Guinness Shares Fraud

Introduction

The Guinness share trading fraud was one of the most famous British business scandals of the 1980s. Guinness shares were to be inflated in order to assist its takeover by the Scottish drinks company Distillers. Ernest Saunders, Gerald Ronson, Jack Lyons and Anthony Parnes were the perpetrators of this crime. They were caught after testimony by an American stock trader Ivan Boesky. Three of the defendants served a prison sentence while one of them Lyons did not because of poor health. Three members of the scandal were British Jews which led to accusations of anti-Semitism in the pursuit of the perpetrators.

The crime involved the defendants to buy shares in Guinness in which the share price would be supported allowing them to take over Distillers. The Scottish drink company favoured the takeover because of a hostile bid. The defendants were guaranteed without the limit any losses if the Guinness shares would drop. This was seen as an unfair advantage in a fair market. The defendants claimed that they supported a share price with a guarantee which was a longstanding market practice. Saunders raised hundred million dollars which was given to Boesky to invest in shares. This was a reward for Boesky because he supported the Guinness share price. Saunders did not correctly describe this sum in Guinness’s accounts. One hundred million dollars were a large percentage of Guinness’s annual profits. Boesky was charged and he provided an account of this payment. Other secret share price support arrangements were found out by investigators. Guinness paid thirty eight million dollars to eleven companies to buy three hundred million worth of Guinness stock. Half of the stock was purchased by Bank Leu, Switzerland’s oldest bank (Kochan, 1987).

Background

Ernest Saunders was the former chief executive of Guinness who was sentenced for five years for false accounting and theft. On appeal, the sentence was reduced to half. Jack Lyons was fined four million pounds for theft and false accounting. Anthony Parnes was jailed for thirty months for false accounting and theft. Gerald Ronson was jailed for a year and fined five million pounds for false accounting and theft. All four men were charged as guilty by the courts. The crimes committed by the four men were outside the banking world in which they used their extensive financial connections to manipulate the stock market.

During the early months of 1991, Saunders and the other defendants appealed against their convictions. The guilty verdicts were not overturned by the court, but their sentences were halved after medical evidence was produced. Saunders claimed to be suffering from Alzheimer’s disease, a non curable form of dementia. A second appeal was also launched by the defendants but the appeal court held the convictions. A secondary trial was also conducted against Patrick Spens and Roger Seelig. This case however collapsed and charges against them were dropped. Despite their acquittal, the defendants had to pay heavy lawyer’s fees and suffered a loss of business. An official reports released by the DTI stated that the biggest buyer of Guinness shares was J Rothschild Holdings, the investment group then led by Lord Rothschild. His company spent an estimated twenty eight million pounds which exceeded the twenty five million support from companies owned by Gerald Ronson (Milne, 1995).

The Trial

J Rothschild was not prosecuted because he did not receive any payment. The report stated that the company wanted to create a good climate for generating business from Guinness’s city advisors. The Rothschilds rejected the accusation that the case was motivated by anti-Semitic sentiments. The takeover witnessed the increase in Guinness plc share price. It settled to about three times its value before the takeover. Saunders insisted that he had discharged his duty to his shareholders. The percentage of shares by the Guinness family dropped to about six percent.

Ernest Saunders criticized the report from the Department of Trade and Industry as being selected and politically motivated. He has always maintained that opponents have over emphasized his role in the affair. According to him the rules for corporate takeovers was not properly defined which made him the convenient scapegoat at that time. He has also categorically denied any knowledge or authorization of the financial transactions that lead to the scandal. The presiding judge also concluded that there was no personal gain involved in the scandal. Saunders was credited with rebuilding the company which benefited the Guinness family and shareholders. The company’s worth increased from ninety million pounds in the 1980s to ten billion pounds today. Jack Lyons who escaped a prison sentence due to poor health continues to regret his part in the affair. Lord Spens another defendant also described the financial report as being flawed and biased (Saunders, 1988).

Ivan Boesky tipped the British department of trade and industry about the insider trading going in Guinness. It had deep consequences for British securities markets and policies. It involved the illegal stock manipulation by top executives of Guinness, which was Britain’s largest brewer and distiller. An estimated seven senior officers were asked to resign because of the investigation. Ernest Saunders was forced to resign by the company because of the investigation. The scandal would ultimately bury Britain’s heavy reliance on self regulation. Proponents of self policing before the scandal argued that it provided swifter punishment as compared with the American legal system. The immediate effect of the scandal was that it slowed down London’s takeover market.

