains and losses arising from
changes in fair value in its income statement in the period in which they occurred. However, as
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described herein, SocGen's mark-to-model fair value measurements of its CDO and RMBS financial
instruments violated the requirements of IAS 39, which states, in relevant part:
The objective of using a valuation technique is to establish what thetransaction price would have been on the measurement date in an arm's lengthexchange motivated by normal business considerations. Valuation techniquesinclude using recent arm's length market transactions between knowledgeable,willing parties, if available, reference to the current fair value of anotherinstrument that is substantially the same.... The chosen valuation techniquemakes maximum use of market inputs and relies as little as possible on entity-specific inputs. It incorporates allfactors that marketparticipants would considerin setting a price and is consistent with accepted economic methodologies forpricing financial instruments . Periodically, an entity calibrates the valuationtechnique and tests it for validity using prices from any observable current markettransactions in the same instrument (i.e. without modification or repackaging) orbased on any available observable market data.
1. Defendants Ignored or Recklessly Disregarded InformationKnown by Them in Calculating the Fair Vale of SocGen'sPortfolio of Subprime Backed CDO and RMBS FinancialInstruments
312. In violation of IAS 39 requirements for fair value measurements , as described above,
SocGen knew or recklessly disregarded information and data readily available to Defendants relating
to the valuations of SocGen's portfolio of subprime-backed CDO and RMBS financial instruments.
The information and data available to Defendants included industry expertise obtained from
SocGen ' s own subsidiary TCW, SocGen' s own trading experience, which reflected the increasing
illiquidity of CDOs and RMBS securities , market data (including the ABX index) and statistics
regarding declining home values, increasing credit delinquencies and default rates. Specifically,
SocGen Defendants and Company management knew or recklessly disregarded the following factors
that were required under IFRS to be considered in the valuation of their CDS and RMBS portfolio
during the Class Period.
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a. SocGen Knew in 2006 and 2007, Through TCW, ItsWholly Owned Subsidiary, that CDO and RMBSSecurities Backed by Subprime Loans Were Decliningin Value and Should Be Avoided
313. Through its United States subsidiary TCW, SocGen knew that the fair values of
subprime securities were deteriorating rapidly. As SocGen explained in its February 14, 2007 press
release, it was an expert in the CDO business:
In 2006, SG AM [Societe General Asset Management] confirmed itspositioning ... as the leading player in the CDO market with TCW (the numberone player in cash CDOs).
314. In fact, TCW was the largest CDO manager and issuer in the world, with over $64
billion in CDO assets under management in 2006-2007. The Chairman of TCW's Board of
Directors during the Class Period was Defendant Day. With Defendant Day concurrently serving as
the Chairman of TCW and a SocGen Board member, TCW was well represented at the executive
level of SocGen. Additionally, TCW's Vice Chairman, Marc Stem, served on the Management
Committee of SocGen during the Class Period. As part of the Management Committee, Stem
participated in meetings, along with SocGen's 12-member Executive Committee, to enhance
SocGen's operational efficiency, discuss business strategy and address other issues of general
interest to the group. Accordingly, information regarding market condition trends, and the liquidity
of CDOs (as well as the subprime securities market) was communicated to SocGen ' s executive
management by some of the highest ranking officials at the Company.
b. The ABX Index Experienced a Sharp Decline FromLate 2006 Into 2007
315. The ABX Index was created in January 2006 when several banks collaborated with a
Company called "Markit" to create an index which provided banks with the ability to track RMBS
and to estimate CDO, market values. During the Class Period, the ABX Index tracked the
performance of 15 to 20 equally-weighted RMBS tranches backed by subprime collateral and was
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used by SocGen as a barometer for assessing how subprime mortgage-related assets were performing
in the market place. The ABX Index tracked the cost of buying and selling Credit Default Swaps on
selected RMBS tranches . Each of the 15-20 RMBS tranches had a different rating, from AAA to
BBB, and was considered a representative sample of other RMBS tranches backed by subprime
collateral with the same rating . Significantly, the American Institute of Certified Public
Accountants' Center for Audit Quality has stated that "the pricing indicated by the ABX credit
derivative index for subprime mortgage bonds may be a Level 2 input when used as an input to the
valuation of a security backed by subprime mortgage loans." Therefore, according to the AICPA,
the ABX could and should be used by banks in valuing RMBS and CDO securities each period.
316. The ABX Index showed that all subprime RMBS tranches were being adversely
affected by the subprime mortgage crisis beginning in late 2006 and into 2007. As shown in the
chart below, during the fourth quarter of 2006 and the first half of 2007, the value of the ABX Index
plummeted. The collapse of the ABX Index during the Class Period indisputably revealed that the
value of RMBS and CDO, backed by subprime mortgages, was deteriorating at a historic pace
during late 2006 and into 2007.
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gure 5: X.BBB 06-2
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317. According to CW1, in mid-2007, at the latest, SocGen's New York office stopped
using the ABX Index to assess how its RMBS portfolio was performing. By mid-2007, the ABX
had declined precipitously , which, according to CW1, clearly showed that SCGL' s RMBS valuations
needed to be reduced. Nevertheless, SocGen abruptly discontinued its prior practice of relying on
the ABX Index to track the value of its RMBS portfolio.
c. SocGen Knew From Its Own Trading ExperienceDuring the Class Period that the Value of ItsCDO/RMBS Portfolio Had Plummeted
318. It was abundantly clear in late 2006 and 2007, that SocGen could not sell the
CDO/RMBS securities that it held . As confirmed by CW2, by March 2007 , SocGen had
"warehouse[d]" hundreds of millions of dollars worth of subprime-backed securities that it planned
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to structure and sell in its next CDO offering. However, according to CW2, SocGen knew at this
time that a CDO offering could not be successful . The New York group had been unable to sell
CDOs or RMBS as the market had dried up and become illiquid. According to CW2, SocGen
canceled the offering and was stuck with the "warehouse[d]" assets. Moreover, CW2 understood
that this was a clear sign that the RMBS/CDO market was illiquid. According to CW1, SocGen
dissolved the New York-based CDO Group on or about the second quarter of 2007. This group was
responsible for purchasing and "warehousing" residential subprime mortgages and other subprime-
backed securities in order to securitize them into CDOs.
319. SocGen had billions of euros worth of CDO/RMBS securities whose values had
rapidly diminished. According to CW1 there were serious problems with liquidity and SocGen
could not obtain quotes for many of its portfolio assets in mid 2007. Instead of following the
required IFRS, which required SocGen to value its CDO securities based on the amount for which
the asset could be exchanged between knowledgeable and willing parties in an arms' length
transaction, according to CW 1, SocGen simply stopped using mark-to-market valuations and instead
substituted in a "Mark to Model" valuation. However, these models didn't work and SocGen was
scrambling to invent a value to buoy its RMBS/CDO portfolios and avoid a write down. CW2
recalls that Carlos Beneto, Head of CDO Structuring, and Arno Denies, Head of RMBS, both of
whom reported directly to Paolo Taddonio, issued an urgent mandate that the IT department change
the parameters of its Calypso system (a computer program designed to assign valuations to CDOs) in
order to obtain valuations of the CDOs. For a two-week period during the late Q 1 to early Q2 2007
time frame, the IT department was working around the clock, trying hundreds of different valuation
models, in an attempt to obtain valuations for its CDOs. However, according to CW2, the IT
department's efforts were to no avail. During this time frame, CW2 recalls attending a meeting,
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which was also attended by Taddonio, where the participants specifically discussed the fact that the
valuation models were not working and did not reflect reality.
320. By the end of 2006, it was common knowledge in sales meetings that the RMBS and
CDO assets had diminished in value and had become illiquid - no one wanted them. As a seller of
structured products, CW5 attended weekly sales meetings. These meetings would take place about
once a week, at the beginning of the week. Abner Figueroa ran the meetings . CW5 explained that it
was clear to everyone, including Taddonio, that they could not sell the CDO/RMBS products.
Figueroa always told the sales staff that they needed to sell the CDO and RMBS products but
everyone knew they could not sell them. At the meetings, or by email prior to the meetings, the
sales staff would receive inventory sheets showing what RMBS and CDO products needed to be
sold. The inventory sheet would also show what had been sold, at what price, class, rating, etc. - the
RMBS and CDO products were always on the sheet with no activity. CW5 stated that the other sales
staff were telling Figueroa that the RMBS/CDOs could not be sold. According to CW5, Dansby
White and Taddonio sometimes sat in on these meetings as well. CW5 explained that SocGen was
aware of the deteriorating value in its CDO portfolio because a daily cash report would show how
much cash SocGen was receiving on its CDOs.
2. SocGen's Q4 Writedown - the Truth Begins to Emerge
321. The factors detailed above, including information from its own subsidiary, the
overwhelming market data available to the Company, along with the Company's own firsthand
experience with trading and selling these subprime-backed assets, were required, under IFRS, to be
considered by SocGen in the valuation of its RMBS and CDO assets at the end of each quarter to
arrive at the value in which they "could be exchanged ... between knowledgeable, willing parties
in an arm 's length transaction " at that point in time. However, the Company ignored or recklessly
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disregarded this information and failed to writedown its CDO and RMBS portfolio to its true fair
value prior to January 2008.
322. On January 24, 2008, when SocGen could no longer conceal its mounting CDO and
RMBS losses from investors, the Company announced that it would record over €2 billion in
subprime-related losses, including writedowns of its subprime-backed CDO and RMBS portfolio.
323. In describing the fair value of its CDO assets as the amount at which they "could be
exchanged ... between knowledgeable, willing parties in an arm's length transaction," SocGen
stated:
The results obtained using the model were supplemented with an approach designedto reflect the illiquidity of the tranches in question. The valuations obtained were inline with the valuation levels of the ABX indexes at December 31, 2007.
324. SocGen also disclosed that while it still used a model that was based on a "credit
stress testing prospective scenario, as opposed to a mark-to-market approach" (the same mark-to
model approach which was used previously), the value calculated by this model was then "compared
to the implied write-downsfrom theABX index" and "[a]dditional writedowns were taken so as to
reflect the illiquidity ofthe relevant tranches."
325. These two key steps were knowingly disregarded in its prior financial results,
resulting in valuations that did not accurately reflect the fair value of SocGen's CDO and RMBS
portfolio, in violation of IFRS, specifically IAS 39.
326. Ignoring the fundamental concept of fair value accounting in favor of performing
valuations that concealed the Company's true subprime exposure was a clear violation of IFRS and
rendered its financial results knowingly false and misleading. Commenting on the fair value
calculations of instruments affected by the subprime crisis, Sir David Tweedie, Chairman of the
International Accounting Standards Board stated, "accounts [including those affected by the
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subprime crisis] are supposed to reflect the current situation, not a probable future one." Tweedie
also commented that "[a]ccounting has to reflect facts, not assume stability when it doesn't exist."
327. Similarly, the IASB recently issued the following comments related to fair value
calculations affected by the subprime crisis:
Some have suggested that, when market prices are depressed or markets are `incrisis', fair value should be measured using a fundamental value approach basedprimarily on management's estimate of future cash flows. In such an approach, ifcash flow estimates are not expected to decline over the life of the instrument (ieuntil settlement or maturity), there should be no decline in the fair value of theinstrument. The argument put forward is that, in market turmoil, adverse marketsentiment creates an illogical view of risk, and this should not be taken into accountwhen measuring fair value.
However, fundamental values are not consistent with the objective ofafair valuemeasurement because they do not take into account factors that marketparticipants would consider when pricing the instrument, such as illiquidity andcredit risk. Fair value reflects the amountfor whichfinancial instruments can beexchanged in the market for those instruments. Transaction prices continue toreflect fair value and cannot be ignored, even in a market crisis. Accordingly, avalue measured using a fundamental value' approach might not represent anestimate ofa current transaction price.
(IASB draft release: Fair value of financial instruments in markets that are no longer active; Sept,
2008).
E. Additional Violations of International Financial Reporting StandardsRelated to the Kerviel Fraud and the Subprime Fraud
328. In addition to the specific IFRS referred to above, the accounting improprieties
related to the Kerviel Fraud and the Subprime Fraud, as alleged herein, also violated the following
International Financial Reporting Standards: IAS 1 Presentation ofFinancial Statements, IAS 10
Events After the Reporting Period IAS 34 Interim Financial Reporting, and the IASB Framework
for the Preparation and Presentation ofFinancial Statements.
