Guinness share-trading fraud
Encyclopedia
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 European Court of Human Rights in Strasbourg later found the trial violated the defendants' human rights by making use of statements obtained under duress.
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.
, 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 facing a hostile bid by Argyll
. 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, $100 million 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
. Saunders had formerly been a senior executive at the Swiss firm Nestlé
.
When the Distillers takeover was completed, Guinness plc also paid a £5.2m. success fee to an American lawyer, Tom Ward, but this was paid in such a way that it was alleged that Saunders had himself had been secretly paid much of the fee outside Britain by Mr Ward. The matter was examined in Guinness plc v Saunders
, a UK company law
case distinct from the criminal cases, and Ward was ordered to return the fee to Guinness plc.
Jack Lyons
Anthony Parnes
Gerald Ronson
"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 connections 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 called upon to justify their actions was widely noted and criticised at the time.." However, the defendants in the second case also suffered loss, though they were acquitted.
, a common form of dementia; if this was a correct diagnosis, 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 that he must have been depressed. The press presented it as Saunders being deceptive and ridiculed him and the decision to release him.
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.
, 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, Ward, returned to Britain to stand trial and was acquitted of any dishonesty. Though acquitted, the defendants had to pay lawyers' fees.
. 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, the Report, 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."
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.
. In 2000 the European Court of Human Rights
ruled that the 1990 trial had been unfair because there had been improper collusion between the DTI inspectors and the prosecuting authorities. A further appeal to the Court of Appeal
Criminal Division that sought to have the Human Rights Act 1998 applied retroactively, and claimed that the trial jury
had been nobbled, failed in 2001. A final appeal to the House of Lords
(now the Supreme Court of the United Kingdom
) failed in 2002.
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
business
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
scandal
Scandal
A scandal is a widely publicized allegation or set of allegations that damages the reputation of an institution, individual or creed...
of the 1980s. It involved an attempt to manipulate the stock market
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
on a massive scale to inflate the price of Guinness
Guinness
Guinness is a popular Irish dry stout that originated in the brewery of Arthur Guinness at St. James's Gate, Dublin. Guinness is directly descended from the porter style that originated in London in the early 18th century and is one of the most successful beer brands worldwide, brewed in almost...
shares and thereby assist a £2.7 billion take-over bid for the Scottish
Scotland
Scotland is a country that is part of the United Kingdom. Occupying the northern third of the island of Great Britain, it shares a border with England to the south and is bounded by the North Sea to the east, the Atlantic Ocean to the north and west, and the North Channel and Irish Sea to the...
drinks company Distillers. The European Court of Human Rights in Strasbourg later found the trial violated the defendants' human rights by making use of statements obtained under duress.
The scandal was discovered after testimony as part of a plea bargain by the US stock trader Ivan Boesky
Ivan Boesky
Ivan Frederick Boesky is an American stock trader who is notable for his prominent role in a Wall Street insider trading scandal that occurred in the United States in the mid-1980s.-Life and career:...
. Ernest Saunders
Ernest Saunders
Ernest Walter Saunders is a former British business manager, best known as one of the "Guinness Four", a group of businessmen who attempted to fraudulently manipulate the share price of the Guinness company. He was sentenced to five years' imprisonment, but released after 10 months as he was...
, Gerald Ronson
Gerald Ronson
Gerald Maurice Ronson is a British business tycoon and philanthropist.-Career:Aged 15, Ronson left school and joined his father in the family furniture business, named Heron after his father Henry. The company expanded into other activities; in the mid-1960s Ronson brought the first self-service...
, Jack Lyons and Anthony Parnes
Anthony Parnes
Anthony Keith Parnes is a millionaire stockbroker who was involved with Ernest Saunders, Gerald Ronson, and Jack Lyons in the Guinness share-trading fraud of the 1980s; they collectively became known as "the Guinness Four"....
, 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.
Crime
Essentially, the defendants were to buy shares in Guinness plcGuinness
Guinness is a popular Irish dry stout that originated in the brewery of Arthur Guinness at St. James's Gate, Dublin. Guinness is directly descended from the porter style that originated in London in the early 18th century and is one of the most successful beer brands worldwide, brewed in almost...
, 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 facing a hostile bid by Argyll
Argyll Foods
Argyll Foods plc was a large supermarket operator in the United Kingdom. In 1987 it acquired Safeway Inc.'s UK subsidiary and in 1996 it changed its name to Safeway plc.-Early years:...
. 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, $100 million was a very large percentage of Guinness's annual profits. Boesky was charged in New York
New York
New York is a state in the Northeastern region of the United States. It is the nation's third most populous state. New York is bordered by New Jersey and Pennsylvania to the south, and by Connecticut, Massachusetts and Vermont to the east...
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
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
.
