In the opening sentence of his judgement in the Fyffes v DCC case, a judgement delivered on 27 July of last year, one of the Supreme Court judges, Niall Fennelly, said: “It used not to be considered any sort of sin to profit financially from the use of secret, private or privileged information. That was how fortunes were made. Now things are different. To trade on the use of inside information is recognised for what it is. It is a fraud on the market. The insider who exploits his access to the special knowledge he enjoys for the purposes of the company in his capacity as executive or director of a company commits a crime. He may be made, additionally, to answer for the profits he has made.”
So, according to the Supreme Court judge, what was involved here was a crime (in a recent statement DCC argued the judge was misunderstood) and the crime involved a fraud of €80m, quite the most spectacular piece of such fraud ever to occur in Ireland. And the person at the centre of this was one of the most respected figures in Irish business, Jim Flavin. What is more, he has been supported to the hilt by a catalogue of other luminaries of Irish business, his fellow directors, past and present, on the board of his company, DCC (see panel on “Directors of DCC”).
But, Jim Flavin was not alone in the insider trading transaction of February 2000, which netted his company, DCC, a profit of that €80m from the sale of DCC's shares in Fyffes. This profit resulted from the sale of shares in the banana company, Fyffes, held by DCC and occurred at a time when Jim Flavin, as a director of Fyffes (as well as CEO of DCC), was aware of inside, secret information concerning Fyffes that was to cause a sharp fall in the value of the shares, once that information became known generally.
And yet, in contravention of Irish law, the sale of the shares went ahead and investors were encouraged to buy these shares on a false basis.
But the focus on Jim Flavin alone by the Irish Association of Investment Mangers misses the point (they said on 22 May “[the association] does not consider it appropriate for Mr Flavin to continue as Executive Director of DCC). For clearly, Jim Flavin was supported by the board of DCC, both at the time of the transaction, immediately afterwards and right up to his resignation. But he was also aided and abetted by a whole array of others.
First, by the directors of Fyffes. The then chairman of Fyffes, Neil McCann, and other directors of Fyffes, encouraged Jim Flavin to complete the sale of the DCC shares to other investors, knowing that there was inside information about a downturn in the trading performance of Fyffes, which would cause the share price to drop appreciably.
Also, it is likely that DCC, through Jim Flavin personally or through its other executives or the board, consulted stock brokers, auditors and lawyers about the proposed sale by DCC of its shares in Fyffes, and took advice about the propriety of what they were doing, in the light of the inside information there was available to Jim Flavin about the downturn in the trading performance of Fyffes.
It is also obvious that the Irish Stock Exchange must have appreciated that something very peculiar had occurred, given that within a few weeks of the sale of the DCC shares in Fyffes, Fyffes issued a profit warning, which caused the value of the shares to collapse by 25 per cent. And yet the Irish Stock Exchange did nothing until the London Stock Exchange instigated an enquiry (the Fyffes shares were also quoted on the London Stock Exchange). And even then the Irish Stock Exchange did as little as it could have done in the circumstances.
A Garda enquiry of sorts was undertaken in 2000 but nothing came of it and there is no reason to believe that the enquiry was anything but perfunctory.
On 27 July last year the Supreme Court found that the now retired DCC executive chairman Jim Flavin had traded illegally on the stock market. After that judgment the Office of Corporate Enforcement tried but failed to have Jim Flavin disqualified as a director, the minimum sanction available for impropriety. Indeed Jim Flavin became executive chairman of DCC, stating his intention to remain on until retirement in mid 2010 – an intention he has not fulfilled. The Irish Association of Investment Managers, which represents the institutional shareholders in public companies, took 10 months after the Supreme Court determination of fraudulent activity to get around to making a statement on the matter.
There is no evidence that the DPP is considering the matter. No government minister or any senior politician from any of the Opposition parties has made a statement on the case.
The background is as follows:
Fyffes financial year ran from 1 November to the following 31 October and in common with other public companies it announced its results at half-yearly intervals. It reported its preliminary results for the full financial year ended 31 October 1999 on 14 December 1999. This disclosed that the profits before tax and exceptional items had been €82.9 million, an increase over the previous financial year by 5.1 per cent. That 14 December statement said Fyffes was confident 2000 would be “another year of further growth for Fyffes”.
However, things had begun to go wrong for Fyffes even by then for the November figures were well below budget and well below the November performance of the previous year. But worse was to follow.
On 25 January 2000 a document was circulated to directors, including Jim Flavin, which included the actual trading performance for the first two months of the financial year (November and December 1999) and a hard forecast for January 2000 (in all, the first quarter of the financial year) showing the company was losing €2.6m in that first quarter. This corresponded with a profit in the first quarter of the previous year of €11.1m. The internal company forecast for the first quarter had been a profit of just €4.7m, so the position was the company was faring €7.3m worse than forecast and €13.7m worse than performance in the first quarter of the previous year.
