Questions remain about ethical standards at DCC despite Flavin's protracted resignation

ANOTHER YEAR'S over, Jim Flavin has moved on, but DCC plc remains in the spotlight for all the wrong reasons.

Senior counsel Bill Shipsey, who was appointed by the High Court in July to conduct an inquiry into the company, is to deliver an interim report on his work in early 2009. The final report, whenever it arrives, is unlikely to make pretty reading.

Flavin, who was the principal architect of the €880 million market cap industrial holding company, displayed remarkable reluctance to resign after the Supreme Court ruled in the summer of 2007 that he had been in possession of price-sensitive information when he sold Fyffes stock worth €106 million into the market in February 2000.

Flavin sold the stock on behalf of DCC. The Fyffes share price fell by 25 per cent a few weeks later. The Supreme Court ruling overturned an earlier High Court judgment that was - partially - in Flavin and DCC's favour.

Arguably it was a scandal that Flavin, and other members of the DCC board, didn't resign when the High Court issued its ruling. Ms Justice Mary Laffoy, while finding for Flavin and DCC on the price sensitivity issue, described as "absurd" the position taken by Flavin and DCC in relation to a tax structure put in place in relation to the Fyffes shares.

Put simply, Flavin told the court in the witness box, and it was DCC's position to the court, that the shares had been sold by a Dutch resident subsidiary called Lotus Green, and that Flavin himself had not dealt. This position was put to the court despite the fact that there was a tape available of Flavin discussing the share sales with a stockbroker.

Ms Justice Laffoy made it very clear that she didn't believe Flavin and DCC's evidence on this issue. Furthermore, she expressed the view that Flavin dealt in the shares with the board's approval.

As was made clear during the lengthy trial, in order for DCC to escape paying Irish capital gains tax on the huge profit it accrued from the sale, the shares had to be sold by the Dutch resident company. At issue was a tax bill of some €17 million.

On the basis of Ms Laffoy's ruling, it is difficult to think other than that DCC, and Flavin, first of all adopted a false position that allowed DCC escape payment of the taxes DCC owed, and then gave wrong evidence on the matter to the second-highest court in the land, in order to maintain that position.

That's just from the High Court case, which Flavin and DCC "won". Flavin remained in his position and the DCC board presented the impression that it was delighted with itself, after the High Court ruling.

The public does not know - yet - whether, arising from what emerged during the High Court hearing, DCC had to make a tax settlement on the Lotus Green issue. Hopefully this is one of the matters Shipsey will comment on in his eventual report.

When, in time, the Supreme Court ruled that "common sense" indicated that Flavin had been in possession of price sensitive information at the time of the massive share sale, the DCC board, astonishingly, sought to portray the finding as a type of technicality. The board publicly stated its unanimous support for Flavin and repeated this support on a number of occasions as the pressure piled on. Just a week before his resignation in May, the board backed Flavin when he stated that he had no intention of going prior to his scheduled retirement in mid-2010.

It needs to be borne in mind that Flavin has spent his adult life dealing in shares and was considered a very astute investor. The decision to sell the Fyffes shares, which were inflated in price due to the dotcom boom, was most likely motivated by his sceptical views on the dotcom boom rather than the trading information he had in his possession. However, the law states that if you have insider information, you can't trade, and he would have known this.

It was when the Director of Corporate Enforcement, Paul Appleby, went to the High Court to seek the appointment of an inspector under the Companies Acts, that Flavin's resignation was announced. Flavin said he resigned because it was in the interests of DCC and its shareholders. "While I am resigning, I firmly hold the view that I have always acted honourably and in what I believe to be the best interests of the company and all its shareholders," Flavin told the board. The latter part of that statement can't be argued with, but it is not a moral position.

Seen from the same point of view - he made money for the company - the board's position becomes understandable. But it is far from reassuring in terms of ethical standards inside the boardroom of one of the State's largest indigenous companies.

The initiation of a Garda inquiry into the matter in the wake of the share sale was one of the factors that led to Fyffes' decision to take a civil action against Flavin and DCC. Unless something startling emerges from the inspector's work, it doesn't seem likely that charges will ever be brought.