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
Bank Leu
Bank Leu AG was a Swiss private bank that existed from 1755 to 2007. Headquartered in Zurich, it was a subsidiary of Credit Suisse from 1990. In 2007, it was merged with that company's other private banking units as Clariden Leu. At the time, it was the oldest bank in Switzerland.The bank was...
. Saunders had formerly been a senior executive at the Swiss firm Nestlé
Nestlé
Nestlé S.A. is the world's largest food and nutrition company. Founded and headquartered in Vevey, Switzerland, Nestlé originated in a 1905 merger of the Anglo-Swiss Milk Company, established in 1867 by brothers George Page and Charles Page, and Farine Lactée Henri Nestlé, founded in 1866 by Henri...
.
When the Distillers takeover was completed, Guinness plc also paid a £5.2m. success fee to an American lawyer, Tom Ward, but this was paid in such a way that it was alleged that Saunders had himself had been secretly paid much of the fee outside Britain by Mr Ward. The matter was examined in Guinness plc v Saunders
Guinness plc v Saunders
Guinness plc v Saunders [1990] 2 AC 663 is a UK company law case, regarding the power of the company to pay directors. It required that whatever rules exist for payment in the company's articles, they must be strictly observed.-Facts:...
, a UK company law
United Kingdom company law
United Kingdom company law is the body of rules that concern corporations formed under the Companies Act 2006. Also regulated by the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives and court cases, the company is the primary legal vehicle to organise and run business...
case distinct from the criminal cases, and Ward was ordered to return the fee to Guinness plc.
Principal defendants and sentences
Ernest SaundersErnest Saunders
Ernest Walter Saunders is a former British business manager, best known as one of the "Guinness Four", a group of businessmen who attempted to fraudulently manipulate the share price of the Guinness company. He was sentenced to five years' imprisonment, but released after 10 months as he was...
- 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
Anthony Parnes
Anthony Keith Parnes is a millionaire stockbroker who was involved with Ernest Saunders, Gerald Ronson, and Jack Lyons in the Guinness share-trading fraud of the 1980s; they collectively became known as "the Guinness Four"....
- City Trader. Jailed for 30 months, reduced on appeal to 21 months, for false accounting and theft.
Gerald Ronson
Gerald Ronson
Gerald Maurice Ronson is a British business tycoon and philanthropist.-Career:Aged 15, Ronson left school and joined his father in the family furniture business, named Heron after his father Henry. The company expanded into other activities; in the mid-1960s Ronson brought the first self-service...
- 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 connections to the City of London
City of London
The City of London is a small area within Greater London, England. It is the historic core of London around which the modern conurbation grew and has held city status since time immemorial. The City’s boundaries have remained almost unchanged since the Middle Ages, and it is now only a tiny part of...
. 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
Peregrine Worsthorne
Sir Peregrine Gerard Worsthorne is a British journalist, writer and broadcaster. He was educated at Stowe School, Peterhouse, Cambridge and Magdalen College, Oxford. Worsthorne spent the largest part of his career at the Telegraph newspaper titles, eventually becoming editor of The Sunday Telegraph...
, 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
The Observer
The Observer is a British newspaper, published on Sundays. In the same place on the political spectrum as its daily sister paper The Guardian, which acquired it in 1993, it takes a liberal or social democratic line on most issues. It is the world's oldest Sunday newspaper.-Origins:The first issue,...
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 called upon to justify their actions was widely noted and criticised at the time.." However, the defendants in the second case also suffered loss, though they were acquitted.
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 was suggested by doctors at Ford Open Prison to possibly be suffering from premature Alzheimer's DiseaseAlzheimer's disease
Alzheimer's disease also known in medical literature as Alzheimer disease is the most common form of dementia. There is no cure for the disease, which worsens as it progresses, and eventually leads to death...
, a common form of dementia; if this was a correct diagnosis, 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 that he must have been depressed. The press presented it as Saunders being deceptive and ridiculed him and the decision to release him.
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.
Secondary trial
The professionals accused in "Guinness Two" were Patrick, 3rd Lord SpensBaron Spens
Baron Spens, of Blairsanquhar in the County of Fife, is a title in the Peerage of the United Kingdom. It was created in 1959 for the lawyer and Conservative politician Sir Patrick 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, Ward, returned to Britain to stand trial and was acquitted of any dishonesty. Though acquitted, the defendants had to pay lawyers' fees.
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 RothschildJacob Rothschild, 4th Baron Rothschild
Nathaniel Charles Jacob Rothschild, 4th Baron Rothschild, Bt, OM, GBE, FBA is a British investment banker and a member of the prominent Rothschild family of bankers...
. 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
Rothschild family
The Rothschild family , known as The House of Rothschild, or more simply as the Rothschilds, is a Jewish-German family that established European banking and finance houses starting in the late 18th century...
are also a Jewish family, it, the Report, 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."