The following comments were appended to this information: “December showed very little improvement in market prices or sentiment (on the already disappointing performance in November) with a multiple price war effecting an already over-supplied market (in bananas).”
Meanwhile the share price was booming for reasons unrelated to actual performance.
In the autumn of 1999 Fyffes had embarked on an internet venture, called worldoffruit.com. It introduced an internet fruit exchange – a business-to-business, on-line trading system. That was the era of the dot.com mania and the venture evoked huge interest, driving the share price of Fyffes upwards. On 1 December 1999 the share price had been at €1.60. It was at €2.62 on 25 January, at €3.20 on 3 February, €3.69 on 8 February, €3.90 on 14 February, peaking at €3.98 on 18 February and falling back to €3.30 by 16 March.
Then on 20 March Fyffes issued what is known as a “profit warning” advising the market the trading performance was very much down on projections and on performance on the previous year. The statement said the trading environment in the early part of the current financial year had been very difficult and, in particular, market conditions in the last two months of calendar 1999 were significantly below expectations. It continued: “The usual recovery in the first month of calendar 2000 had been slower than anticipated… As a result we expect that the performance for the first half of the year, on a like for like basis, will be below that achieved during the same period of last year. Present trading is slightly improved but, at this stage, it is too early to predict whether the shortfall can be recovered in the second half (of the financial year).”
Essentially what was in the “profit warning” was the information that had been available to directors, including Jim Flavin, over the previous few months.
This “profit warning” – ie the disclosure of the information that was essentially the same as Jim Flavin and the other directors had known – caused the share price to fall from €3.60 to €2.70 in a single day and to €2.46 on the following day, a drop of 25 per cent in two days. By the end of April 2000 it had dropped to €1.85.
But Jim Flavin had arranged for all the DCC shares in Fyffes (10.5 per cent of the total shareholding) to be sold in three tranches on 3 February (when the share price was €3.20), 8 February (when the share price was €3.69) and 14 February 2000 (when the share price was €3.90), approximately 5 weeks before the profit warning.
Some of the Fyffes shares sold by DCC were bought by London institutional investors and, apparently, they prompted a London Stock Exchange investigation, starting on 7 April 2000, into what had happened and, in particular, into what appeared to be the curious sequence of events: DCC had a director on the board of Fyffes, DCC sold its massive shareholding in Fyffes, making a profit of over €80m and a few weeks later the share price collapsed. (The London Stock Exchange was empowered to investigate this because Fyffes and, incidentally, DCC, were quoted on it.) Subsequently the Irish Stock Exchange instituted its own investigation and that continued into 2001 and towards the end of 2001 the Irish Stock Exchange reported the matter to the DPP. As Ms Laffoy noted in her High Court judgment in the case: “There the matter rests.”
A key issue in the case was whether Jim Flavin actually “dealt” in the shares or whether he was a mere conduit between the stockbrokers and the company that actually held the shares for DCC, namely Lotus Green. Ms Laffoy found Jim Flavin had dealt in the shares. She said: “I hold that the evidence supports a finding that… Mr Flavin both caused and procured the dealing, which resulted in the share sales.” This finding by the High Court was in direct conflict with the evidence of Jim Flavin and in direct conflict with the position of the DCC board on, essentially, a matter of fact.
The performance of Fyffes through this whole affair seems curious also.
First, Fyffes made no suggestion that Jim Flavin had engaged in insider trading until over 20 months later in October 2001, when its solicitors, Arthur Cox wrote to DCC and Jim Flavin. Proceedings were initiated on 28 January, a week before the statutory limitation period in relation to the taking of such actions.
Then there was the conduct of Fyffes at the time of the DCC shares sale.
There was telephone contact between Jim Flavin and Neil McCann on 3 February 2000 before the first tranche of shares was sold. They arranged to meet at the Great Southern Hotel at Dublin airport that evening between 6pm and 7pm. David McCann went along with his father. When Jim Flavin arrived they congratulated him and they shared a bottle of champagne.
On the following day Neil McCann wrote to Jim Flavin saying: “Further to our meeting last evening it is encouraging to note this morning that the share price has stood up but I think, in all our interests, it could be helpful if the remainder of the shares are disposed of, so they will not be overhanging the market. It is quite an achievement to have disposed of such a volume and get such a good reaction. Hopefully it augers well for the balance.”
No hint of concern about insider dealing here.
Then there is the reality that during this very time, after the directors of Fyffes had information that all was not well with the Fyffes trading performance in the first few months of its financial year (starting on 1 November 1999), company directors and executives undertook a series of “roadshows” to potential investors and never informed them of the information they had available about trading performance, information Fyffes was later to claim was price sensitive insider information, used improperly by Jim Falvin.