329. More specifically, regarding required disclosures in interim financial statements,
SocGen violated IAS 34 Interim Financial Reporting, which states:
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An entity shall include the following information, as a minimum, in the notesto its interim financial statements, if material and if not disclosed elsewhere in theinterim financial report. The information shall normally be reported on a financialyear-to-date basis. However, the entity shall also disclose any events or transactionsthat are material to an understanding of the current interim period:
(a) a statement that the same accounting policies and methods ofcomputation are followed in the interim financial statements ascompared with the most recent annual financial statements or, if thosepolicies or methods have been changed, a description of the natureand effect of the change;
(c) the nature and amount ofitems affecting assets, liabilities, equity,net income, or cashflows that are unusual because oftheir nature,size, or incidence;
(d) the nature and amount of changes in estimates of amounts reported inprior interim periods of the current financial year or changes inestimates of amounts reported in prior financial years, if thosechanges have a material effect in the current interim period;
(h) material events subsequent to the end of the interim period thathave not been reflected in the financial statements for the interimperiod.
330. In addition , SocGen violated IAS 10, Events After the Reporting Period, which
requires disclosure of certain events that arise after the balance sheet date, but prior to the issuance
of the financial statements (non-adjusting events after the balance sheet date). IAS 10 provides as
follows, in relevant part:
An example ofa non-adjusting event after the reportingperiod is a declinein market value of investments between the end of the reporting period and thedate when thefinancial statements are authorizedfor issue. The decline in marketvalue does not normally relate to the condition of the investments at the end of thereporting period, but reflects circumstances that have arisen subsequently. Therefore,an entity does not adjust the amounts recognized in its financial statements for theinvestments. Similarly, the entity does not update the amounts disclosed for theinvestments as at the end of the reporting period, although it may need to giveadditional disclosure under paragraph 21.
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If non-adjusting events after the reporting period are material, non-disclosure could influence the economic decisions that users make on the basis ofthe financial statements. Accordingly, an entity shall disclose the following foreach material category ofnon-adjusting event after the reporting period:
(a) the nature of the event; and
(b) an estimate of its financial effect, or a statement that such an estimatecannot be made.
The following are examples of non-adjusting events after the balance sheet date that would generally
result in disclosure:
... (g) abnormally large changes after the reporting period in asset prices or foreignexchange rates.
331. SocGen also violated the general requirements ofIAS 1 which states, in relevant part:
An entity whose financial statements comply with IFRSs shall make anexplicit and unreserved statement of such compliance in the notes. Financialstatements shall not be described as complying with IFRSs unless they comply withall the requirements of IFRSs.... The application of IFRSs, with additionaldisclosure when necessary, is presumed to result in financial statements that achievea fair presentation.
All items of income and expense recognised in a period shall be included inprofit or loss unless a Standard or Interpretation requires otherwise.
The notes shall:
(a) present information about the basis of preparation of the financialstatements and the specific accounting policies used in accordancewith paragraphs 108-115;
(b) disclose the information required by IFRSs that is not presented onthe face of the [financial statements]; and
(c) provide additional information that is not presented on the face of the[financial statements], but is relevant to an understanding of any ofthem.
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332. Finally, because of the accounting improprieties described herein relating to the
Kerviel Fraud and the Subprime Fraud, SocGen's publicly issued financial results issued during the
Class Period also violated the following fundamental accounting principles included in the IASB
Framework:
(a) The principle that financial statements should "provide information about thefinancial position, performance and changes in financial position of an entitythat is useful to a wide range of users in making economic decisions."(Framework 12);
(b) The principle that financial statements should "show the results of thestewardship of management, or the accountability of management for theresources entrusted to it." (Framework 14);
(c) The principle that financial statements should provide information about the"economic resources" controlled by an entity, as well as "its financialstructure, its liquidity and solvency, and its capacity to adapt to changes inthe environment in which it operates." (Framework 16);
(d) The principle that financial statements should provide information about anentity's performance during a period, "in particular its profitability ... inorder to assess potential changes in the economic resources that it is likely tocontrol in the future" and, importantly, "the variability of performance."(Framework 17);
(e) The principle that the information in the financial statements should bereliable in that it represents what it purports to represent (i.e., "free frommaterial error and bias"). That information should be reliable as well asrelevant is a notion that is central to accounting. (Framework 31);
(f) The principle that prudence should be exercised in preparation of financialstatements in response to the "uncertainties that inevitably surround manyevents and circumstances." "Prudence is the inclusion of a degree ofcaution" in such preparation "such that assets or income are not overstatedand liabilities or expenses are not understated." (Framework 37);
(g) The principle of completeness, which means that nothing material is left outof the information that may be necessary to ensure that the financialstatements meet the criteria of reliability and relevance. (Framework 38);
(h) The principle that financial statements have the characteristic ofcomparability in that "the financial effect of like transactions and otherevents must be carried out in a consistent way throughout an entity ... andfor different entities." (Framework 39);
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(i) The principle that the timeliness of reporting should be considered, as an"undue delay" may impair the relevance of financial information.(Framework 43);
(j) The principle that "the application of principal qualitative characteristics andof appropriate accounting standards normally results in financial statementsthat convey what is generally understood as a true and fair view of, or aspresenting fairly," "the financial position, performance and changes infinancial position of an entity." (Framework 46).
F. Defendants' Failure to Disclose the Internal Control and RiskManagement Deficiencies Relating to the Kerviel Fraud and theSubprime Fraud Violated Financial Regulations of the AMF and theFrench Commercial Code
333. In addition to SocGen's numerous failures to disclose and record the nature, scope,
exposures, risks, and financial statement impacts related to both the Kerviel Fraud and the Subprime
Fraud as described above, the Company's true financial condition and results of operations were
further masked by false and misleading statements that the Company maintained an effective
framework of internal controls covering financial disclosures, financial reporting, and risk
management.
334. In its 2007 Registration document and in similar statements made in other Class
Period financial results, SocGen provided a report on Internal Controls which, in accordance with
article L. 225-37 of the French Commercial Code, was certified by SocGen ' s Chairman. Other
Senior Executives at SocGen were equally involved in the oversight of internal controls as noted in
the report:
Philippe Citerne, Societe Generale's Chief Executive Officer is responsiblefor ensuring the overall consistency and efficiency of the internal control system. Hechairs the Internal Control Coordination Committee (CCCI) which meets on aquarterly basis and is attended by the Corporate Secretary, the Head of RiskManagement, the Chief Financial Officer, the Chief Information Officer and theHead of Group Internal Audit.
335. Throughout the report, the Company clearly described the importance of effective
internal controls at SocGen:
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Given the extent and diversity of the risks inherent in banking activities,internal control within banks is a vital instrument in risk management and thus playsan important role in ensuring the sustainability of their business.
Internal control is designed to:
• detect and measure the risks borne by the Company, and ensure they areadequately controlled;
• guarantee the reliability, integrity and availability of financial andmanagement information;
• verify the quality of the information and communication systems.
336. The report outlined the specific control procedures that were purportedly in place to
ensure the accuracy of the financial statements and provided false assurance to investors that these
controls were operating effectively. These false assurances included:
The departments involved in theproduction offinancial data are as follows:
• the middle office in the Corporate and Investment Banking division validatesthe valuations offinancial instruments....
• the back office . .. checks that financial transactions are economicallyjustified, records transactions in the accounts and manages means of payment;
^atathe Group Finance Department gathers all accounting and management
... in a series of standardized reports .... so that it can be used in the overallmanagement of the Group and disclosed to third parties (supervisory bodies,investors, etc.).
Above and beyond its role of consolidating the Group's accounting andfinancial information, the Group Finance Department is also entrusted with large-scale audit assignments : it monitors the financial aspects of the Group's capitaltransactions and its financial structure, manages its assets and liabilities, andconsequently defines, manages and controls the Group 's financial position andstructural risks . Furthermore, it ensures that the regulatory financial ratios arerespected, defines accounting standards, frameworks, principles and proceduresfor the Group, ensures they are observed and verifies that all financial andaccounting data published by the Group is reliable.
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Local accounts are drawn up in accordance with local accounting standards,and the consolidated Group accounts are compiled in accordance with thestandards defined by the Group Finance Department, based on the IFRS adoptedby the European Union . The Group Finance Department has its own standards unit,which monitors the applicable regulations and drafts new internal standards tocomply with any changes in the regulatory framework.
Accounting data are compiled by the back and middle offices andindependently from the sales teams, thereby guaranteeing that information is bothreliable and objective . These teams carry out a series of controls defined by Groupprocedures on the financial and accounting data:
daily verification of the economic reality of the reported information;
• reconciliation , within the specified deadlines, of accounting andmanagement data using specific procedures;
• production of a quarterly analytical report on the supervision carriedout, which is submitted to the management of the entity or division, and to the GroupFinance Department.
Given the increasing complexity of the Group's financial activities andorganizations, staff training and IT tools are reviewed on a permanent basis to checkthat theproduction and verification offinancial and management accounting dataare effective and reliable.
In practice, the internal controlprocedures implemented by the various businessesare designed to guarantee the quality ofthefinancial and accounting information,and notably to:
ensure the transactions entered in the Group's accounts areexhaustive and accurate;
validate the valuation methods usedfor certain transactions;
ensure that transactions are correctly assigned to the correspondingfiscal period and recorded in the accounts in accordance with theapplicable accounting regulations , and that the accountingaggregates used to compile the Group accounts are compliant withthe regulations in force;
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The accounting audit team is comprised ofexperienced auditprofessionals and ischarged with the following functions:
audits of any areas where financial information is deemed to bemost sensitive, to verify that accounting standards are correctlyapplied;
At the third level of control, the General Inspection Department generallycarries out accounting audits as part of its general inspections, but also conductsspecific audits to check the quality of the controls carried out by the staff responsiblefor producing accounting, financial and management data.
337. The numerous assurances made by the Defendants in the 2007 Registration Document
as outlined above as well as similar statements made throughout the Class Period regarding the
effectiveness of the Company's disclosure controls and procedures, internal control over financial
reporting, and risk management were materially false and misleading because, in fact, SocGen had
numerous deficiencies in these areas related to the Kerviel Fraud and the Subprime Fraud, as
detailed in 9[9[127, 137, 153.
XI. ADDITIONAL JURISDICTION ALLEGATIONS
338. This Court has subject matter jurisdiction over the claims brought on behalf of
investors who purchased or acquired SocGen securities on foreign markets and/or on the over-the-
counter market as the focus of the Subprime Fraud was the U.S.
339. During the Class Period, there was but a single worldwide market for SocGen shares
and SocGen ADRs, which traded in tandem, as set forth in the chart at 126.
340. SocGen's ADRs are traded on the over-the-counter market under the symbol SCGLY.
At the end of the Class Period, SocGen had outstanding approximately 3.8 million holders ofADRs,
which are issued by Bank of New York Mellon. During the Class Period , SocGen's ADRs had
substantial trading volume, reaching a high of 4,423,717 on August 20, 2007, and a total volume of
trading during the Class Period of 87,412,345. On January 24 and 25, 2008, trading volume reached
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a high of 2,543,895 and 976,679 respectively. Importantly, SocGen is closely followed by a number
of U.S. analysts, including Goldman Sachs & Co., Morgan Stanley and Merrill Lynch. Additionally,
SocGen has significant U.S. institutional ownership.
A. SocGen's U.S. Operations
341. SocGen has been operating in the U.S. since 1938. According to its website, SocGen
"is [now] one of the largest foreign banking organizations in the U.S. with approximately 2,900
professionals working in 13 U.S. cities." Within the United States, SocGen operates principally
through two divisions, SGCIB and SGAM (a division of SGIMS). SocGen maintains offices and
facilities in New York, Chicago, Dallas, Houston, Jersey City, Boston and Los Angeles . In 2004,
SGCIB derived 29% of its income from its U.S. operations.
342. The SGCIB division has several wholly-owned subsidiaries operating in the U.S.,
including SG Americas Inc., SG Americas Securities , LLC, SG Constellation LLC, and SG Energie
(USA) Corp. Each of these subsidiaries maintains offices at SocGen's New York headquarters,
which is located within the District at 1221 Avenue of the Americas, New York, New York.
