A great deal of questionable behaviour in the Irish corporate world was uncovered by the Fyffes case, writes Prof Niamh Brennan
The outcome of the DCC-Fyffes litigation represents a resounding victory for Jim Flavin. The tone of the judgment is emphatic. It strongly states that: (1) Jim Flavin exited Fyffes to make a profit on the dot.com bubble around Fyffes' internet venture, wof.com; (2) No evidence was provided that the profit resulted from the wrongful use by Mr Flavin of confidential information; and (3) Mr Flavin was not in possession of price-sensitive information at the time of the share sales.
The judge's only mild censure was that Mr Flavin/DCC should have applied a more rigorous compliance process in relation to the sales, given price-sensitivity considerations.
But many other questions remain as a result of the insights into the Irish corporate world which we obtained from this case. Thanks to Jim Flavin and the McCann family, an extraordinary amount of corporate dirty linen was washed in public. In the adversarial environment of a courtroom, evidence of corporate misbehaviour tumbled into the public domain. No one could have imagined in advance quite how much questionable behaviour would be unearthed.
Are we to assume from this one case that the behaviours uncovered represent the way in which business is conducted in corporate Ireland? Some might argue that the activities which came to light in this case are unique to the two litigating parties and are not representative of wider corporate standards in Ireland, but I wonder.
Reading the excellent coverage of the case in The Irish Times felt at times like reading a most outlandish work of financial fiction. Here are some of the incidences which came to our attention:
The company secretary of Fyffes, Philip Halpenny, drafted a profit warning on March 14th 2000. The next day he flew to Frankfurt to participate in an investor relations roadshow. The profit warning was eventually issued on March 20th 2000. The Irish Stock Exchange requires price-sensitive information to be released "without delay". I do not believe six days between drafting and issuing a profit warning meets this objective. If I were an investor who had bought shares in those six days, I would feel very aggrieved. Is a six-day delay acceptable to the Stock Exchange? If not, what do they do - what can they do - when a company fails to meet acceptable disclosure standards?
Annual accounts are one of the main means of providing information to shareholders. Discomforting evidence also came to light concerning the quality of Fyffes' financial reporting. Significant new information was disclosed during the case that was not apparent from Fyffes' financial accounts. Those accounts were audited. It is disappointing to see an Irish plc being economical with the financial truth. Is any action being taken in Ireland in relation to low standards of financial reporting? If not, can investors place any confidence in Irish public company annual accounts?
Ms Justice Laffoy commented on the quality of the evidence of the two prime witnesses of fact in the case, David McCann and Jim Flavin. She said that the evidence of fact had been overlaid with ex post facto rationalisation and retrospective analysis, had at times veered on advocacy, and at times rationalisation had veered towards revisionism. In a concluding comment on this she said that she did not get the impression that these witnesses believed the veracity of the position they were presenting.
Goodbody Stockbrokers' tape-recordings of conversations around the sale were destroyed. It would have been clear at the time that these tapes could be of considerable interest given that Mr Flavin sold his entire shareholding a short time before a profit warning by Fyffes, which caused tongues to wag. No explanation has been provided as to why the tapes were destroyed. Although no regulation was breached by destroying the tapes, one wonders why they were not kept.
Ms Justice Laffoy said in her judgment: "As a contemporaneous record, the tapes give a particularly reliable insight . . . The existence of the tapes allows . . . the finder of fact . . . to view a process, or part of a process, as it happened."
Davy Stockbrokers kept its tapes in a safe in the compliance officer's room. When the compliance officer was on leave, the deputy chairman of Davy, Kyran McLaughlin, made a copy of them. He passed this copy to Jim Flavin at a time when Mr Flavin was under investigation by the Irish Stock Exchange/DPP.
The Irish Stock Exchange is required to report any suspicions of insider trading activity to the DPP. Having done so, the CEO of the Irish Stock Exchange, Tom Healy, subsequently acted as a conduit of information received (presumably confidentially) from the DPP and passed this information to Mr Jim Flavin - the party it originally reported to the DPP. Brian Davy, chairman of Davy Stockbrokers and deputy chairman of the Irish Stock Exchange, also acted as a conduit of information from the Stock Exchange to Mr Flavin. Thus, it seems that representatives of the regulator were exchanging information with the person about whom they reported suspicions of insider trading to the DPP. At the very least, this practice seems inappropriate. How can investors have confidence in a regulator which acts in this way?
DCC established a Dutch subsidiary, Lotus Green, through which the shares were sold to avoid capital gains tax. It was essential for the scheme to work that the management of Lotus Green be in Holland. There was evidence in court of fictitious letters, and of minutes being adjusted in order to make sure written records were "in accord with the underlying fundamentals in relation to a tax situation".
In practice, nearly all Lotus Green documentation was prepared by DCC in Dublin. For example, a strategy paper was prepared in 2000 by DCC's chief financial officer (as shown by his name on the document). When this document was sent to DCC's tax advisers, they changed the name on the document, replacing it with the names of two Dutch Lotus Green directors. Coopers and Lybrand is reported as advising that should it transpire that the company was controlled and managed from Dublin, rather than from Amsterdam, then the Irish Revenue might seek to raise capital gains tax on the profit DCC made (through its Dutch subsidiary, Lotus Green) on the Fyffes shares.
To summarise, evidence came out during the case of lack of truthfulness in financial reporting, inappropriate behaviour by regulators, and a myriad of conflicts of interests among some of the most senior people in our business community.
The financial regulator, IFSRA, recently published a discussion paper on probity and competence of directors. In relation to probity, it refers to directors having a "spotless record". This term is not one that comes to mind in relation to this piece of corporate litigation.
Niamh Brennan is the Michael MacCormac Professor of Management at UCD and academic director of the Institute of Directors' Centre for Corporate Governance at UCD