In re Societe Generale Securities Litigation 08-CV-02495-First Amended and Consolidated

205 Pages·2008·9.15 MB·English

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OFNEW YORK
x
In re SOCIETE GENERALE SECURITIES : No. 08-CIV-02495 (GEL)
LITIGATION
x CLASS ACTION
FIRST AMENDED AND CONSOLIDATED COMPLAINT FORVIOLATION OFTHE
FEDERAL 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 ofor Recklessly Disregarded Numerous Red Flags
Indicating that Kerviel Was Engaging in Unhedged Directional Trades and
that SocGen Lacked Adequate Risk Control Management Systems.....................82
B. Defendants Knew ofor Recklessly Disregarded Numerous Red Flags
Indicating that SocGen's RMBS/CDO Portfolio Was Materially
Overstated ..............................................................................................................88
C. The Government Investigations Pursued by U.S. and French Government
Agencies 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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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 ofthe Individual Defendants'
Class Period Sales Are Suspicious...........................................................106
2. The Individual Defendants' Stock Sales Made Shortly After
SocGen's Repurchasing ofCompany Stock Are Suspicious as Well......109
F. The Termination, Resignation and Reassignment ofKey Members of
SocGen's Senior Management Team and Other Participants in the Fraud Is
Further Evidence ofDefendants' Scienter...........................................................110
G. SocGen's Simultaneous Disclosure ofBoth Frauds Confirms Scienter..............112
H. Defendants' Participation in a Scheme to Defraud Shareholders ........................112
X. DEFENDANTS' MATERIALLY FALSE AND MISLEADING FINANCIAL
REPORTING DURING THE CLASS PERIOD.............................................................115
A. Applicable Accounting Standards........................................................................116
B. Defendants' Failure to Disclose and Record the Nature, Extent and
Financial Impact ofthe Kerviel Fraud Violated International Financial
Reporting Standards.............................................................................................117
1. SocGen's Restatement ofIts 2007 Financial Results ..............................118
2. SocGen's Specific Violations ofIFRS in FY2007 Financial Results......122
C. Defendants' Failure to Disclose and Record the Nature, Extent, and
Financial Impact ofthe Subprime Fraud Violated International Financial
Reporting Standards.............................................................................................124
1. Financial Statement Impact ofthe Subprime Fraud ................................125
2. SocGen's Lack ofDisclosures Relating to the Subprime Fraud
Violated International Financial Reporting Standards.............................126
D. SocGen's Valuations ofIts RMBS and CDO Financial Instruments
Violated International Financial Reporting Standards.........................................130
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1. Defendants Ignored or Recklessly Disregarded Information Known
by Them in Calculating the Fair Vale ofSocGen's Portfolio of
Subprime Backed CDO and RMBS Financial Instruments.....................131
a. SocGen Knew in 2006 and 2007, Through TCW, Its
Wholly Owned Subsidiary, that CDO and RMBS Securities
Backed by Subprime Loans Were Declining in Value and
Should Be Avoided......................................................................132
b. The ABX Index Experienced a Sharp Decline From Late
2006 Into 2007 .............................................................................132
c. SocGen Knew From Its Own Trading Experience During
the Class Period that the Value ofIts CDO/RMBS Portfolio
Had Plummeted............................................................................134
2. SocGen's Q4 Writedown - the Truth Begins to Emerge.........................136
E. Additional Violations ofInternational Financial Reporting Standards
Related to the Kerviel Fraud and the Subprime Fraud ........................................138
F. Defendants' Failure to Disclose the Internal Control and Risk
Management Deficiencies Relating to the Kerviel Fraud and the Subprime
Fraud Violated Financial Regulations ofthe AMF and the French
Commercial Code ................................................................................................142
XI. ADDITIONAL JURISDICTION ALLEGATIONS........................................................145
A. SocGen's U.S. Operations ...................................................................................146
B. Defendants' False Statements Were Made, and Its Fraudulent Conduct
Occurred, 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 to
Support and Benefit Defendants' Sales ...............................................................157
C. Details ofDefendant Day's Insider Trading........................................................160
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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 ofpurchasers ofSociete Generale
("SocGen" orthe "Company") securities during theperiod August 1, 2005 toJanuary 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 onthe world's largest options exchanges, such as the U.S.-basedISE,
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 inplace, arbitrageactivities shouldcarrylittlerisk. Theessentialkeytothistypeoftrading,
however, is risk management control.
3. This caseconcernsthe concealment ofamassivetradingscandalattheCompany,the
concealment ofthe extent and nature ofthe Company's exposure to the U.S. mortgage market and
thelackofadequateriskcontrols atacompanythatisinthebusiness ofmanagingrisk. Atthe same
time that SocGen was amassing billions in undisclosed losses due to apurported rogue trader, the
Company was sitting on billions in undisclosed losses related to its investments in sub-prime
Residential Mortgage-Backed Securities ("RMBS") andCollateralizedDebtObligations ("CDOs").