343. SGCIB's New York office was integral to the perpetration of the fraud alleged herein.
SocGen's FICC Americas division in New York was responsible for the purchasing, packaging,
valuation and management of SocGen's CDO and RMBS portfolio, which was subject to a€2 billion
plus writedown, announced January 24, 2008. Each of Defendants' false and misleading statements
regarding the valuation of its RMBS and CDO portfolio, as well as its exposure to the subprime
market, emanated from its FICC America' s division in the U.S.
344. SGCIB's New York office was also responsible for implementing SocGen's risk
management policies. The New York office houses one of two "risk division [ s]" for SocGen (the
other is located in Paris), which is responsible for "analyzing the quality of the group's
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counterparties and approving the exposure limits allocated to all entities and business lines." See
2007 Reg. Doc.
345. In addition, SocGen's audit committee, which is responsible for implementing
SocGen's risk management policies, held several meetings at its New York office during the Class
Period. At these meetings, the audit committee reviewed "principal risks, asset and liability
management, internal control and the financial aspects ofplanned acquisitions." See 2007 Reg. Doc.
346. In addition to SGCIB, SocGen's Global Investment Management and Services
division or SGIMS (of which SGAM is a core division), a self-described "international asset
manager, " also has several wholly-owned subsidiaries in the U.S. For instance, SG Investment
Management Corp and TCW Group, Inc., which is the parent company for Trust Company of the
West, a recognized leader in CDO asset management, has offices in Los Angeles, New York and
Houston. TCW was acquired by SocGen in 2001 to provide SGAM with a larger U.S. presence and
to facilitate the sale of SGAM products to the U.S.
347. TCW has 700 employees and manages $130 . 8 billion in assets (as of March 31,
2008). Of the $130.8 billion in assets that TCW manages, $70.5 billion are dedicated to U.S. Fixed
Income, of which roughly $56 billion are dedicated to CDOs. TCW specializes in fixed income
strategies , specifically MBSs and CDOs . TCW's three flagship products are Concentrated Core
Equities, Mortgage Backed Securities and Mezzanine Investing. In 2007, Total Securitization
named TCW CDO Manager of the Year. TCW had been also named CDO Manager of the Year in
2006 by Risk Magazine . In 2007, Morningstar named TCW's Chief Investment Officer, Jeffrey
Gundlach, Fixed Income Manager of the Year.
348. Defendant Day who is and, at all relevant times, was a U.S. resident, is and, at all
relevant times, was the Chairman of TCW.
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349. Defendant Day reaped more than €175 million in proceeds from his insider sales by
selling his SocGen stock through U. S. stock exchanges in 2006 and 2007. This fraud, perpetrated
against investors trading on U.S. exchanges in Los Angeles and New York, allowed Defendant Day
to directly profit from the insider knowledge he gained in the U.S. through his position at TCW.
Defendant Day utilized insider knowledge, thereby violating his duty both to SocGen shareholders
and to investors trading on U.S. markets, when he dumped millions ofSocGen shares in 2006 and
2007 on U.S. exchanges at artificially inflated prices.
350. SocGen's SGAM division purports to be one of the world's leading asset managers,
with €357.7 billion in assets under management as of December 21, 2007. As ofMarch 31, 2008, its
U.S. division employed 750 managers and analysts. SGAM markets itself as "one of the only
European asset managers to have a global structure founded on local expertise." Moreover, SGAM
claims to be "a renowned player in the USA."
351. Of SGAM's roughly €358 billion in assets under management at December 31, 2007,
27% came from the U.S.
352. Since its acquisition of TCW, SGAM' s management of U.S. assets has increased to
€115 billion (as of December 31, 2007). In 2001, only 2% of SGAM's assets under management
were from the U.S. and less than 5% of TCW's assets came from outside the U.S. At the end of
2006, however, 31%, or €345 billion in assets managed by SGAM came from the U.S. Since its
acquisition by SGAM, TCW's asset base has grown from $86 billion to $144.9 billion. This
accounts for approximately 32% of SGAM's total assets.10 By the end of the Class Period, TCW
managed roughly one-third of SGAM' s assets.
10 ("Brawl in the Family," Europmoney Institutional Investor, February 2007.)
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353. As part of its acquisition of TCW, SocGen named several SocGen executives to
TCW's board, including Defendant Citerne, GIMS's CEO Collas and SGAM's CEO Clot.
Likewise, Defendant Day was appointed to SocGen's Board of Directors. More recently, TCW's
vice-Chairman Mark I. Stem was appointed to SocGen's Management Committee on June 19, 2007.
As a member of the management committee, Stem participated in meetings relating to SocGen's
operational efficiency, business strategy, and other issues of general interest to the group.
B. Defendants' False Statements Were Made, and Its FraudulentConduct Occurred, in the United States
354. During the Class Period, and no later than the beginning of 2006, SocGen Paris
implemented its TGV initiative . SocGen wanted to reap the enormous profits that other big banks
were generating from selling United States mortgage-backed securities - in particular, structuring
and underwriting CDOs. In order to accomplish this, SocGen had to expand SGCIB's presence in
the United States - specifically in New York City (the epicenter of United States mortgage-backed
securities market). Under the TGV plan, SocGen established the CDO Group in New York." The
CDO Group included approximately 100 people responsible for underwriting (structuring) CDOs
and RMBS securities. SocGen's New York office quickly grew to approximately 2,000 people
under the TGV initiative . The TGV plan was developed by SocGen' s senior executives in Paris, but
was implemented and supervised in the United States by Paolo Taddonio, head ofFICC Americas in
New York, who reported directly to CEO Mustier. Accordingly, many ofthe false statements made,
11 In April 2006, during an interview with Institutional Investor Americas, Mustier, then actingCEO of SGCIB, stated that SocGen wanted "to establish a significant presence in the U.S. marketsfor structured-finance products and asset-backed securities." ("Pardon My French," InstitutionalInvestor Americas, April 2006.)
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as alleged herein, and a substantial part of the Subprime Fraud was largely perpetrated and carried
out in the United States under SocGen's supervision.
355. As alleged in more detail herein: (i) SocGen's New York operations accumulated,
sold and eventually got stuck with billions of dollars in United States subprime residential mortgage
backed securities (RMBS and CDO); (ii) SocGen's New York operations created bogus values and
VaR models for its RMBS and CDO portfolio; (iii) SocGen's New York operations generated trade,
cash and profit reports and sent them to SocGen Paris on a daily basis ; and (iv) SocGen's New York
operation engaged in a short selling scheme with hedge fund Magnetar in order to induce its
customers into buying its "crap" CDOs.12 Furthermore, SocGen regularly communicated with
analysts in the United States regarding its operations and financial conditions.
356. SocGen's New York operations was responsible for establishing the values for its
RMBS and CDO portfolio. However, SocGen severely lacked the vital internal controls necessary
to accurately value its RMBS and CDO portfolio. According to former SocGen-New York
employees, SocGen's valuation models made no sense and did not reflect reality.
357. Numerous former SocGen employees who worked in the Company's New York
operations during the Class Period have confirmed that SocGen was aware in early 2007 (and no
later than mid-2007) that there was no market for RMBS and CDOs. In fact, in the beginning of
2007, SocGen's New York operations had to cancel its planned CDO offering because there was no
market for CDOs and ultimately got stuck with these unsold assets. When SocGen's New York
CDO Group was dissolved in mid-2007, it confirmed that the market for RMBS and CDO products
was not viable. Moreover, when the CDO Group was ultimately dissolved in mid-2007, SocGen-
12 SocGen-New York was also responsible for the sale of CDOs structured by SocGen.
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New York was "stuck" with a large portfolio of CDOs that could not be sold in the open market
given the lack of a viable market.
358. By early to mid-2007, it had become increasingly apparent to SocGen-New York that
its CDO portfolio suffered from serious valuation problems. A former employee recalls a specific
meeting at SocGen-New York on or about Q1 or Q2 2007, attended by Taddonio, Gregg Condas,
Dave Asking and Richard Basking, in which they discussed the fact that the valuation models did not
reflect reality. Indeed, there were several sales meetings in New York throughout 2006 and into
2007, where Tadonnio was present, in which it was clear that the RMBS/CDO values had dropped
significantly and that the market had become illiquid.
359. Beginning in 2006, as a means to rid itself of virtually worthless CDOs, SocGen-New
York engaged in a short selling scheme with the Magnetar hedge fund (based in Evanston, Illinois)
that allowed SocGen to sell its CDOs to its customers by giving the false appearance that the lowest,
riskiest piece of the CDO, the equity tranch, had been sold unconditionally. In fact, Magnetar
purchased the equity tranch of SocGen's CDO, but only on the condition that it could short (using
Credit Default Swaps) the remaining piece. This allowed SocGen to sell the CDO and enabled
Magnetar to make hundreds of millions in profit when the price of the CDO dropped, as both
SocGen and Magnetar expected it would.
360. SocGen-New York was in constant communication with SocGen Paris. SocGen-New
York generated and sent P&L cash, trade and sales reports to Paris on a daily basis. These daily
reports were reviewed by SocGen Paris. Paris had a checks and balances system to monitor the
reports that came in from New York.
361. Executives from SocGen's Paris headquarters visited SocGen-New York on a regular
basis. For example, Mustier was at SocGen's New York office almost every month and no less than
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once a quarter . Also, Mustier participated in planned retreats with SocGen's New York front office
personnel (including traders) geared towards motivating and rewarding the front office.
362. During the Class Period, SocGen Paris was clearly aware of how badly the RMBS
and CDO market had deteriorated based on its communications with SocGen-New York. By mid-
2007, in response to this deterioration, SocGen executives in Paris implemented several "significant"
initiatives in an attempt to remedy the valuation issues with its RMBs and CDO portfolio, including
a directive to "move the VaR engine" (generated on SocGen ' s Opus System) from New York to
Paris. This transition was intended to provide the Executive Group in Paris with "more control" over
the VaR analysis.
363. As alleged herein, SocGen communicated directly with analysts in the United States,
as well as with other members of the United States financial community. For example, on
September 10, 2007, at the Lehman Brothers Financial Services Conference in New York, Frederic
Oudea, SocGen's current CEO and former CFO during the Class Period, speaking on behalf of
SocGen, repeated SocGen's prior false statements that it had only "limited exposure to US mortgage
and LBO financing."
364. At the September 10, 2007 Lehman Brothers conference in New York, Oudea
represented that SocGen has "[d]irect and indirect exposure to US mortgage assets and loans leading
to limited losses in case of severe stress tests. " Oudea further stated : "In a scenario of USD 150 bn
cumulative losses on subprime mortgage loans for the whole industry, SG CIB estimated loss under
EUR -100 m (for a total cumulative industry loss ofUSD 200 bn, SG CIB estimated loss under EUR
-200 m)." Oudea's statements at the Lehman conference in New York were false and misleading.
As alleged herein, at the time Oudea was speaking at the Lehman Brother's conference, Defendants
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knew, or recklessly disregarded, that SocGen's subprime losses were estimated to far exceed
€100 million, or even €200 million.
365. SocGen released all of its filings in English on its website and at every earnings
release, SocGen provided analysts with packets, written in English, explaining the performance of its
business.
XII. APPLICABILITY OF PRESUMPTION OF RELIANCE: THE FRAUD-ON-THE-MARKET DOCTRINE
366. Plaintiffs will rely upon the presumption of reliance established by the fraud-on-the-
market doctrine in that, among other things:
(a) Defendants made public misrepresentations or failed to disclose material facts
during the Class Period;
(b) The omissions and misrepresentations were material;
(c) The Company' s stock and ADRs traded in efficient markets;
(d) The misrepresentations alleged would tend to induce a reasonable investor to
misjudge the value of the Company' s stock and ADRs; and
(e) Plaintiffs and other members of the Class purchased SocGen stock and/or
ADRs between the time Defendants misrepresented or failed to disclose material facts and the time
the true facts were disclosed, without knowledge of the misrepresented or omitted facts.
367. At all relevant times, the markets for SocGen stock and ADRs were efficient for the
following reasons, among others:
(a) As a regulated issuer, SocGen filed periodic public reports; and
(b) SocGen regularly communicated with public investors via established market
communication mechanisms, including through regular disseminations ofpress releases on the major
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news wire services and through other wide-ranging public disclosures, such as communications with
the financial press, securities analysts and other similar reporting services.