During the 1980s, British companies reportedly spent thirty billion dollars in takeovers which surpassed even the American market. However none of the businessmen who were central figures in the scandal were prevented from working as company directors. The European Court of Human Rights decided that Mr. Saunders trial was unfair because he had been pressurized to answer the Department of Trade and Industry inspectors’ questions. Saunders maintains that the DTI did not understand the rules of the takeover game. He said that takeovers are very serious businesses which involve life and death for businesses. Despite the scandal, Britain replaced its self regulatory takeover code in 2006 (Guinness, 1997).

Ernest Saunders had a successful career in management before becoming Chief Executive of Guinness plc. He was famous for cost cutting efficiency and nicknamed “Deadly Ernest”. A friendly takeover bid for Scottish based United Distillers plc resulted in manipulation which quietly boosted the Guinness share price. Saunders was charged and convicted on 27th August 1990 for false accounting and theft. He was charged with dishonest conduct in a share support operation. There were no suggestions that Saunders actually did profit from these offences in a direct manner. The allegation by the court was that they were committed to make the company’s takeover bid more successful. The board of directors at Guinness plc were not informed. They did not sanction his arrangements which involved passing one hundred million dollars to American Ivan Boesky.

The Department of Trade and Industry report describes Saunders as someone who did unjustifiable favours for friends. Saunders is currently working as a business consultant which includes advising mobile phone retailer Carphone Warehouse. Jack Lyons another of the defendants was accused of using his personal relations with Prime Minister Margaret Thatcher to ensure that the takeover bid for Distillers was approved by the Office of Fair Trading. The matter was passed to the Paul Channon and subsequently unblocked. Lyons also purchased a substantial block of Distillers and Guinness shares in the lead up to the bid, with personal guarantees from Saunders that any future losses would be paid by Guinness (Pugh, 1987).

Judgement

Lyons was charged in 1987 along with the other defendants but he escaped prison because he was suffering from ill health. He lost his knighthood and had to pay a fine of four million pounds. British Prime Minister, John Majors is reported to have said that the rule on forfeiture and precedents led him with no choice but to remove his knighthood. Lyons launched an appeal in 1995 which reduced his fine and removed one count of conspiracy. The lawyers of the defendants stated that the clients had lost their right to silence because they were forced to provide evidence to the Department of Trade and Industry inspectors. The prosecution replied that the defendants had nothing to hide and that the share market had been regulated for centuries. Lyons, Parnes and Ronson relied on Saunders whose plans were not approved by the Guinness board of directors. Repeated appeals by Lyons and other defendants were upheld by the courts.

The publishing of the DTI report prompted Jack Lyons to state that he was regretful about the events of the past. He is also reported to have said why he acted so foolishly. He questioned his involvement in the scandal. He however believed that his actions were not criminal but foolishness. The Guinness scandal was seen as evidence of the aggressive dealing and spectacular money making of the 1980s culture of Thatcherism. The Thatcher government however was reported to have supported the prosecution of Lyons. The European Union declared in 2001 that the trial was not fair because the DTI inspectors compelled the defendants to testify (Channon, 2005).

Parnes was also another defendant in the scandal which involved the support for the Guinness share to enable it to merge favourably with Distillers. He was described as a flamboyant corporate executive who was sentenced to two and a half years on charges of false accounting and theft. His sentence was reduced to twenty one months on appeal. Parnes defended his conviction by insisting that a reasonable person with experience in the city could not have done anything dishonest. Guinness shares did not reach a price higher than was justified. Parnes did not believe he was responsible to disclose this to the Stock Exchange. The payments according to him were legal and lawful for services. He proclaimed his innocence because he had not been informed by Saunders that the arrangements for Guinness plc had not been approved by the board of directors. Parnes made two appeals in 1991 and 1995 which reduced his sentences but did not overturn the verdict by the courts. Michael Heseltine, the President of Board of Trade in 1995 lifted a government order which prevented disclosing evidence to the defendants during their appeals.

