Tuesday, January 29, 2008

French Investors Hit Soc Gen with Subprime-Related Lawsuit

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As further details have emerged, Société Générale’s account of how Jérôme Kerviel triggered billions of dollars in losses has come under scrutiny, as reported on the January 29, 2009 Wall Street Journal (here). But questions are also being raised about trades in SG shares by SG director Robert Day and foundations he controls in the days prior to SG’s recent disclosures, as reported here, and those questions have now apparently taken the form of a lawsuit.

Given the nature of SG’s recent disclosures, it is hardly surprising that investors might file a legal action seeking management accountability. But the first lawsuit filed appears to relate not to the bank’s January 24, 2008 disclosures about Kurviel’s unauthorized trading, but instead to the bank’s announcement the same day of a 2.08 billion euros write-down for losses related to subprime lending in the United States. As the Wall Street Journal stated on January 25, 2008 (here) when reporting on the bank’s announcements of the prior day, "the disclosure of allegedly fraudulent trading overshadowed fourth-quarter write-downs by Société Générale totaling 2.05 billion euros to cover its mortgage exposure."

According to news reports (here and here) French lawyer Frederik-Karel Canoy has filed an insider trading lawsuit on behalf of 130 individual investors and "four to five" companies with stakes in the bank. Frustratingly, the news reports do not specify where the lawsuit has been filed, what the specific basis for the lawsuit is, or who the defendants are.

The news reports are clear that the lawsuit relates to the timing of Robert Day’s January 2008 trades in SG shares. Day is an American billionaire financier (here), who founded the Trust Company of the West, which was sold to SG in 2001. Day is currently Chairman of The TCW Group. According to forms filed on the website of the Autoritié des Marchés Financiers (AMF), the French market regulator, Day or foundations he controls made five sales between January 9 and January 18, 2008.

The first sale (documented here), in Day’s own name, took place on January 9, 2008 at a price of 95.27 euros a share and resulted in proceeds of 85.7 million euros.

The second sale (documented here), on behalf of the Robert Day Foundation, took place on January 10, 2008, as a price of 95.9 euros a share and resulted on proceeds of 8.6 million euros a share.

The third sale (documented here), on behalf of the Kelly Day Foundation, also took place on January 10, 2008, at a price of 95.9 euros a share, and resulted in proceeds of about 959,000 euros.

The fourth trade (documented here), on behalf of Day, took place on January 18, 2008, at a price of 90 euros a share and resulted in proceeds of 40.5 million euros.

The fifth trade (documented here), on behalf of the Robert Day Foundation, took place at a price of 90 euros a share, and resulted in proceeds of 4.5 million euros.

The total proceeds from all of the sales total about 140 million euros, or about $208 million. All of the trades took place at prices of between 90 and 95 euros. The bank’s shares closed at 75.81 euros on January 24, the day of the bank’s announcements. Day still holds about 1.8 million SG shares, worth about 148.2 million euros ($220 million) at today’s closing price.

Of Day’s total trades, 45 million euros ($67 million) took place on January 18, the date that bank management says that it discovered the unauthorized trading. January 18 is also the Friday immediately proceeding the Monday, January 21, on which the bank had originally scheduled to disclose its subprime mortgage write-down, but that announcement apparently was postponed to January 24 after the discovery of the unauthorized trades.

Canoy, the lawyer who filed the lawsuit, reportedly said that he questions the "precision and sincerity" of the bank’s disclosures about its subprime exposures. A January 29, 2008 Bloomberg.com article (here) quotes a spokesperson for ADAM, a French shareholder activist association, as citing a November 2007 letter to investors from SG’s CFO Chief estimating the bank's subprime loss at 230 million euros. The spokesperson is quoted as saying that "shareholders who put their trust in these reassuring statements were clearly led astray.''

The shareholders association apparently has also asked that the AMF to launch an investigation into SG for insider trading, failure to disclose the extent of its subprime losses, and how it accounted for the losses attributed to resolving Kerviel's positions. The AMF confirmed (refer here) that it has opened an investigation.

Finally, Canoy is also quoted as saying that he has filed a separate lawsuit related to Kurviel’s alleged fraud. According to press reports (here), Canoy sued the bank over the way the bank unwound the unauthorized positions and sold securities into the marketplace. Unfortunately, there is even less information in the news reports about this second lawsuit.

The bank for its part denies that the trades were improper. The bank claims (refer here) that Day sold the shares during a limited window when board members are authorized to sell stock. The bank spokesperson says that "no inside information was used in any way." The spokesperson denied that Day was advised of Kurviel’s trading losses and said that Board members were not told of the subprime write-down until January 20th. According to the Financial Times (here), the bank also says that the January 20th meeting was set on January 18, but that the "meeting was called in the evening of January 18, after Mr Day had executed his share sales and 'without any indication on the agenda'. "

None of the press coverage explains why the bank would have a trading window that would remain open on the Friday immediately preceding the Monday on which the company planned to make its year-end earnings release. Obviously, the danger with allowing trading that close to an earnings release is the possibility that it might create the appearance that the insider traded with knowledge of undisclosed information in the earnings release or perhaps even because of information in the earnings release.

Call it a hunch, but there just might be some additional future litigation involving one or more aspects of these various circumstances.

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