XIII. DEFENDANTS' INSIDER SALES DURING THE CLASS PERIOD
A. Defendants' Insider Trading Scheme
368. The Individual Defendants' insider trading was timed to take advantage of artificially
inflated share prices at all-time stock price highs, either during or immediately following very
substantial stock re-purchase activity by SocGen and occurring just in time to avoid precipitous
drops in share prices. Individual Defendants made the following sales during the Class Period while
they were aware of material adverse facts about SocGen which they knew had not been disclosed to
the market:
PercentDate of Shares of Stock
Name Sale Location Sold13 Price Proceeds SoldDidier Alix 05/17/2007 Euronext Paris 23,171 € 142.93 € 3,311,911
23,171 € 3,311,911 81.2%
DanielBouton 03/17/2006 Euronext Paris 92,794 € 116.2314 € 10,785,376
04/12/2006 Euronext Paris 13,373 € 109.53 € 1,464,84505/30/2006 Euronext Paris 12,906 € 114.76 € 1,481,04006/30/2006 Euronext Paris 12,906 € 106.56 € 1,375,20009/29/2006 Euronext Paris 21,401 € 117.57 € 2,516,09211/30/2006 Euronext Paris 21,259 € 118.73 € 2,524,05412/20/2006 Euronext Paris 30,329 € 119.61 € 3,627,64101/12/2007 Euronext Paris 10,149 € 122.90 € 1,247,35002/15/2007 Euronext Paris 10,149 € 126.27 € 1,281,55003/15/2007 Euronext Paris 10,149 € 114.22 € 1,159,19005/16/2007 Euronext Paris 10,149 € 144.20 € 1,463,475
13 Amounts are adjusted for the Company's capital changes via rights issue on 10/26/06 &3/13/08.
14 Share price used is closing price on 3/17/06.
- 154 -
06/15/2007 Euronext Paris 10,149 € 135.35 € 1,373,700
255,713 € 30,299,515 65.3%
PhilippeCiterne 07/03/2006 Euronext Paris 93,027 € 107.12 € 9,964,801
12/28/2006 Euronext Paris 53,516 € 121.12 € 6,482,09512/28/2006 Euronext Paris 54,586 € 121.12 € 6,611,778
Robert Day 04/05/2006
01/04/2007
01/11/2007
01/11/200701/09/200801/10/200801/10/200801/18/200801/18/2008
Los AngelesNew York StockExchangeNew York StockExchangeNew York StockExchangeEuronext ParisEuronext ParisEuronext ParisEuronext ParisEuronext Paris
201,129 € 23,058,674 81.3%
3,657 $140.28 $512,962
225,356 € 123.09 € 27,739,186
53,416 $156.27 $8,347,181
1,282 $156.98 $201,183961,486 € 89.18 € 85,744,96410,683 € 89.77 € 959,06696,149 € 89.77 € 8,631,59553,416 € 84.28 € 4,502,111480,743 € 84.28 € 40,518,9951,886,187 €168,095,917 53.5%
- plus -$9,061,326
369. As set forth in greater detail below, Defendants failed to publicly disclose any detail
about their sale of SocGen shares, except for total holdings and number of options exercised, until
required to do so by the exchange regulator , the AMF, in March 2006 . Even so, based on the
incomplete trading details available, we know that Defendants sold, at least, during the Class
Period over 2.3 million oftheir shares for at least €225 million. These massive sales constituted
53% to over 81% ofDefendants' available holdings and were timed to take advantage of a huge
multi-bullion euro share re-purchase plan that was devised, controlled and executed by Defendants.
Defendants manipulated the timing and amounts of the re-purchases in order to create and support
the demand for shares which acted to contribute to the artificial inflation of share prices just as the
Individual Defendants were heavily selling their personal shares. The Individual Defendants'
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millions of euros of insider selling was often in addition to huge salaries and undeserved and
inflated bonuses obtained based on manipulated Company financial results.
370. During the Class Period Defendant Bouton was paid a base salary of €1,000,000,
€1,250,000, and €1,250,000 in the years 2005,2006,2007, respectively, and obtained performance-
linked bonuses of €2,300,000 and €2,180,000 in the years 2005 and 2006, respectively, based on
bogus results that grossly overstated the quality of earnings and understated the huge risks SocGen
had to take in order to generate those earnings. Defendant Citerne was paid a base salary of
€600,000, €750,000, and €750,000 in the years 2005, 2006, 2007, respectively, and obtained
performance-linked bonuses of€1,270,000 and €1,310,000 in the years 2005 and 2006, respectively.
Additionally, in 2006 and 2007, Defendant Bouton received a total of 270,914 stock options and
Defendant Citerne received a total of 156,503 stock options that accounted for millions of dollars in
additional compensation.
371. Defendants Bouton and Citerne received performance related bonuses for 2005 and
2006 only because of the false financials and inflated results that SocGen was reporting during the
Class Period, which these two Defendants knew about at the time. But, even with their inflated
multi-million dollar pay and undeserved performance bonus payouts, the appetite for more pay that
Defendants Citerne and Bouton had developed remained unsatisfied . At the expense of Company
shareholders and market participants , Defendants caused the Company to embark on a manipulative
and well-timed stock buy-back program while simultaneously dumping their own personal Company
shares. The buyback program allowed Individual Defendants to artificially manipulate or influence
the stock price of SocGen at key periods of time so that they could unload their personal shares with
the help of a corresponding additional boost.
- 156 -
B. SocGen's Stock Repurchase Program Was Timed to Boost SharePrices to Support and Benefit Defendants' Sales
372. Individual Defendants caused SocGen to engage in a stock buy-back program from
2005 to 2008 that cost shareholders of SocGen nearly €1 billion . The entire rationale for any stock
re-purchase plan is that it constitutes the best use - i.e. investment - of corporate funds. However,
SocGen's stock buy-back and re-purchase plan was used to prop up the share price in a calculated
manner - to facilitate and assist insiders in obtaining the highest price for their personal shares. In
other words, the Individual Defendants were selling their personal shares while simultaneously
causing the Company to spend hundreds of millions of euros to re-purchase shares. Accordingly,
Defendants manipulated and defrauded the market in order to sell their shares at the highest possible
price.
373. From January 1, 2005 to November 23, 2006, Individual Defendants caused SocGen
to re-purchase 8.6 million shares ofSocGen Stockfor approximately €680,000,000. By the end of
2005, the share price had reached the record price of approximately €96 per share. Throughout 2005
and until March 21, 2006, Individual Defendants were not required by the French regulator, the
AMF, to publicly disclose the details of their stock sales. The new rule requiring public disclosure
was to go into effect March 21, 2006. Until that time, Individual Defendants only had to disclose
their trades to the AMF.
374. On March 8, 2006, Individual Defendants caused SocGen to re-purchase over 87,000
shares at approximately €113 per share for a total expenditure of nearly €10 million. Just days later,
Defendant Bouton, the Chairman and CEO of SocGen, sold 92,794 SocGen shares for
approximately €116 per share and over €10 million in total proceeds. This was the largest known
share sale by Defendant Bouton and it was completed just after the Company made a similarly large
re-purchase. Defendant Bouton's huge sale was also completed just days before Defendant Bouton
- 157 -
was required to begin publicly disclosing details of his insider trading. This massive sale was timed
to take advantage of both the boost and support from the re-purchase by the Company as well as the
last chance to conceal the details of a huge trade from shareholders.
375. From November 13, 2006 to November 17, 2006, Individual Defendants caused
SocGen to re-purchase over 1 million Company shares at about €129 per share for total expenditures
of approximately €134 million. Within a few trading days, on November 30, 2006, Defendant
Bouton sold over 21,000 of his SocGen shares at approximately €118 per share for over €2.5 million
in proceeds - his third highest grossing sale of shares that Plaintiffs have been able to identify.
376. From December 4, 2006 to December 22, 2006, Individual Defendants caused
SocGen to re-purchase over 850,000 shares at approximately €124-127 per share for over €106
million of shareholders' cash. During this same period of time, on December 20, 2006, Defendant
Bouton made his second largest known share sale of over 30,000 shares at over €119 per share for
over €3.6 million in proceeds . On December 28, 2006, Defendant Citerne also made his largest
known combined sale and sold over 108,000 shares at €121 per share for over €13 million in
proceeds.
377. Incredibly, the Individual Defendants were just getting started. Within days, the
insider selling and SocGen re-purchase program started up again. From January 15, 2007 to
January 19, 2007, the Individual Defendants caused SocGen to re-purchase over 420,000 shares at
over €131 per share for total expenditures of €55 million of shareholders' cash. From January 4,
2007 to January 11, 2007, Defendant Day sold over 280,000 of his shares at approximately €123 per
share for total proceeds of over €27.5 million , plus U.S. dollar transactions for proceeds in excess of
$8.5 million all over U.S. exchanges. Not to be left out of this next re-purchase, on January 12,
2007, Defendant Bouton also sold over 10,000 of his SocGen shares at over €122 per share for over
- 158 -
€1.2 million in proceeds . All of these sales - from November 2006 to January 2007 - occurred as
SocGen reported record results, indicated greater growth potential, and the Individual Defendants
were reassuring investors about SocGen's "low exposure to credit risk," which, according to them,
justified the huge share re-purchase program. The entire rationale of the share re-purchase was that
SocGen shares were "cheap," and therefore it was the best use of shareholder funds, but Defendants
Bouton, Day and Citerne knew these statements were false as they were dumping huge amounts of
their own shares at prices near the all-time highs, and almost double what the shares trade at today.
378. From April 2, 2007 to June 29, 2007, SocGen' s re-purchase program and Defendants'
illegal insider trading continued. During these four weeks, the Individual Defendants caused
SocGen to re-purchase over 805,000 shares at a cost to shareholders ofover €114 million. During
this same time, Defendant Bouton made two large sales of his SocGen shares at the highest price
per share ofany ofhis known sales . On May 16, 2007, Defendant Bouton sold over 10,000 shares
at over €144 per share for proceeds of over €1.4 million. Defendant Alix also got in on the action
the very next day and sold 23,171 sharesfor 0,311,900 in a single trade. This represented a sale
ofover 81% ofDefendant Alix's available holdings and was at the top ofthe Class Period share
price . And on June 15, 2007, Defendant Bouton again sold over 10,000 shares at over €135 per
share for proceeds of over €1.3 million.
379. The last share re-purchase occurred later in 2007. From November 1, 2007 to
November 30, 2007, the middle of 4Q07, the Individual Defendants caused SocGen to re-purchase
over 580,000 shares at a total cost of nearly €60 million . Within a few weeks, Defendant Day
engaged in the largest insider selling of any Defendant. From January 9, 2008 to January 18, 2008,
at the same time SocGen purported to discover Kerviel's trades, Defendant Day sold over 1.6
million sharesfor over €140 million in proceeds . The huge purchases of shares by SocGen, and the
- 159 -
timing of those purchases, acted to artificially create demand for SocGen shares and boost the share
price during periods of time when Defendants engaged in massive amounts of illegal insider trading
and sold a majority of their available share holdings to profit from their scheme.
C. Details of Defendant Day's Insider Trading
380. During the Class Period, while in possession of material, adverse undisclosed
information about the Company, SocGen Director, and TCW founder and Chairman, Defendant
Day, sold at a minimum over 1. 8 million shares of his SocGen stock at inflated prices, for a
staggering €168,095,917 plus $9,061,326 USD in illegal insider trading proceeds, and 204,577
units of "Other Financial Instruments" related to SocGen securities for about €223,754 in additional
illegal insider trading proceeds . Of this massive amount, €140,356, 731 were soldjustafter SocGen
admits that abnormal trading risks were detected and the process that led to the unwinding of
Kerviel's positions began.