Lord Spens another defendant stated that DTI inspectors did not understand the rules of the takeover game. Ronson another of the “Guinness Four” was convicted in August 1990 of conspiracy, false accounting and theft. He was fined five million pounds and given a one year jail sentence. The European Court of Human Rights ruled that the 1990 trial had been unfair because it had violated Article 6.1 of the European Convention on Human Rights (Channon, 2005).

Bank Leu AG was a Swiss private bank from 1755 to 2008. It was a subsidiary of Credit Suisse from 1990. It has been merged with the company’s other private banking units. It emerged during the investigations of the Guinness share fund scandal, that the bank was involved in half of the purchases. Two of Guinness’ directors made an under the table agreement in which the Bank subsidiaries bought forty one million shares of Guinness. The latter promised to pay the shares at cost and deposited seventy six million dollars with Bank Leu’s Luxembourg subsidiary (Channon, 2005).

The Guinness affair tarnished the reputation of London’s financial district which prompted calls for tighter regulation of the securities market. It also threatened to become a liability for Margaret Thatcher. Some corporate executives since the scandal have pointed out that the case proves that takeover rules were violated. However they believe that mergers are sound. The scandal also questioned the economic policies of Margaret Thatcher. The government had opened up the city to new competitors and new practices in a market liberalization drive. Critics also called for more regulation of the financial district in the aftermath of the scandal. They said that an independent statutory agency should operate which would be like the United States. Britain’s current takeover law is governed by the City Code on Takeovers and Mergers. The Code used to be a non statutory set of rules which was controlled on a theoretically voluntary basis, but the scandal brought such damage that it was put on a statutory footing.

The official inquiry report by Department of Trade and Industry rejected accusations by Saunders that a deceptive operation like this would be acceptable. The report stated that the aim of the manipulation by the defendants was to create a false market. If Guinness had not acted illegally, another company would have successfully taken over Distillers. The Department of Trade and Industry was shocked at the behaviour of the defendants. They termed it as a disregard for government laws and regulations. All those who supported in the scandal were paid for their help and given protection against losses. The company wanted to create a climate which would give them future business. An estimated five million pounds were made to an American lawyer who was an employee of Guinness.

The Guinness share trading scandal hit the British corporate market very hard. It also tarnished the reputation of London’s financial district. Ernest Saunders and the remaining defendants were accused of using manipulation to take over Distillers Company which faced a hostile takeover. They illegally ordered the purchase of their own stock and arranged to pay off the buyers. The resulting run up in the share price created its cash and stock offer to prevail. The network included London financial institutions, Swiss bank and Wall Street inside trader Ivan F. Boesky. Ernest Saunders, Gerald Ronson, Jack Lyons and Anthony Parnes were the perpetrators of this crime. All four people were charged with theft and false accounting. Only Lyons was spared a prison term because of his failing health. Appeals made by the defendants would eventually reduce their sentences but the court would uphold their convictions.

Conclusion

The scandal caused the British government to regulate its takeover policies. It also led to a criticism of Margaret Thatcher’s government and her economic policies. The market liberalization was blamed for the scandal. Saunders and some of the defendants till this day maintain that they did nothing unethical. They also accuse of the Department of Trade and Industry inspectors of lacking the knowledge about corporate takeovers. Lyons is the only one of the defendant who feels remorse and regret for his behaviour. However he calls his behaviour foolishness rather than being criminal. The scandal proves that white collar crime can be reduced by ensuring that the executive cadre are carefully monitored and made role models for leadership. These respected leaders can expect to project the manners and behaviours which would be appropriate for managers to emulate. Acceptable and moral leadership is the best way to act as a deterrent against white collar crime. Many accounting firms today deny the presence of a conflict between auditing and consultancy. However research has shown that clients have to pay their accountants more money for consulting. Many clients begin to think that auditing firm is more interested in consulting. They also perceive that the audit company is sending the client’s to their consultants for work.

References

Adrian Milne and James Long - Guinness Scandal: Biggest Story in the City's History 1995

James Saunders - Nightmare: Ernest Saunders and the Guinness Affair (Arrow Books, 1988)

Jonathan Guinness - Requiem for a Family Business (Macmillan 1997)

Nick Kochan and Hugh Pym - The Guinness Affair: Anatomy of a Scandal (1987)

Paul Channon. - "Conspiracy Encyclopedia" (2005)

Peter Pugh – "Is Guinness good for you? Bid for Distillers - the inside story". (Financial Training Pubns 1987)

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