‘Guinness Affair’ Shakes British Financial Circles

It has become known simply as “the Guinness affair.”

But it is a complex and far-reaching case of alleged stock manipulation by the huge brewer Guinness PLC in its $4.7-billion bid to acquire Distillers Co., a gin and Scotch whiskey maker.

The case has already had a major impact on the City, London’s financial district, and when it comes before the Old Bailey criminal court, possibly this fall, it may become what the Observer newspaper called the “financial trial of the century.”

The scandal came to light amid an official crackdown on British securities fraud and is widely seen as the Conservative government’s response to charges that its radical deregulation of the financial sector opened the door to white-collar crime.

Ties to Boesky

The affair began with what then was Britain’s biggest-ever takeover bid, and to the government’s embarrassment, it coincided with Big Bang, its giant 1986 deregulation of the securities business.

It even has ties with deposed American arbitrager Ivan F. Boesky, who told U.S. authorities in 1986 about his involvement in Guinness stock and they, in turn, tipped off British officials.

It has since tarnished Guinness, one of Britain’s leading companies. Ernest Saunders, its former head and once one of Britain’s most respected chief executives, has spent a night in jail and faces 40 charges including attempting to pervert the course of justice, and destroying and falsifying documents.

The Department of Trade and Industry and Scotland Yard have snared four other members of the upper crust of British business. The defendants include one of the country’s richest entrepreneurs, a baron, a knight and a partner in prestigious brokers Cazenove & Co., who reportedly serve Queen Elizabeth II.

All, including Saunders, have protested their innocence, with Saunders claiming he is a scapegoat and target of a personal vendetta.

“I feel incensed at the lies which have been told about me by others,” he said.

After the most recent arrest, of Cazenove partner David Mayhew on April 7, the Independent newspaper said: “The scandal has now reached the very heart of the City establishment. The shock waves will reverberate for a long time to come.”

Scandal Shows Inadequacies

The high-profile prosecution, being handled by a new Serious Fraud Office, has undermined confidence in the City, dampened some takeover activity and has hurt the business of some of the companies involved, experts say.

Said Rod Barrett, banking analyst at the investment firm Hoare Govett Ltd., “It’s there in the background. . . . I think it has brought a considerable awareness of all the rules and regulations.”

Sir Nicholas Goodison, chairman of London’s Stock Exchange, denies the scandal has shown the City’s system of self-regulation to be inadequate. He says the individuals are to blame.

The details of the case have filtered out piecemeal from authorities, newspaper reports, and the new Guinness management, which took over when Saunders was fired in January.

At the heart of the case is the allegation that Saunders arranged for various of his associates here and abroad to buy Guinness’ shares during its 2.53-billion pound ($4.7 billion) bid for Distillers Co., maker of Gordon’s gin and Johnnie Walker Scotch.

The idea, it is alleged, was to artificially inflate the price of Guinness shares to make Guinness’ cash-and-stock offer more attractive than a rival bid from Agryll Group PLC, a supermarket chain.

But eight months after Guinness won the battle in April, 1986, inspectors from the Department of Trade and Industry raided Guinness headquarters.

‘War Cabinet’ Reported

Saunders, 52, quickly was sacked and became the first person charged. He spent a night in jail last May and is free on 500,000 pound ($925,000) bail.

Three other Guinness directors resigned. They are American lawyer Thomas Ward, management consultant Olivier Roux, and Arthur Fuerer, chairman of Zurich-based Bank Leu AG.

Police have issued a warrant for Ward’s arrest, while the Observer says Roux will be the star prosecution witness. No charges have been brought against Fuerer.

Saunders, Ward, Roux and Roger Seelig, former corporate finance director at the investment firm Morgan Grenfell & Co., allegedly formed a “war cabinet,” hatching the share-repurchasing scheme and luring in business associates with fees, promises of favors and guarantees against trading losses.

Guinness has taken legal action to recover 25 million pounds ($46 million) allegedly paid to these associates.

As the scandal unraveled, Guinness revealed that its former management invested the equivalent of about $185 million in a Boesky fund after Boesky bought Guinness shares.

Another U.S. link was Meshulam Riklis, chairman of Rapid-American Corp. of Cincinnati, who has cooperated with the British investigation along with Boesky.

Schenley Industries Inc., which Guinness has since acquired from the Riklis family and which distributes Guinness’ Dewar’s Scotch whiskey in the United States, also purchased the brewer’s stock during the Distillers takeover, Guinness said.

July Court Date

Saunders faces the most charges, but over the past 11 months, six other men have been charged and freed on bail. They include Seelig of Morgan Grenfell, Mayhew of Cazenove, and three of Britain’s biggest business names: financier Sir Jack Lyons, billionaire property developer Gerald Ronson and former merchant bank director Lord Patrick Spens.