381. Defendant Day's sales were highly unusual in their amount and timing. In fact,
Defendant Day completed his sales just days before the devastating public disclosure of SocGen's
subprime losses caused the stock price to drop over 23%. These were the largest known sales
Defendant Day ever completed - and dwarfing all others as indicated in the chart below:
- 160 -
Societe GeneraleRobert Day - Insider Sales
July 1, 2005 to February 29, 2008
€1501.1
€1aarJ
13
0
U-
€ aryl
ass Pe, VC..•
•r.c -x.23!08v
8•.,I•LJ i,a.a,c.^
plus
J A S 0 N D J F M A M J J A 5 0 N D J F M A M J J A S 0 N D J F
2005 2006 2007 2008
€160
€150
€140
€130
€120
v€110 I°
€100 I°
€90
€80
€70
€6a
382. On January 28, 2008, the UK' s Times Online discussed Defendant Day's massive end
of Class Period sales (and underestimated the total that Defendant Day actually gained by over €40
million) in an article entitled: "SocGen director offloaded €100m worth ofshares; Jerome Kerviel
is charged as it emerged that Robert Day sold nearly €100m in shares eight days before the
scandal erupted":
Mr. Day, 65, is the founder of TCW, a Los Angeles investment company which is asubsidiary of Societe Generale's asset management group. TCW, based in LosAngeles, has a portfolio of $66 billion in collateralized debt obligations (CDOs) ofwhich $52 billion are under management for Societe Generale Asset Management.CDOs are complex financial instruments which are often backed by sub-primemortgage debt. Societe Generale revealed last week it has €4.9 billion in CDOsbacked by US sub-prime mortgage debt.
383. The Company's 2008 Registration document identifies Defendant Day as Chairman
and CEO of SocGen's U.S. subsidiary TCW, and one of the "directors [that] carry out functions
-161-
within the group." Defendant Day took advantage of material non-public information, including
SocGen's imminent massive writedowns related to its subprime exposure, as well as the Company's
exposure to massive unhedged, directional trades by Kerviel, by selling over 1.6 million shares, over
49.44% ofhis holdings for over €140 million in the month of January 2008 alone.
384. The timing of Defendant Day's end of Class Period sales were highly suspicious, as
they took place at the same time management was discerning Kerviel's positions and just before the
Company's planned Monday announcement of a massive increase of subprime writedowns.
Specifically:
(a) After unloading over 1 million shares over the course of just two days,
January 9 and 10, 2008, Defendant Day then sold over 500,000 more shares on Friday, January 18,
several days after SocGen admits that abnormal trading risks were detected that resulted in
additional controls being put into place which started the process that led to the unwinding of
Kerviel's positions;
(b) All of Defendant Day's January 2008 trades took place at share prices
between €84 and €90. SocGen's shares closed on January 24, 2008, after the €7 billion writedown
disclosure, at €75.81, it quickly collapsed further to €71.05 per share;
(c) On January 17, 2008, SocGen's stock traded on volume of 4,361,876 shares
on the Euronext Paris. On January 18, 2008, the day that SocGen management admits that it was
made aware of Kerviel's position, but still prior to any public disclosure, SocGen's trading volume
jumped to 11,578,779 shares. Yet still, Defendant Day's trades on January 18, 2008 made up close
to 5% of all trading in the Company 's stock on that high volume day, a day when Kerviel's
perilous positions were made aware to only a select few;
- 162 -
(d) SocGen's official statement that these trades were made during a "window of
time where such trades were permitted under Societe Generale's trading policies for directors[,]" is
highly misleading since its directors' trading window was apparently open on Friday, January 18,
2008, when a press conference to announce subprime writedowns was scheduled for Monday,
January 21, 2008. The Monday press conference was postponed until after Kerviel' s positions could
be unwound; and
(e) Further, a meeting of the Board of Directors Audit Committee was scheduled
in advance and set for that Sunday January 20, 2008, just prior to the Board of Directors meeting
which Defendant Day would attend, to specifically discuss the writedowns related to U.S. residential
mortgage assets, in particular Mezzanine CDOs.
385. In addition, of Defendant Day's minimum 1,886,187 Class Period shares sold, a
significant portion of these fraudulent trades were performed over U.S. exchanges. Defendant Day's
illicit insider trades in 2006 and 2007 were reportedly accomplished in Los Angeles and over the
New York Stock Exchange, and total 283,711 shares of SocGen common stock for gross proceeds of
€27,739,186, plus an additional $9,061,326 USD. While Defendant Day' s massive trades in January
2008 tend to overshadow his prior sales in 2006 and 2007, these earlier sales still amount to an
extraordinary number of shares dumped and proceeds gained, all while in possession of material,
adverse, inside information and all completed over U.S. exchanges . Also, Defendant Day's U.S.
trading activities in January 2007 coincided with the Company's stock re-purchase program. From
January 15, 2007 to January 19, 2007, the Individual Defendants caused SocGen to re-purchase over
420,000 shares at over €131 per sharefor total expenditures of65 million ofshareholders' cash.
From January 4, 2007 to January 11, 2007, Defendant Day sold over 280,000 of his shares at
-163-
approximately €123 per sharefor totalproceeds ofover €27.5 million plus U. S. dollar transactions
for proceeds in excess of$8.5 million.
386. The total Class Period insider trading proceeds realized by Defendant Day of
€168,095,917, plus $9,285,079 USD, was enormous and represented his dumping ofover 53% of
his available SocGen holdings during the Class Period.
387. Given that the huge amounts and opportunistic timing of these sales is highly
suspicious, both the U.S. Attorney for the Eastern District of New York and the SEC are
investigating Defendant Day's January 2008 trading activities.
D. Defendant Bouton's Illegal Insider Trading
388. During the Class Period, while he was in possession of material, adverse, non-public
information, Defendant Bouton sold at least 255,713 shares of SocGen stock for illegal insider
trading proceeds of 00,299,515. Defendant Bouton sold over 65% of his available SocGen
holdings during the Class Period. These are sales by the Chairman and CEO of the Company -
over 65% of his holdings - during a time when he had devised and executed a €1 billion stock re-
purchase program that, in effect, told shareholders the stock price was cheap and under-valued.
Defendant Bouton ' s trading is set forth below:
- 164 -
Societe GeneraleDaniel Bouton - Insider Sales
July 1, 2005 to February 29, 2008
€12
€10
o €8
D
LL €6
€4
€2
€0
Cass Pe, oc : 8:1 05 - 1.23.08
Class Period Sales:
Shares Sold : 255.713Proceeds : €30.299.515Percentageof Shares Sold : 65.3°/10
In. 1
J A S 0 N D J F M A M J J A S 0 N D J F M A M J J A S 0 N D J F
2005 2006 2007 2008
389. Defendant Bouton' s sales throughout the Class Period were suspicious in both timing
€160
€150
€140
€130
€120 si00
T
€110f!)
€100
€90
€80
€70
€60
and amount, especially when compared to Defendant Bouton's positive statements to the market
while he was dumping his own personal shares. Defendant Bouton unloaded millions of euros worth
of shares at near all-time historic highs for SocGen stock throughout the Class Period, all while
making positive public statements regarding the Company's risk control procedures and exposure to
the subprime market. Indeed, Defendant Bouton completely misrepresented the effect that the
subprime meltdown was having on SocGen's highly exposed Mezzanine grade CDOs and other
subprime investments. Defendant Bouton's final two trades came as SocGen's stock price peaked in
May and June 2007, just as he downplayed the threat that the subprime crisis posed to the Company.
390. In addition to the sales that Defendant Bouton reported to the AMF which were
subsequently posted on the AMF's website, Defendant Bouton exercised two batches of options and
-165-
then immediately sold on March 17, 2006. This sale came after the AMF order of March 9, 2006
which required that certain insider' s sales be publicly reported on the AMF website, butjust days
before this order was officially published and took effect on March 21, 2006. As vividly shown by
the above chart, Defendant Bouton's well-timed sale away from the public eye is byfar the single
largest sale Defendant Bouton makes during the entire Class Period, and before Defendant
Bouton was required to publicly disclose the details ofthe sale, including that he was able to sell
92,794 shares at a then all-time stockprice high of€116per shareforproceeds in excess of€10.7
million.
391. The timing of Bouton's massive sale, after the AMF March 9, 2006 order butprior to
the official publication of the AMF order on March 21, 2006, contradicts the so-called ethical reform
that Bouton himself advocated in the highly publicized September 23, 2002 report, "Promoting
Better Corporate Governance In Listed Companies" or more commonly referred to as, simply, the
Bouton Report on Corporate Governance . A Dow Jones article observed:
Amid the criticism, big business is trying to salvage what it can. The newBouton report on corporate governance issues - put together last month by thechairman of one of France's biggest banks and signed by nine other chief executivesor chairmen of other large French companies - advocates cautious reform . ... TheBouton report admits there is a need for reform but puts the emphasis on self-discipline in the boardroom rather than new laws. "It's the way we behave,individually and collectively, that is the best way ofbringing aboutan improvementin corporate governance," says the report .. . French businessmen point out thatEnron and WorldCom happened in a highly regulated environment in the U.S. Theyalso warn of the danger of knee-jerk legislation and allowing the U.S. to effectivelyset the rules for corporate governance along the lines of the recent Sarbanes-OxleyAct, which tightens up accounting governance and disclosure rules."
(Oct. 7, 2002 "French Business Fights Rearguard Action Over Co Reform," Dow Jones
International News.)
392. As the CEO and Chairman of the Company, Defendant Bouton was responsible for
the strategic vision of SocGen, including the development and implementation of the Company's
- 166 -
risk control management procedures. Defendant Bouton's position as Chairman and CEO placed
him in a position to access any and all Company information at his request, especially as the wave of
news related to the subprime market, and related investments, spread throughout the financial world
starting as early as 2005. Defendant Bouton used the Company-specific knowledge that he gained
through his position as Chairman and CEO, and within TCW along with Defendants Citerne and
Day, to dump 65% of his available shares throughout the Class Period for over €30 million in
proceeds.
393. Finally, the insider trading proceeds realized by Defendant Bouton of over €30
million was many times greater than his salary and provided him a huge incentive to drive the
SocGen share price up in order to obtain maximum prices for the sales of his shares.
E. Defendant Citerne's Insider Trading
394. During the Class Period, while in possession of material, adverse, undisclosed
information about the Company, Director and Co-CEO Defendant Citerne sold at least 201,129
shares of his SocGen common stock for €23,058,674 in illegal trading proceeds and 40,244 units of
"Other Financial Instruments" related to SocGen securities for €33,678 in illegal trading proceeds.
Defendant Citerne's massive unloading of SocGen common stock resulted in him selling 81% ofhis
available holdings during the Class Period. As shown below, Defendant Citerne's massive insider
selling was highly unusual and timed to take advantage of the near-all-time stock price highs:
- 167 -
Societe GeneralePhilippe Citerne - Insider Sales
July 1, 2005 to February 29, 2008
€15l i
€10lvij)
U-€ 51.1
€ alvl
Class Period Sales:
Shares Sold: 201.129Proceeds: €23.058.674Percentageof Shares Sold: 81.3%
J A S D N D J F M A M J J A S O N D J F M A M J J A S D N D J F
2005 2006 2007 2008
€160
€150
€140
€130
€120
€110
€100 `°
€90
€80
€7a
€60
395. As discussed above, Defendant Citerne's unique position within SocGen gave him a
high level of access into the specific areas of the Company that would result in the accumulation of
huge risks and the end of Class Period writedowns. Not only was Defendant Citerne a Director and
Co-CEO of SocGen, as well as a director of Defendant Day's SocGen U.S. subsidiary TCW, he also
chaired the Company's CCCI, which met on a quarterly basis and was attended by the Corporate
Secretary, the Head of Risk Management, the Chief Financial Officer, the Chief Information Officer
and the Head of Group Internal Audit, all of whom are responsible for the implementation and
monitoring of SocGen's risk control management systems.
396. With the level of insight that Defendant Citerne had into the two key problematic
areas for the Company, risk control and subprime exposure, the timing of Defendant Citerne's
- 168 -
known Class Period sales is highly suspicious. In a single day of trading, just three days before the
end of FY2006, Defendant Citerne sold 108,102 shares. This one day of trading by Defendant
Citerne resulted in illegal trading proceeds of over €13,093,873 and came when executives and
analysts within TCW, the CDO experts and SocGen' s U.S. subsidiary at which Defendants Citerne
and Day were directors, knew of the significant and substantial increase in risk in the subprime
market - and therefore risk to SocGen's subprime-related holdings, including its RMBS and CDO
portfolio, and business model - due to significant increases in the default rates on subprime
mortgages. Armed with such knowledge gained from his position at TCW, combined with his non-
public knowledge of SocGen's heightened exposure to its subprime portfolio, including the
Company's portfolio of Mezzanine CDOs and other structured finance instruments, Defendant
Citerne sold big, €13,093,873 in a single day, and again, like Bouton's sales, in direct violation of
SocGen's Director's Charter which banned such short swing sales.