Whenthemarketlearned thetruthabouttheCompany's tradinglosses, inadequateriskcontrols and
sub-prime losses, the price of SocGen securities declined dramatically. Throughout the Class
Period, insiders sold over€225,000,000 worth oftheir SocGen shares atten-year stockprice highs,
and, literallydaysbeforethedisclosureofthetruefacts, aSocGen director,DefendantDay, dumped
morethan€140, 000,000 worth ofhis SocGen securities totheunsuspecting public -asaleofabout
50% of his total holdings. Now, SocGen is subject to numerous international and U.S.-based
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regulatoryand criminalinvestigations andtheCompany'sreputationandcredibilityhasbeenforever
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 tolosses increased dramatically-atone pointreaching€ 50 billioninmarketrisk, which
is andwas morethan SocGen's entiremarket capitalization. Kerviel's massivedirectionaltradesdid
notgounnoticedatSocGen. SocGen's inadequateriskcontrols generatedclearandunequivocalred
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 ofeuros.
5. Tobesure, overan extendedperiod oftime, Kervielwasthe"subjectofmorethan 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
discoveredbyoneofthe Company'sinternalaccountingcommittees. Suchfictitious 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 ofthe e-mailheldanemergencymeetingthatdayinwhichthefictitious transactions were
confirmed. Suchdeals continued, however, withthe approval ofthe directors ofSocGen's finance
department, resulting in a €2.2 billion accounting gap by late June-early July 2007.
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6. Inaddition, Kerviel's earnings fromproprietarytrades weregrosslydisproportionate
to both his trading authority and the earnings offellow traders on the "Delta One" arbitrage desk
whereheworked. As Kerviel himselfexplained, "Icannotbelievemyhierarchy was notawareof
thesums Iwasplacing, [a]s itis impossible togenerate thatkinds ofprofitwith smallpositions."
SocGen alsoknewthatKerviel hadfailedtotaketherequiredtwo-weekcontinuous vacationtime-
akeyrequirement inanyriskcontrolmanagement system on atrading desk and critical to allowing
anothertradertoreviewandmanage Kerviel's trades -butfailedtotake any action. Inotherwords,
Kerviel's actions were either known to Defendants or Defendants were extremely reckless in not
knowing aboutthem-thereis simplyno waythat SocGen couldnothave knownhadit engagedin
grossly deficient risk management practices. The French Banking Commission reached the same
conclusion about SocGen's clearlyinadequateriskcontrol systems andimposed a€4 million fine-
the largest ever in its history.
7. While Kerviel was posting highly risky directional bets onthe market, exposing the
Companytobillions inlosses, internalredflags werebeingignored and fictitious trades werebeing
discussedinternallybutnotdisclosed-Defendants werepubliclycharacterizingtheCompany'srisk
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" andthat"riskiskeptundercontrol, understrongsupervisionandusingourexpertise."
Defendants' statements and characterizations ofSocGen'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'sriskcontrol procedures werenotbeingimplemented andfollowed as executivesandthe
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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 ofthe purported controls and
policies. Investors wouldhaveconsidered thelackofsufficientriskcontrols atSocGen tobehighly
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
Companyhas now restatedits financial statements foreach quarterinFY 2007. Therestatement is
an admission that SocGen's reported financial results were materially false and misleading at the
time thatthey wereissued. Themagnitude ofthe restatementis staggering. SocGen was forced to
restate€1 .4billion, an astounding 78% ofits net incomereportedly earned bythe Company during
thethreemonthperiod endedJune 30, 2007. SocGen's CIB division wasforcedtorestate98% ofits
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 incertaincomplex andriskyRMBSs and CDOs. SocGen's subprimeexposurearosefrom
two primary sources: large unhedged positions on senior tranches of"subprime RMBS" and large
unhedgedpositions on"super seniortranches" of"Mezzanine CDOs," whichwerebackedbyjunior
(BBB and sub-BBB rated) tranches of"subprime RMBS."
10. As the value of these securities declined, SocGen refused to acknowledge or
adequately account forthe extent oflosses onitspositions. Whenanalysts questionedtheCompany
aboutits exposure tothe declineintheprices ofRMBSs andCDOs, Defendants falselydownplayed
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the Company's exposure and understated the significance of the losses that the Company was
experiencing onitspositions. Unbeknownsttoinvestors, SocGen hadaccumulatedandwarehoused
massiveamounts ofRMBSs and CDOs inanticipationofrepackagingthesecurities andsellingthem
toinvestors as evenmore complex structured finance products. However, beforetheycouldfollow
through on those plans, the market for these securities evaporated and the value ofthe securities
dramatically declined. In effect, the subprimeparty ended and SocGen was left holdingbillions in
impaired loans that it concealed from the market.
11. During the Class Period, investors werenevertold the full extent ofthe 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 furtherfromthe 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 ofthese 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 ofbusiness.
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 ofthese products needed to be substantially
reduced. Bythe end ofMarch 2007, SocGen hadbeen forcedto scrap aplanned CDO offering, and
by the middle of 2007, SocGen had disbanded its New York-based CDO Group, which had
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