The Fyffes case against DCC for insider dealing, which ended this week, is a story of high stakes and high-rolling players, writes Colm Keena, Public Affairs Correspondent.
The huge Fyffes/DCC insider dealing case that ended this week in the High Court is the largest commercial clash ever in this State and one which has cast an unforgiving light on some aspects of the Dublin business world.
The case involved personality clashes, reputational damage and enormous amounts of money.
During the course of the 87-day hearing it emerged that in March 2000 an executive from Fyffes, who had just completed an early draft of an intended profit warning, travelled to Germany to give a presentation to a gathering of potential investors in Fyffes shares.
When the profit warning was issued, on March 20th, 2000, the Fyffes share price plummeted 25 per cent in two days.
In the two months prior to the issuing of the profit warning, the fruit distribution company held an unprecedented number of investor presentation meetings. There was huge interest in the company at the time because of the dotcom boom and Fyffes's then worldoffruit.com (WOF) project.
While other fruit companies such as Chiquita and Dole came out with profit warnings and poor results during 1999, Fyffes finished the year with a strong performance. Its WOF project saw its share price soar from €2 to nearly €4 in the first two months of 2000.
However, it emerged during the case that the excellent profits reported by Fyffes for its 1999 financial year did not reflect the bad trading the company was then encountering. The 1999 profits had been boosted by €19 million that came from items that would not be available in 2000, but this was not known to the market.
In other words, the market was not being alerted to the real trading difficulties being encountered by Fyffes.
In December 1999, when announcing its preliminary results for its 2000 financial year, Fyffes, in an "outlook statement", said it expected 2000 to be a year of further growth.
During the court case Fyffes managing director David McCann said this statement to the market did not in fact reflect trading concerns that existed at the time.
The case taken by Fyffes is that Jim Flavin, managing director of industrial holdings group DCC plc, was in possession of "price-sensitive information" concerning Fyffes, on dates in February 2000 during which Fyffes shares held by DCC were sold for €106 million.
Flavin was at the time a non-executive director of Fyffes and in that capacity was given trading reports sent on a monthly basis to Fyffes directors. Fyffes's 2000 financial year began on November 1st, 1999. The poor trading the company had encountered earlier in the calendar year 1999 continued through November and December 1999. A pick-up the company was hoping for in January 2000 did not materialise.
The two trading reports received by Flavin in early and late January outlined this difficult position. The cumulative situation outlined was that Fyffes expected at the end of January that it would have made a loss of €2.6 million. The market was expecting Fyffes's profits for the year as a whole of up to €90 million.
PRICE-SENSITIVE INFORMATION is information that is not generally available but which if it became available would cause a material change to the share price.
Fyffes argued in court that "common sense" showed that the information Flavin had in his possession was price sensitive. Furthermore, it argued, the effect on the share price of the profit warning issued on March 20th supported this view. The profit warning referred to bad trading in November and December.
DCC, on the other hand, said the information was not price sensitive. It pointed out that at the time Fyffes was preparing its budget for 2000, which envisaged further profit growth, it was aware of the poor trading the company was encountering. The company went on to issue its outlook statement during December, and to host an unprecedented number of investor presentations during January and February 2000.
It also gave permission to a Fyffes executive to trade in shares in January, ie at a time when it was now saying the company's top people were in possession of price-sensitive information. On the night of the first DCC share sale, the then-chairman of Fyffes, Neil McCann and son David bought a bottle of champagne for Flavin and later encouraged him to sell off the rest of the DCC holding.
Nowhere in Fyffes's files, until the first or second week of March 2000, does any mention appear of a possible need to inform the market of poor trading.
This, said DCC counsel Kevin Feeney SC, was the "cancer" at the core of the Fyffes case. It was expecting Flavin to interpret the trading statements in a way Fyffes's executive directors had failed to interpret them at the time.
Complicating the whole issue is the fact that control of the shares had been transferred by DCC to a Dutch resident subsidiary called Lotus Green, as part of a tax scheme. DCC argued that Lotus Green sold the shares, and that Flavin, insofar as he was involved in the share sales, acted solely as a "conduit". Fyffes argued that DCC and Lotus Green endeavoured, for tax reasons, to ensure the files made it seem Lotus Green managed the share sales, but that the reality was that Flavin was in charge.