397. On top of all this, as discussed more fully below, from December 4, 2006 to
December 22, 2006, Individual Defendants caused SocGen to re-purchase over 850,000 shares at
approximately €124-127 per share for over €106 million of shareholders ' cash, thus inflating
SocGen's share price even morejustprior to Defendant Citerne's huge end ofDecemberpayday.
While Company funds were put to use buying the supposedly under-valued shares of SocGen,
Defendant Citerne was unloading his personal stake within the Company at near all-time-high share
prices.
398. Defendant Citerne, unfortunately, was not the only executive bailing out and selling
his SocGen shares. Defendant Bouton's second largest Class Period sale occurred just one week
before Defendant Citerne's largest sales, and to top it all off, Defendant Day then unloaded
€27,739,186, plus an additional $8,548,364 USD, in his own shares over the two weeks after
- 169 -
Defendant Citerne 's December 28, 2006 trades . All of this trading by TCW directors in the same
three-week period directly corresponds to the Company's stock buyback program and to TCW's
knowledge of the rapidly deteriorating condition of the U.S. real estate market and the resulting
meltdown that subprime lending and securitization would cause for SocGen's subprime-related
investments , including its RMBS and CDO portfolio.
399. Finally, Defendant Citerne' s minimum insider trading proceeds of over €23 million
was a huge multiple over his 2006 and 2007 salary of €750,000, with these sales timed to take
maximum advantage of the near all-time high in the price of SocGen shares.
F. Defendant Alix's Insider Trading
400. During the Class Period, while in possession of material, adverse, undisclosed
information about the Company, Co-CEO Defendant Alix sold at least 23,171 shares of his SocGen
common stock for €3,311,911 in illegal insider trading proceeds and 3,516 units of "Other Financial
Instruments" related to SocGen for an additional €151,117 in illegal insider trading proceeds.
Defendant Alix's securities sales during the Class Period were suspicious in both timing and amount.
401. Defendant Alix's two sales were accomplished in less than nine months after
Defendant Alix was appointed Co-CEO and soon after he learned of the significant and substantial
increase in risk in the RMBS and CDO markets and SocGen ' s exposure thereto through its
undisclosed heavy involvement in Mezzanine grade CDOs and other mortgage-linked securities.
These Mezzanine CDOs were highly susceptible, drastically more so than most CDOs, to this
increase in risk related to RMBS. Defendant Alix, like Defendant Citerne, sold an unbelievable 81 %
of his available holdings of SocGen shares during the Class Period. In fact, as shown below,
Defendant Alix sold his SocGen shares at peak prices - at almost three times the price of SocGen
shares after the truth of SocGen's risk exposure was uncovered:
- 170 -
Societe GeneraleDider Alix - Insider Sales
July 1, 2005 to February 29, 2008
€3.51x1
€ 3.INv1
€2.01.1
o.. cd:6.-V05 1123.08
Class Period Sales:
c ass
€2.51.1
Shares Sold, 23.171Proceeds: €3.311.911Percentageof Shares Sold: 81 2% A 1J^
€1.51.1
a
-A-
t 0. 5 Iv1
€0.arv'lJ A S 0 N D J F M A M J J A S 0 N D J F M A M J J A 5 0 N D J F
2005 2006 2007 2008
€160
€150
€140
€130
€120
7
€110 `:U)
€1 o o `°
€9a
€ sa
€70
€60
402. The timing of Defendant Alix's single known Class Period SocGen common stock
sale on May 17, 2007 is highly suspicious . This single sale of common stock for proceeds of
€3,311,911 came just 9 trading days after the Company's stock price reached its all-time high
closing price of €158.42. Also, as previously discussed, this sale took place right in the middle of
the April 2, 2007 to June 29 , 2007, SocGen stock re-purchase program. This extremely well timed
dumping of81% ofhis available stock holdings came less than nine months after Defendant Alix
entered his new role as Co-CEO ofSocGen. In addition, Defendant Alix's insider trading proceeds
of over €3,311,911 was a high multiple relative to his 2007 salary of €500,000.
XIV. LOSS CAUSATION/ECONOMIC LOSS
403. On January 24, 2008, SocGen revealed that its risk control management process was
so lax that 31 year-old junior trader Jerome Kerviel had been able to take massive unhedged equity
- 171 -
positions on various European indices totaling €50 billion - exceeding SocGen's market
capitalization and causing SocGen to book a €4.9 billion loss to pre-tax income once those equity
positions were unwound. At the same time SocGen chose to announce €2.05 billion of further
writedowns, including a €1.1 billion writedown on its RMBS and CDO portfolio - confirming
market rumors only days earlier that significant additional writedowns were indeed necessary.
404. When the truth concerning SocGen's lack of risk control management system and
RMBS and CDO writedowns entered the market and became apparent to investors, SocGen's stock
fell precipitously as the prior artificial inflation came out of SocGen's stock price. As a result of
their purchases of SocGen stock artificially inflated prices during the Class Period, Plaintiffs and
other members of the Class suffered economic loss, i.e., damages under the federal securities laws,
as the truth was disclosed on and around January 24, 2008.
405. By misrepresenting the Company's financial results, its risk control management
system and the value of its RMBS and CDO portfolio, including the need to write down further
significant amounts of its RMBS and CDO portfolio, Defendants presented a misleading picture of
SocGen's business risks and internal controls. Thus, instead of truthfully disclosing during the Class
Period that SocGen lacked the necessary internal controls to adequately prevent misconduct and
manage its trading risks and that its RMBS and CDO portfolio was overvalued in excess of €1
billion, Defendants caused SocGen to falsely report its financial results and made false and
misleading statements about SocGen's financial condition, including the strength of its risk control
management system and the value of its RMBS and CDO portfolio.
406. These false and misleading statements caused and maintained the artificial inflation in
SocGen's stock price throughout the Class Period, until the truth was revealed to the market.
- 172 -
Defendants' false and misleading statements had the intended effect and caused SocGen stock to
trade at artificially inflated levels - reaching a high of €148.29 per share on May 4, 2007.
407. On January 18 though January 21, 2008, SocGen's stock price dropped 16% from
€93 to €78.52 as information began leaking into the market that SocGen had failed to fully write
down its RMBS and CDO portfolio to accurately reflect its true value. The price drop on January 18
through January 21, 2008 was statistically significant, i.e., not explained by movements in the
market as a whole, and the direct result of the leakage of information into the market that SocGen's
RMBS and CDO portfolio was significantly overvalued. As explained by one analyst, the 16% drop
in share price during these few days was consistent with a drop in 2007 net profit ifSocGen were to
write down its RMBS and CDO portfolio €1.3 billion.
408. Similarly, as a result of SocGen's January 24, 2008 disclosure, SocGen's stock
dropped from €79.08 to €75.81 on January 24, 2008, or €3.27 per share, on heavy volume of over 26
million shares. This price decline was statistically significant . SocGen's ADR shares in the U.S.
similarly lost value as a result of these revelations.
409. In sum, as the truth was revealed, initially through the leakage of information
concerning further subprime writedowns and later upon the Company' s disclosure of the Kerviel-
related loss and confirmation of additional subprime writedowns , the Company' s stock price
plummeted, the artificial inflation came out of the stock and Plaintiffs and other members of the
Class were damaged.
410. The timing and magnitude of SocGen ' s stock price declines negate any inference that
the loss suffered by Plaintiffs and other Class members was caused by changed market conditions,
macroeconomic or industry factors or Company-specific facts unrelated to the Defendants'
fraudulent conduct. The economic loss, i.e., damages, suffered by Plaintiffs and other members of
-173-
the Class was a direct result of Defendants' fraudulent scheme to artificially inflate SocGen's stock
price and the subsequent significant decline in the value of SocGen's stock when the truth was
revealed to the market.
XV. NO SAFE HARBOR
411. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements plead in this Complaint. Many
of the statements pleaded herein were not specifically identified as "forward-looking statements"
when made, and many were representations about the Company' s present status. To the extent there
were any forward-looking statements: (a) there were no meaningful cautionary statements
identifying the important then-present factors that could cause actual results to differ materially from
those in the purportedly forward-looking statements; and (b) the particular speakers of such forward-
looking statements knew that the particular statements were false or misleading, and/or the forward-
looking statements were authorized and/or approved by an executive officer of the Company who
knew that those statements were false when made.
412. Any purported warnings contained in the press releases and statements quoted herein
were generic and unparticularized boilerplate statements of risks, and thus lacked the meaningful
cautionary language necessary to insulate any purportedly forward-looking statements.
XVI. CLASS ACTION ALLEGATIONS
413. Plaintiffs bring this action as a class action pursuant to Rule 23 of the Federal Rules
of Civil Procedure on behalf of all persons who purchased SocGen ADRs and other securities on the
open market during the Class Period and who suffered damages as a result of their purchases (the
"Class"). Excluded from the Class are (1) the Company and the Individual Defendants ; (2) members
of the immediate family of each of the Individual Defendants; (3) the subsidiaries or affiliates of the
Company; (4) any person or entity who is, or was during the Class Period, a partner, officer, director,
- 174 -
employee or controlling person of the Company; (5) any entity in which any of the Defendants has a
controlling interest ; and (6) the legal representatives , heirs, successors or assigns of any of the
excluded persons or entities specified in this paragraph.
414. The members of the Class are so numerous that joinder of all members is
impracticable . While the exact number of Class members is unknown to Plaintiffs at this time and
can only be ascertained through appropriate discovery, Plaintiffs believe that there are, at minimum,
thousands of members of the Class who purchased SocGen securities during the Class Period. The
disposition of their claims in a class action will provide substantial benefits to the parties and the
Court. During the Class Period, SocGen had more than 500 million shares of stock outstanding,
owned by thousands of persons.
415. There is a well-defined community of interest in the questions of law and fact
involved in this case. Questions of law and fact common to the members of the Class which
predominate over questions solely affecting individual Class members include:
• Whether Defendants violated the 1934 Act as alleged herein;
• Whether Defendants omitted and/or misrepresented material facts;
• Whether Defendants knew or recklessly disregarded that their statementswere false and misleading;
• Whether the price of SocGen's securities during the Class Period wasartificially inflated due to non-disclosures and/or misrepresentationscomplained of herein; and
• The extent of damage sustained by Class members and the appropriatemeasure of damages.
416. Plaintiffs' claims are typical of the claims of the members of the Class as Plaintiffs
and members of the Class sustained damages arising out of Defendants' wrongful conduct in
violation of federal law as complained of herein.
-175-
417. Plaintiffs will fairly and adequately protect the interests of the members of the Class
and have retained counsel competent and experienced in class actions and securities litigation.
Plaintiffs have no interests antagonistic to or in conflict with those of the other Class members.
418. A class action is superior to other available methods for the fair and efficient
adjudication of the controversy since joinder of all members of the Class is impracticable.
Furthermore, because the damages suffered by the individual Class members may be relatively
small, the expense and burden of individual litigation make it impossible for the Class members
individually to redress the wrongs done to them. There will be no difficulty in the management of
this action as a class action.
XVII. FIRST CLAIM FOR RELIEF
For Violation of §10(b) of the 1934 Act and Rule 10b-5 Against All Defendants
419. Plaintiffs repeat and reallege I9[1-418.
420. Each of the Defendants is liable for making false and misleading statements, or
failing to disclose material adverse facts and acting directly or indirectly as a participant in a scheme
and/or course of business which: (i) deceived the investing public regarding SocGen, its business,
finances and prospects; (ii) artificially inflated the price of SocGen ADRs and other securities during
the Class Period; (iii) caused Class members to purchase SocGen stock at inflated prices; and
(iv) permitted Defendants to sell shares of SocGen stock at inflated prices.
421. Defendants' direct participation included preparing and/or reviewing SocGen's false
and/or misleading public filings and/or press releases, and knowingly or recklessly giving false
information to securities analysts, money and portfolio managers and institutional investors in
conference calls and other presentations.
422. Despite their knowledge of SocGen's false and misleading statements, Defendants
failed, throughout the Class Period, to disclose material adverse facts about the financial condition
- 176 -
and business prospects of SocGen, which caused the Company' s filings, press releases and other
public statements issued during the Class Period to be materially false and misleading for the reasons
set forth herein. The Defendants directly and indirectly, knowingly or recklessly engaged and
participated in a fraudulent scheme and course of conduct to conceal adverse material information
about the business, finances, financial condition operations and future business prospects of SocGen.
