Tuesday, December 23, 2008

The Guinness share-trading fraud

The Guinness share-trading fraud was a famous British business scandal of the 1980s. It involved an attempt to manipulate the stock market on a massive scale to inflate the price of Guinness shares and thereby assist a £2.7 billion take-over bid for the Scottish drinks company Distillers. The scandal was discovered after testimony as part of a plea bargain by the US stock trader Ivan Boesky. Ernest Saunders, Gerald Ronson, Jack Lyons and Anthony Parnes, the so-called "Guinness four", were charged, paid heavy fines and, with the exception of Lyons, who was suffering from ill-health, served prison sentences later reduced on appeal.

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[edit] The Crime

Essentially the defendants were to buy shares in Guinness plc, and by supporting the share price Guinness would be able to take over Distillers, a much larger company. The Distillers board favoured Guinness as partners and were faced with a hostile bid. In guaranteeing without limit the defendants' losses if the value of their Guinness shares dropped, the defendants were seen to have an unfair advantage in what should be a fair market. The prosecution relied on a new law; the defendants claimed that supporting a share price with a guarantee was an unusual but longstanding market practice.

Saunders had raised US$100 million which was advanced to Boesky to invest in shares; it was said that managing this amount was Boesky's reward for supporting the Guinness share price. Saunders was said to have misdescribed this sum in Guinness's accounts, though some believed that it was properly an off-balance sheet item. At that time $100m. was a very large percentage of Guinness's annual profits. Boesky was charged in New York on another matter, and mentioned this payment under questioning. This was passed on to the DTI corporate inspectorate in London, leading to an investigation in which Saunders' other secret share price support arrangements were unravelled. It also emerged that Saunders' arrangements had not been revealed to, nor sanctioned by, the Guinness board.

All told, Guinness paid $38 million to 11 companies in at least six countries to buy $300 million worth of Guinness stock. Half of the stock was bought by Bank Leu, Switzerland's oldest private bank.[1] Saunders had formerly been a senior executive at the Swiss firm Nestlé.

[edit] Principal defendants and sentences

Ernest Saunders: Former Guinness chief executive. Jailed for 5 years, halved on appeal, for false accounting, conspiracy, and theft.

Jack Lyons: Financier. Fined £4m for theft and false accounting. Stripped of his knighthood.

Anthony Parnes: City Trader. Jailed for 30 months, reduced on appeal to 21 months, for false accounting and theft.

Gerald Ronson: Businessman and best known as a visible donor to charities. Jailed for a year, and fined £5m, for false accounting and theft.

"Guinness One" ended in Sept 1990 with guilty verdicts against all four men and jail sentences for Saunders (five years), Ronson (one year) and Parnes (two and a half years). Ronson was fined £5 million and Lyons £4 million. Ronson, Parnes and Lyons were all ordered to pay £440,000 in costs.

The common factor in this case was that the alleged crimes were committed by businessmen outside the banking world, though with extensive financial connexions to the City of London. Parnes was their link man to the transactions. The nub of the case was whether the overall arrangements and inducements went too far in distorting the market.

Comments were passed by Peregrine Worsthorne, among others, in relation to the fact that three of the men were members of the Jewish-British community, while Saunders had a Jewish father and Boesky was Jewish. Some commentators have alleged a greater or lesser antisemitic component in the pursuit of the fraudsters. The Observer noted:

Many in the Anglo-Jewish community were made wary by aspects of the Guinness share-rigging scandal in the late Eighties. The fact that other, non-Jewish, businessmen were not seen to be prosecuted so vigorously was widely noted and criticised at the time.[2] However, the defendants in the second case also suffered loss, though they were acquitted.

[edit] Appeals

In May 1991 Saunders and his co-accused appealed against their convictions. The guilty verdicts were upheld, though his sentence was halved after medical evidence was produced to suggest he was suffering from a mental illness. Saunders claimed he was suffering from Alzheimer's Disease, a common form of dementia; if so, he made a recovery unique in medical history. Alzheimer's, like all dementias, is usually incurable being a progressive degenerative disease of the brain. Saunders has since maintained he must have been depressed.

After work by lawyers for Parnes and Ronson in unearthing material about SFO investigations into other support operations, which they said should have been disclosed before the trial, a second appeal hearing was granted; the appeal court upheld the convictions.

[edit] Secondary Trial

The professionals accused in "Guinness Two" were Patrick, 3rd Lord Spens, a former director of Henry Ansbacher & Company, a bank, charged with 4 offences; Roger Seelig, former corporate finance director at Morgan Grenfell & Company, charged with 12 offences. Charges against David Mayhew of Cazenove, a takeover consultant, never made it to trial.

The case against Spens and Seelig collapsed in 1992 and charges against Mayhew were dropped after pre-trial challenges by his lawyers. Another defendant Mr. Ward returned to Britain to stand trial and was acquitted of any dishonesty. Though acquitted, the defendants had to pay lawyers' fees.

[edit] Official Report

A DTI report that was finally released in 1997 clarified that the biggest buyer of Guinness shares to support the bid was J Rothschild Holdings, the investment group then headed by Lord Rothschild. The £28.7 million spent by his company exceeded the £25.1 million support from companies owned by Gerald Ronson, who was jailed for his role, but there was no criticism of J Rothschild. The main reason was that other supporters were paid for their help and were given indemnities against losses, but J Rothschild received no payment. The Report's inspectors said that the firm's motive was to create a favourable climate for obtaining future business from Guinness's City advisers, the stockbrokers Cazenove and the merchant bank Morgan Grenfell. As the Rothschilds are also a Jewish family, it also weakened (after a very lengthy delay) the argument by some that the prosecution and DTI inspectorate were motivated by antisemitic sentiment.

J Rothschild issued a statement saying it was pleased that the report had at last been published and making clear that the firm was not a party to the wrongdoings identified in the report. It read: "Guinness shares were purchased for proper commercial motives. J Rothschild was subject to no obligation to disclose the share purchases. The arrangements were, and were regarded as, perfectly normal at the time."

[edit] Financial outcomes

After the takeover the Guinness plc share price increased and settled to about three times its value before the takeover. Saunders could argue that he had discharged his duty to his shareholders. While this benefited the Guinness family enormously, their percentage of shares in the reformed company dropped to about 6% and their last director retired in 1992. Guinness plc had also negotiated a compensation package in 1988 for those who owned Distillers shares at the time of the takeover, which was accepted.

Bank Leu, still reeling from its role in a massive insider trading scandal in the United States, was ultimately forced to merge with Crédit Suisse in 1990.

[edit] Further reading

Thom Burnett et al. - "Conspiracy Encyclopedia" (2005) ISBN 1-59609-156-8

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