For those of you with the stomach to plough through this, here's the preliminary internal report compiled by Societe Generale in connection with that $7.1bn rogue trading affair:

'The Special Committee was given the following tasks by the Board of Directors: ensure that the causes and sizes of the trading losses uncovered by the bank in January 2008 have been completely identified, that measures have been, or will be, put in place to prevent the re-occurrence of incidents of the same nature, that the information communicated by the bank faithfully reflects the findings of the inquiries and that management of the situation is conducted in the best interests of the company, its shareholders, its clients, and its employees.

On January 24th 2008, the bank's General Inspection department was given the responsibility to perform an internal audit. The Banking Commission dispatched an audit team which commenced its work on January 25th 2008. Criminal proceedings were opened on January 28th 2008 by the investigating magistrates, Van Ruymbeke and Desset, who entrusted the investigation to the Paris financial brigade. The French securities regulator (AMF) has opened an inquiry into the financial information and the market for Société Générale shares. The Minister of the Economy, Finance and Employment delivered a report on these events to the Prime Minister on February 4th 2008.

The aim of the audit carried out by the General Inspection department is to establish the chronology of the fraudulent positions, to identify the responsibilities and control malfunctions which allowed the fraud to occur, to seek the motives for the fraud and any accomplices and to confirm the absence of any other frauds using some of the same mechanisms in other equity market activities. The scope of the mission was reviewed and approved by the Special Committee, which enlisted PriceWaterhouseCoopers to review the work performed by the General Inspection.

To successfully carry out its mission, the General Inspection used a team of over forty employees. The aims of the different investigations are not identical but their realisation is largely based on the same tasks and on interviews with the same individuals. Consequently, the General Inspection was given responsibility for coordinating requests from the other investigating bodies with which it is cooperating in a spirit of transparency and efficiency. It goes without saying that the criminal investigation takes priority over the other inquiries and, given its constraints, it has prevented the bank's General Inspection department from carrying out all of the interviews required for its conclusions.

The Special Committee submits below its assessment of the interim conclusions of the internal audit mission carried out by the General Inspection department of the Société Générale, as well as a status update on the measures designed to strengthen the control systems in order to avoid the occurrence of similar frauds.

The nature of the trading activities where the fraud occurred

In the Global Equities Derivatives Solutions (GEDS) department of the Corporate and Investment Banking arm of Société Générale, the trading activities where the fraud occurred can be separated into two main types of activities, depending on whether they are directly linked or not to client operations.

The former activities involve carrying out transactions in the market with a view to reducing or even eliminating the risk for the bank resulting from operations carried out for its clients.

The latter activities, called arbitrage or proprietary trading involve taking advantage of differences in the valuation of correlated assets, for example, by purchasing a portfolio of financial instruments while selling at the same time another portfolio of very similar financial instruments but with a slightly different value. The fact that the two portfolios have very similar characteristics and that they offset each other means that these activities present very little market risk. As the differences in value are often very small, numerous transactions are required involving sometimes high nominal amounts in order to generate any significant income.

In both cases, trading activities are not allowed to take positions on rises or falls in the market (called directional risk) unless they are residual, over a short period, and within strictly defined limits.

Intermediary conclusions of the internal audit mission

The conclusions of the internal audit mission confirm the main characteristics of the fraud, as explained on January 24th 2008 by Société Générale's management.

The author of the fraud departed from his normal arbitrage activities and established genuine "directional" positions in regulated markets, concealing them through fictitious transactions in the opposite direction. The various techniques used consisted primarily of:

• purchases or sales of securities or warrants with a deferred start date;
• futures transactions with a pending counterparty;
• forwards with an internal Group counterparty.

The author of the fraud began taking these unauthorised directional positions, in 2005 and 2006 for small amounts, and from March 2007 for large amounts. These positions were uncovered between January 18th and 20th 2008. The total loss resulting from these fraudulent positions has been identified and amounts to 4.9 billion euros, after their unwinding between January 21st and 23rd 2008.

The General Inspection department believes that, on the whole, the controls provided by the support and control functions were carried out in accordance with the procedures, but did not make it possible to identify the fraud before January 18th 2008. The failure to identify the fraud until that date can be attributed firstly to the efficiency and variety of the concealment techniques employed by the fraudster, secondly to the fact that operating staff did not systematically carry out more detailed checks, and finally to the absence of certain controls that were not provided for and which might have identified the fraud. The Inspection General department has refrained from drawing any conclusions at this stage regarding the responsibility of the front office managers supervising the fraud's author, given the ongoing legal investigation which has not enabled it to interview all those concerned. At this stage of the investigations, there is no evidence of embezzlement or internal or external complicity (i.e. the existence of a third party who knowingly assisted the fraudster to conceal his positions).The investigations are continuing, in particular, to cover a wider area than the activities of the author of the fraud.

After receiving the comments of PriceWaterhouseCoopers, the Special Committee concurs with these conclusions. It has decided to make public the General Inspection department's interim summary report. The report is attached to this press release.

Measures aimed at reinforcing the control system in order to prevent further frauds

As soon as the fraud was uncovered, weaknesses were identified in the supervision and control system which required immediate corrective measures. Consequently, action plans were immediately implemented as part of a structured plan consisting of three priority areas:

• Strengthening IT security through the development of strong identification solutions (biometry), the acceleration of current structural plans for the management of access security and targeted security
audits
• Reinforcing controls and alert procedures; these are reviewed mainly to ensure the appropriate circulation of relevant information between the different units and at the appropriate management level
• Strengthening the organisational structure and governance of the operational risk prevention system to develop its cross-functional nature and better take account of the fraud risk, including from a human resources perspective.

The bank took into account in its action plans the comments and recommendations made in the report delivered by the Minister of the Economy, Finance and Employment to the Prime Minister on February 4th 2008. The bank has implemented or has initiated the implementation of additional measures designed to strengthen its control systems each time it appeared necessary on the aspects highlighted by the report. 

The Special Committee has entrusted PriceWaterhouseCoopers with the task of analysing all the measures that will be implemented, assessing the relevance of the measures, and making any recommendations that it deems appropriate. PriceWaterhouseCoopers' report will be given to the Board of Directors and will be made public prior to the Annual General Meeting.

The Special Committee has ensured that the information distributed by the bank faithfully reflects the findings of the investigations and that the situation is properly managed in the best interests of the company, its shareholders, clients and staff. It will continue to do so over the next few months and will report on its mission to the Annual General Meeting of shareholders on May 27th 2008'.

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