423. As a result of the above described acts of the Defendants, they have violated § 10(b)
of the Exchange Act and Rule lOb-5 promulgated thereunder in that they (a) employed devices,
schemes and artifices to defraud; (b) made untrue statements of material facts or omitted to state
material facts necessary in order to make the statements made in light of the circumstances under
which they were made not misleading ; or (c) engaged in acts, practices and a course of business
which operated as a fraud or deceit upon Plaintiffs and the other members of the Class in connection
with their purchases of SocGen stock.
424. Plaintiffs and the other members of the Class, at the time of the misrepresentations
and omissions, did not know that these statements were false and misleading and believed them to be
true. In reliance upon the integrity of the market, Plaintiffs and the other Class members were
damaged as they paid artificially inflated prices for SocGen ADRs and other securities. Had
Plaintiffs and the other members of the Class known the truth, they would not have bought their
ADRs and other securities at the prices they paid
425. The market for SocGen securities was open, well-developed and efficient at all
relevant times. Defendants' misrepresentations and misleading omissions were the reason for the
loss suffered by Plaintiffs and the other Class members.
XVIII. SECOND CLAIM FOR RELIEF
For Violations of §10(b) of the 1934 Act and Rule 10b-5 Against the Individual Defendants
426. Plaintiffs repeat and reallege 919[1-418.
- 177 -
427. During the Class Period, each Individual Defendant occupied a position that made
him privy to non-public information concerning SocGen. Because of this access, each of the
Individual Defendants knew that the adverse facts specified herein were being concealed and that
false and misleading statements were being made. Notwithstanding their duty to refrain from selling
SocGen stock while in the possession of material, non-public information concerning SocGen, the
Individual Defendants sold over 2.3 million shares of the Company's stock, profiting from their
fraudulent scheme. The Individual Defendants made the following sales during the Class Period,
while they were aware of adverse facts about SocGen that they knew had not been disclosed to the
market:
Societe Generale (SOCGEN)Insider Sales: 4/12/06-1/24/08Amounts are adjusted for the Company's capital changes via rights issue on 10/26/06 & 3/13/08
Ordinary Shares
Name Date of Sale LocationShares ShareSold Price Proceeds
Didier Alix 5/17/2007 Euronext Paris 23,171 € 142.93 € 3,311,911
23,171 € 3,311,911
Daniel Bouton 3/17/20064/12/20065/30/20066/30/20069/29/200611/30/200612/20/20061/12/20072/15/20073/15/20075/16/20076/15/2007
Estimate: used closingpriceEuronext ParisEuronext ParisEuronext ParisEuronext ParisEuronext ParisEuronext ParisEuronext ParisEuronext ParisEuronext ParisEuronext ParisEuronext Paris
92,794 € 116.23 € 10,785,37613,373 € 109.53 € 1,464,84512,906 € 114.76 € 1,481,04012,906 € 106.56 € 1,375,20021,401 € 117.57 € 2,516,09221,259 € 118.73 € 2,524,05430,329 € 119.61 € 3,627,64110,149 € 122.90 € 1,247,35010,149 € 126.27 € 1,281,55010,149 € 114.22 € 1,159,19010,149 € 144.20 € 1,463,47510,149 € 135.35 € 1,373,700255,713 € 30,299,515
- 178 -
PhilippeCiterne 7/3/2006 Euronext Paris 93,027 € 107.12 € 9,964,801
12/28/2006 Euronext Paris 53,516 € 121.12 € 6,482,09512/28/2006 Euronext Paris 54,586 € 121.12 € 6,611,778
201,129 € 23,058,674
Robert Day 4/5/2006 Los Angeles 3,657 $140.28 $512,962New York Stock
1/4/2007 Exchange 225,356 € 123.09 € 27,739,186New York Stock
1/11/2007 Exchange 53,416 $156.27 $8,347,181New York Stock
1/11/2007 Exchange 1,282 $156.98 $201,1831/18/2008 Euronext Paris 480,743 € 84.28 € 40,518,9951/10/2008 Euronext Paris 10,683 € 89.77 € 959,0661/10/2008 Euronext Paris 96,149 € 89.77 € 8,631,5951/9/2008 Euronext Paris 961,486 € 89.18 € 85,744,9641/18/2008 Euronext Paris 53,416 € 84.28 € 4,502,111
1,886,187 €168,095,917$9,061,326
Other Securities
Name Date of Sale LocationSecuritiesSold
UnitPrice Proceeds
Didier Alix 10/9/2006 Euronext Paris 3,516 € 42.98 € 151,117
3,516 €151,117
PhilippeCiterne 10/9/2006 Euronext Paris 40,244 € 0.84 € 33,678
40,244 € 33,678
New York StockRobert Day 10/5/2006 Exchange 7,824 $1.11 $8,699
New York Stock10/6/2006 Exchange 136,798 $1.09 $149,244
New York Stock10/10/2006 Exchange 59,955 $1.10 $65,811
204,577 $223,754
- 179 -
428. The Individual Defendants violated §10(b) of the Exchange Act and Rule lOb-5 in
that they, directly or indirectly;
(a) employed devices, schemes and artifices to defraud;
(b) engaged in acts, practices, and a course of business that operated as a fraud or
deceit upon Plaintiffs and others similarly situated in connection with their purchases of SocGen
securities during the Class Period; and
(c) traded SocGen shares while in possession of material, non-public information.
XIX. THIRD CLAIM FOR RELIEF
For Violation of §20(a) of the 1934 Act Against All Defendants
429. Plaintiffs repeat and reallege 919[1-418.
430. Defendants acted as controlling persons of SocGen within the meaning of §20(a) of
the Exchange Act, 15 U.S.C. §78t(a), as alleged herein . By virtue of their positions as officers,
directors or controlling shareholders of SocGen, their high-level positions, and participation in
and/or awareness of the Company's operations, Defendants had the power to influence and control
and did influence and control, directly or indirectly, the decision-making ofthe Company, including
the content and dissemination of the various statements that Plaintiffs contend are false and
misleading. Defendants were provided with or had unlimited access to copies of the Company's
reports, press releases, public filings and other statements alleged by Plaintiffs to be misleading prior
to and/or shortly after these statements were issued and had the ability to prevent the issuance of the
statements or cause the statements to be corrected.
431. In particular, each of the Individual Defendants had direct involvement or intimate
knowledge of the day-to-day operations of the Company during the Class Period. Therefore, each is
presumed to have had the power to control or influence the particular transactions giving rise to the
- 180 -
securities violations as alleged herein, and exercised the same. SocGen controlled the Individual
Defendants and all of its employees.
432. By reason of such wrongful conduct, Defendants are liable pursuant to §20(a) of the
1934 Act. As a direct and proximate result of the wrongful conduct, Plaintiffs and other members of
the Class suffered damages in connection with their purchases of the Company's stock during the
Class Period.
XX. FOURTH CLAIM FOR RELIEF
For Violation of §20A of the 1934 Act Against the Individual Defendants Bouton and Day
433. Plaintiffs repeat and reallege 919[1-418.
434. During the Class Period, each Individual Defendant occupied a position that made
him privy to non-public information concerning SocGen. Because of this access, each of the
Individual Defendants knew that the adverse facts specified herein were being concealed and that
false and misleading statements were being made. Notwithstanding their duty to refrain from trading
in SocGen stock while in the possession of material, non-public information concerning SocGen, the
Individual Defendants sold over 2 . 3 million shares of the Company' s stock, profiting from their
fraudulent scheme while Plaintiffs purchased contemporaneously. Plaintiffs identified in the
following table purchased shares contemporaneously with Individual Defendants Bouton's and
Day's stock sales on the following dates:
Name Date of Plaintiffs Making Units ProceedsSale Contemporaneous Sold
Purchases
Bouton 4/12/2006 Avon 13,373 €1,464, 845.001/12/2007 Boilermakers 10,149 €1,247, 350.003/15/2007 Vermont 10,149 €1,159, 190.006/15/2007 UFCW 880 Funds 10,149 €1,373,700.00
BOUTON SUB-TOTAL: 43,820 €5,245,085.00
-181-
Name Date of Plaintiffs Making Units ProceedsSale Contemporaneous Sold
Purchases
Day 4/5/2006 Avon 3657 $512,962.081/4/2007 Boilermakers 225,356 €27,739,186.001/11/2007 Boilermakers 53,416 $8,347,181.001/11/2007 Boilermakers 1282 $201,182.521/18/2008 Vermont 534,159 €45,021,106.00
DAY SUB-TOTAL: 817,870 €72,760,292.00-plus-$9,061,325.60
GRAND TOTAL OF DEFENDANTS BOUTON'S AND €78,005,377.00DAY'S -plus-CONTEMPORANEOUS SALES: $9,061 ,325.60
435. Plaintiffs and all other members of the Class who purchased shares of SocGen
securities contemporaneously with the sales of SocGen securities by the Individual Defendants:
(1) have suffered substantial damages in that they paid artificially inflated prices for SocGen
securities as a result of the violations of § 10(b) and Rule 1 Ob-5 herein described; and (2) would not
have purchased SocGen securities at the prices they paid, or at all, if they had been aware that the
market prices had been artificially inflated by Defendants' false and misleading statements.
XXI. PRAYER
WHEREFORE, Plaintiffs pray for judgment as follows:
A. Declaring this action to be a proper class action pursuant to Fed. R. Civ. P. 23;
B. Awarding Plaintiffs and the members ofthe Class damages and prejudgment interest;
C. Awarding Plaintiffs' reasonable costs, including attorneys' fees; and
D. Awarding such equitable/injunctive or other relief as the Court may deem just and
proper.
- 182 -
YXII. JURY DEMAND
Plaintiffs demand a trial by jury.
DATED: October 16, 2008 COUGHLIN STOIA GELLERRUDMAN & ROBBINS LLP
SAMUEL H. RUDMANTHEODORE J. PINTARPATRICK W. DANIELSRYAN A. LLORENSJESSICA T. SHINNEFIELD
THEODORE J. PINTAR
58 South Service Road, Suite 200Melville, NY 11747Telephone : 631/367-7100631/367-1173 (fax)
COUGHLIN STOIA GELLERRUDMAN & ROBBINS LLP
PATRICK I. COUGHLINTHEODORE J. PINTARRYAN A. LLORENSJESSICA T. SHINNEFIELD655 West Broadway, Suite 1900San Diego, CA 92101Telephone: 619/231-1058619/231-7423 (fax)
COUGHLIN STOIA GELLERRUDMAN & ROBBINS LLP
RANDI D. BANDMAN52 Duane Street, 7th Floor
New York, NY 10007Telephone : 212/693-1058
212/693-7423 (fax)
-183-
COUGHLIN STOIA GELLERRUDMAN & ROBBINS LLP
MICHAEL F. GHOZLANDSEAN K. COLLINS9601 Wilshire Blvd., Suite 510Los Angeles, CA 90210Telephone: 310/859-3100310/278-2148 (fax)
Lead Counsel for Plaintiffs
S:\CasesSD\Societe Generale_SocGen\Cpt SocGen First Amended.doc
- 184 -
(I-Xl'11F1C'A`1 TON OF 1 AMFII) PLAIN IFF
i't.iltSl >> .I .1(1) T I3ll1 1^ r1 Si C' t RITIFS
A'FitNAW l' f 1114S I ONINVLS"1-ME NTCO MM1 (" PlaintiA-)declares:
1. Plainti11has reviewed a complaint and authorized its filing.
2. i'laintift'did not acquire the security that is the stit^jWof this action at the
direction ocpiaintifrs Iit igation counsel or in order to participate in this private action
or any other litigation under the federal securities laws.
3. WAR is "Illing to serve as a representativ party on behalf' of the
class, including, pro iding testimony Oi deposition and trial, ii' necessary.
4. Plaintiff has Wed Upon itlg000n COtirlSCi'5 Of ttlC ittstu dial
records in order to deterniinc that Plaint 11 has made the tollo ing trtinsoction(s)
during the Class Period in the see un i ties that a rc the Subjec t o this a ction:
unity l rLuis_^c tic^^^ Date Price Per S hare
See attached Schedule A.