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 familyGuinness family
The Guinness family is an extensive aristocratic Irish Protestant family noted for their accomplishments in brewing, banking, politics and religious ministry...
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
Insider trading
Insider trading is the trading of a corporation's stock or other securities by individuals with potential access to non-public information about the company...
scandal in the United States, was ultimately forced to merge with Crédit Suisse
Credit Suisse
The Credit Suisse Group AG is a Swiss multinational financial services company headquartered in Zurich, with more than 250 branches in Switzerland and operations in more than 50 countries.-History:...
in 1990.
Final appeals 2000–02
Having had their sentences reduced on appeal, the "Guinness One" trial defendants also tried to reverse their convictions by using the 1997 DTI report and the UK Human Rights Act 1998Human Rights Act 1998
The Human Rights Act 1998 is an Act of Parliament of the United Kingdom which received Royal Assent on 9 November 1998, and mostly came into force on 2 October 2000. Its aim is to "give further effect" in UK law to the rights contained in the European Convention on Human Rights...
. In 2000 the European Court of Human Rights
European Court of Human Rights
The European Court of Human Rights in Strasbourg is a supra-national court established by the European Convention on Human Rights and hears complaints that a contracting state has violated the human rights enshrined in the Convention and its protocols. Complaints can be brought by individuals or...
ruled that the 1990 trial had been unfair because there had been improper collusion between the DTI inspectors and the prosecuting authorities. A further appeal to the Court of Appeal
Court of Appeal of England and Wales
The Court of Appeal of England and Wales is the second most senior court in the English legal system, with only the Supreme Court of the United Kingdom above it...
Criminal Division that sought to have the Human Rights Act 1998 applied retroactively, and claimed that the trial jury
Jury
A jury is a sworn body of people convened to render an impartial verdict officially submitted to them by a court, or to set a penalty or judgment. Modern juries tend to be found in courts to ascertain the guilt, or lack thereof, in a crime. In Anglophone jurisdictions, the verdict may be guilty,...
had been nobbled, failed in 2001. A final appeal to the House of Lords
Judicial functions of the House of Lords
The House of Lords, in addition to having a legislative function, historically also had a judicial function. It functioned as a court of first instance for the trials of peers, for impeachment cases, and as a court of last resort within the United Kingdom. In the latter case the House's...
(now the Supreme Court of the United Kingdom
Supreme Court of the United Kingdom
The Supreme Court of the United Kingdom is the supreme court in all matters under English law, Northern Ireland law and Scottish civil law. It is the court of last resort and highest appellate court in the United Kingdom; however the High Court of Justiciary remains the supreme court for criminal...
) failed in 2002.
Further reading
- Nick Kochan and Hugh Pym – The Guinness Affair: Anatomy of a Scandal (1987) ISBN 0-7470-2610-6
- Adrian Milne and James Long – Guinness Scandal: Biggest Story in the City's History (1990) ISBN 0-7181-3445-1
- James Saunders – Nightmare: Ernest Saunders and the Guinness Affair (Arrow Books, 1988) ISBN 0-09-974480-5
- Jonathan Guinness – Requiem for a Family Business (Macmillan 1997) ISBN 0-333-66191-5 (an insider's account).
- Peter Pugh – "Is Guinness good for you? Bid for Distillers – the inside story". (Financial Training Pubns 1987) ISBN 1851850740
- Gerald RonsonGerald RonsonGerald Maurice Ronson is a British business tycoon and philanthropist.-Career:Aged 15, Ronson left school and joined his father in the family furniture business, named Heron after his father Henry. The company expanded into other activities; in the mid-1960s Ronson brought the first self-service...
– "Leading from the Front" (Mainstream Publishing) ISBN 978-1-84596-530-3 - Thom Burnett et al. – "Conspiracy EncyclopediaConspiracy EncyclopediaConspiracy Encyclopedia: The Encyclopedia of Conspiracy Theories is a non-fiction reference book about conspiracy theories, with an introduction by Thom Burnett. It was published in 2005 by Chamberlain Bros., and in 2006 by Collins & Brown...
" (2005) ISBN 1-59609-156-8
External links
- BBC comment on the report published in 1997
- "Guinness Four fail in fight for acquittal", BBC NewsBBC NewsBBC News is the department of the British Broadcasting Corporation responsible for the gathering and broadcasting of news and current affairs. The department is the world's largest broadcast news organisation and generates about 120 hours of radio and television output each day, as well as online...
, 21 December 2001. - "Life and high-flying times of four partners in crime", The ScotsmanThe ScotsmanThe Scotsman is a British newspaper, published in Edinburgh.As of August 2011 it had an audited circulation of 38,423, down from about 100,000 in the 1980s....
, 22 December 2001.