5. PlaintiI has not sought t0 serve or served as a representative party for a
class in an action filed under ( 1 e federal securities laws except as detailed below
during, the thee: yeas prior to the date 01 this Certification:
Nola.
(. The Plainti l't' "-il l not. accept any payment Ipr serving as a representative
part' on bellt of the class b yond the Mint ii s pro rota hart of oni' itlove }
except Such reasona1DI °, Costs ind expenses (including, loci `.'%` ges) directly relating to
the representation ol the class as ordered or approved by the court.
I declare tir4 e:r penalty of pe rjury that the foregoing is true a nd correct.
Executed this nay c7l _ __CQJ ' 2008.
VI.- MON'I' PENSION INVESTMENTC0M9MYEI'FF.
By:
Its: cis€:
m :: t; N
SCHEDULE A
SEC; JF 'flES 1RA1'dSACTIONS
Acqui lon
W i;2Jti:5 1920 E BB A 7. .32.:Ui;:'7 1_ 3 5, 4 3.22
AMM i".._006 7 9v i 107 49
01110006 1115 c 114 75
02/27...'00 /5 5 € a _ x.20
03.:':;...0 11626 €: IS 31C4i'! 'om 2%,646 € 106 43
11 12007 8711 €. 106.15
k±i'. 1:2008 2W € 7174
G to T:pWA su €. ln.L 0
v l i ; e: ^sri9i4s of i Price
63/2020 4 11521
652 ^J M3', Q 1 2 5 i 3 39
.... WON ..!5 L 122 34
11220006 1,009 € 121.174241007 1157 E n 39 45
,f,;,.,'!)7 327 ... W44.
1206/20(173.^_5i cJ1. $
PURSUANT O F ED.aRAL SECURI ESL WS
AVON PEMSIO1 ' t' € I fl DMM91`` O `ir3"Y BAT'14 & NORTH EAsT
SOMERSET COUNCIL ("Plaixntiffs) declares:
1. Plaintiff Mu reviewed a ccpnpl:aant and authorized its filing.
2. Plaintiff (lid ftot tiCq'c i tt ^tthy :that'is the :subject,o fthis action at the
dirertien of lalailitiff's counsel or in order to participate in this private action or any
other litigation under the fedi al seciiritie's 1AWs.
3. Plaintiff is will im4 to sefve as. a repre.se-n ativeparty'on behalf of the
class, including providing testi Qrty at deposition and trial; if necessary.
4. Plaintiff has. made t effollowing transaction (s) during the `lass Period in
the securities that ac the subjeet of tills action:
ecu ity I r n etioti Date Price Per Share
See attached Schedule A.
i. Plaintiff has not sought to serve or served as a.iepresentati.ve party for a
class in an action lIedl under the federal securities laws except as detailed below
during the three years prior- to the date of this Certif`catio is
;srar^clrn {'^. Gr'crcr^5a ^i1.1a:h'linepic., et al., No. I :07-c -O574-1..LS (S,l,).N.YY,)
6. 'Flit, Piainti 1 ill not accept any payment for serving as a rcprescntative
panty on behalf of the class beyond the. Plaintiffs -oro rata share of any recovery,
SOCCtl"N?
c p uch rcast^r ab1 . : rr ti er s {ax lzzd^n^ ost ag ) ciieetlj relating to
th e} :ic e t t n o t th l ss s o ed or `ap roved by the court
I declare ithd& penalty .tf perjury that the foregoing is true and cor ect.
Executed this f &1 clay .of .O _ l?3£ , 200&.
AVON PENSION FUND,ADMT 7IS E ER.ED BY BA TI & NORTHEAST t 11VIERSET COUNCIL
By, 15-s
so^GE?:
sECfARr `9 :' 'RANSA; 7a jw5
AcquWtions
Date Typal m,blx4t of
0 13V2Od& '13,.5 i.3 1 f :'©4/O4/200 9, 32 41.0x.
WOOD%0410079006 815 6114.'8771 O/2O •? 11;€18 1 .3^
Date 1ypd!Amvii ?it.ofAvtd +_cu___ _, i . Price
12/08/2006 7,714 €115,031.2/14/ Ofl6 7.,815 C 119150711312007 11,037
.... .... .. ... .. ;^N!!y:n.,,.^r+:^^mc»-,......a.,+.,....^ra••.m..^.....+e-.....mnr.m+^cr+c..zw*w^rr.wwu...ro^i^an....+..w......+,..-ww?.:4i!^+^+e°.•^....n
CERTIFICATION O.IF NAMED P.LAIN'TIFF
PURSUANT TO FEDERAL SECURITIES LAWS
BOILERMAKER-BLACKSMITH NATIONAL PENSIONFUND ("Plaintiff')
declares:
1. Plaintiff has reviewed a complaint and authorized its filing.
2. Plaintiff did not acquire the securitythat is the subjectofthis action at the
direction of plaintiffs counsel or in order to participate in this private action or any
other litigation cinder the federal securities laws,
i. Plaintiff is willing to serve as a representative party on behalf of the
class, including providing testimony at deposition and trial , if necessary.
4. Plaintiffhas made the following transaction(s) during the Class Period in
the securities that are the subject of this action:
Security Transaction Date Price Per Share
See attached Schedule A.
5. Plaintiff has not sought to serve or served as a representative party for a
class in an action filed under the federal securities laws except as detailed below
during the three years prior to the date of'this Certification:
In re Exodus Jomrnunicaiions , Inc. Sec. Litig., No, C-O1-2661-MMC; (N.D. Cal.)
6. The Plaintiff will not accept any payment for serving as a representative
party on behalf of the class beyond the Plaintiffs pro rata share of any recovery,
SOCGL-N
except such reasonable costs and expenses (including lost wages) directly relating to
the representation of the class as ordered or approved by the court.
I declare under penalty of perjury that the foregoing is true and correct.
Executed this .. s . day of" . ..._._2008.
BOILERMAKER-BLACKSMITHNATIONAL PENSION FUND
B
Its: Executive Administrator
a 2 o
SOCGEN
SCHEDULEA
SECURITIES TRANSACTIONS
Acquisitions
Date Type/Arount ofAcquired Securities Acquired pvCe
01109/2007 13,707 8122.300310512007 25,317 € 114.7003.'1412007 800 E 114.820812012007 4.982 € 111.35
Sales
Date Typo/Anmount ofSold Soeurtfes Said Price
05!0412007 5,092 € 1355.83
10/10/2007 8X343 € 118.061210512907 7,965 € 93.88
12/17/2007 895 € 92.1601!21/2008 373 € 75.53
Opening position of 43,917 sharps
(: .-.'RTIFIC:;ATION OF NAMED PLAINTIFFI't_^JZSUA T TO FEDERAL SECT RITIE S LAWS
UNITE FOOD AND COMME RCIAl., WORKERS UNION LOCAL 880 --
R.T%7i'.hiZs I:"OOD E}vlP1,OYERS JOINT PENSION FUND ("Plaintiff) declares:
Plaintiff'#ias reviewed a complaint and a uthorized its tiling.
2. Plaintiii'dicl not acquire the security th l is the subject ofthis action at the
direction oI'hiaiutifl''s counsel or in order to participate in this private action or any
Other litigation und e r the federal securities lawns.
3. Plaintiffis Willi:ng to serve as a rehcesentativ party on behalf of the
class, inchiding providing testimony at deposition and trial, if necessary.
4, Plaintiff has made the following transaction(s) during the C lass Period in
the securities that are the subject of this act on:
Security Tc»saction Rapt e Price Per Share
See attached Schedule A.
5. (a) Plaintiff has been appointed to serve as a representative party for aclass in the following actions filed under the Federal securities lm-\'s during the three}-ears prior to the date of this (:'ertification:
UP'CIF Lear; 880 -. Rola l Food i,. NVcwnumi :flirting C.'bp., e: at. No. O5-CV-I046-MSK-BNB (ft COI L) .)ch'- alz V. lives ;r, lxcr., e; al., No. 3:^' c^-{)?,3I9 .`;!(t -`I'J!3 ((:).tti.J.}
In re C^xll"er t:nratp"'llics, inc. Sec, No. SACV_0 -00169 CJC(RNI3x) (0.0. Ca I.)
(b) P1ainti flis seeking to serve as a 1't (?res ntativ party {'bra class in
the following actions filed under the federal securities laws:
(c) Plaintiff initially sought to serve as is representative party for aclass in the following actions filed under the federal securities laws during the threeyews prior to the date of this Certification:
1:1°t'!t'' Locat S't) - Ri'tail roes<i, ci ell, r. Sunrise Senior l,h'in ,hie„ in u1., No. 4?-cv O d2-R13W (f i)C)
SMGEN"
6. The Pla.int.iff'vvil1 not accept anypayment for serving as a representative
party on behalf of the class beyond the Plaintiff's pro rata share of any recovery,
except such reasonable costs and expenses (including lost wages) directly relating to
the representation of the class as ordered or approved by the, court.
I declare Under penalty of perjury that the foregoing is true and correct.
'Executed this Clay of ....._._, 2008.
By.
Its: Trustee, United Food and CommercialWorkers Union Local 880 - RetailFood Employers Joint Pension Fund
_2_SOCCH N
. ....- ..._ .. ^ . _.... .. Sri-
SCHEDULE A
Acquisitions
DateAcquired
04/27/200706/11/200711101/2007
Sales
DateSold
06/05/2007O1!1012008
SECURITIES TRANSACTIONS
TypelAmount ofSecurities Acquired
'15,5003,2005,890
Type/Amount ofSecurities Sold
904:800
Price
$42.49$38.55$32.69
Price
S3&50$27.97
DECLARATION OF SERVICE BY MAIL
I, the undersigned, declare:
That declarantis and was, at all times herein mentioned, a citizen of the United States
and a resident of the County of New York, over the age of 18 years , and not a party to or interested
party in the within action; that declarant ' s business address is 52 Duane Street, 7th Floor, New York,
New York 10007.
2. That on October 17, 2008 , declarant served the FIRST AMENDED AND
CONSOLIDATED COMPLAINT FOR VIOLATION OFTHE FEDERAL SECURITIES LAWS by
depositing a true copy thereof in a United States mailbox at New York, New York n a sealed
envelope with postage thereon fully prepaid and addressed to the parties listed on the attached
Service List.
3. That there is a regular communication by mail between the place of mailing and the
places so addressed.
I declare under penalty of perjury that the foregoing is true and correct. Executed this 17th
day of October, 2008, at New York, New York.
JAMIE EA
Sean Kennedy CollinsMichael Fred GhozlandCoughlin Stoia Geller Rudman
& Robbins LLP9601 Wilshire Boulevard, Suite 510Los Angeles, CA 90210
Kent Andrew BronsonMilberg Weiss Bershad & Schulman LLPOne Pennsylvania PlazaNew York, NY 10119
Mark C. HolscherKirkland &Ellis LLP777 South Figueroa St., Ste. 3400Los Angeles, CA 90017
Ted PintarRyan A. LlorensJessica ShinnefieldCoughlin Stoia Geller Rudman
& Robbins LLP655 West Broadway, Suite 1900San Diego, CA 92101
Ira M. PressKirby McInerney LLP825 Third Avenue, 13th FloorNew York, NY 10022
Elizabeth Ann BerneyCohen, Milstein, Hausfeld & Toll, P.L.L.150 East 52nd Street, 30th FloorNew York, NY 10022
Robert Samuel CohenJoseph Serino, Jr.Kirkland & Ellis LLP153 East 53rd StreetNew York, NY 10022
Bryan Joshua LevineScott D. MusoffGeorge Abraham ZimmermanSkadden, Arps, Slate, Meagher & Flom LLPFour Times SquareNew York, NY 10036
James Stuart NotisGardy & Notis, LLP440 Sylvan Avenue, Suite 110Englewood Cliffs, NJ 07632
Samuel Howard RudmanDavid Avi RosenfeldCoughlin, Stoia, Geller, Rudman
& Robbins LLP58 South Service Road, Suite 200Melville, NY 11747
Joseph Harry WeissWeiss & Lurie551 Fifth Ave,New York, NY 10176
Randi Dawn BandmanCoughlin Stoia Geller Rudman
& Robbins LLP52 Duane Street, 7th FloorNew York, NY 10007
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