During the hearing Flavin was asked if he believed it was right that Lotus Green's board minutes should have been "altered in a way that does not reflect reality?" He said he would leave that question for the board of Lotus Green. However, commenting generally, he said that sometimes minutes might be adjusted to make sure "something is in accord with the underlying fundamentals in relation to a tax situation". Flavin was not on the Lotus Green board.
During the hearing the court was played tapes of a stockbroker from Davy stockbrokers talking to Flavin about the first share sale. Having discussed various matters Flavin then tells the dealer that he may be contacted by a man in The Netherlands. Flavin continues: "I have no authority in the matter." He can then be heard to laugh. Flavin's evidence was that this was a mannerism of his and that nothing should be read into it. A Dutch director of Lotus Green then contacted the dealer and confirmed the trade.
STOCKBROKING FIRMS ARE obliged to retain tapes of dealings for three months in case there are any disputes after the trades. Davy had a practice of keeping such tapes for six months. Davy was, and is, stockbroker to both Fyffes and DCC. Goodbody stockbrokers was also involved in the DCC trades.
When Davy learned that the Stock Exchange was investigating the DCC trades, its compliance officer, Pamela Downey, had a copy made of the relevant conversations from the firm's mastertape. She kept this copy tape in her office but, when she was out of the office for a number of days, the deputy chairman of Davy, Kyran McLaughlin, had a copy made and faxed transcripts of the taped conversations to Flavin. At the time, December 2001, the Exchange and the Director of Public Prosecutions (DPP), were conducting inquiries into the trades. McLaughlin was not called by either side.
The court also heard of contacts between Flavin and Roy Barrett, head of Goodbodys, in the context of the Stock Exchange inquiry into the trades. Six days after Goodbodys had been contacted by the Exchange in 2000, a fax was sent from Flavin to Barrett. The fax read in part: "Further to our discussion, I attach extracts from our report to the Stock Exchange with references to Goodbodys Stockbrokers highlighted and relevant faxes from Lotus Green."
When Paul Gallagher SC, for Fyffes, asked if Flavin was seeking to "co-ordinate Goodbody's response to the Stock Exchange with DCC's response", Flavin said he wanted to ensure the Exchange had "proper information on which to make a judgment". He said he thought the word "co-ordinate" was very unfair.
The Stock Exchange report was sent to the DPP without DCC being given a chance to respond to its findings. This practice by the Exchange has now been revised. "The reputation of DCC and my reputation are in tatters because of that particular approach," Flavin told the court, referring to the actions of the Exchange.
It became clear during the case that there was no love lost between Flavin and Neil McCann's two sons, David and Carl. Flavin may have tried to prevent the sons taking over when Neil McCann, the man who turned Fyffes into one of the largest fruit distribution companies in the world, was bowing out. He also may have at times queried the remuneration being accorded to the two sons.
If Fyffes wins the case the damages against DCC could run as high as €80 million. Flavin's reputation would be in ruins, and he would be facing the possibility of a criminal charge. Irrespective of who wins, there has been damage done to the reputation of Fyffes.
The only sure bet is that the six senior counsel working on the case, as well as the solicitors, junior counsel and spin doctors involved, have all done well out of the dispute, and that their respective clients are more than capable of footing the bill.
A judgment from Ms Justice Mary Laffoy is expected in the autumn.
Oh, and one other sure bet: the loser will appeal to the Supreme Court.
Neil McCann: A hugely admired member of the Irish business world, Neil McCann (left) grew an Irish fruit distribution company based in Co Louth, Fruit Importers of Ireland, into one of the largest fruit distribution companies in the world. He was not called to give evidence.
David McCann: A solicitor and chief executive of Fyffes, David McCann (left) spent nine days in the witness box. He told the court that Fyffes got through 1999 "by the skin of our teeth". The market was not told that the 1999 profits included provisions that would not recur in 2000. "We didn't tell anyone. We didn't have an obligation to report that detail," he said. An outlook statement in December 1999 saying the company expected further growth in profits in 2000 did not reflect the underlying concerns regarding trading that the company had at the time. This did not mean the company had acted in bad faith, he said.
Carl McCann: An accountant and executive chairman of Fyffes, Carl McCann (below) told the court that the decision to take an action against DCC and Jim Flavin was not based on difficult relations with Flavin. He accepted that relations between him and Flavin were often tense. In a note written to Flavin but not sent, during a dispute over remuneration for the McCanns, Carl McCann wrote: "Your...compulsion to dominate everyone and every meeting is well known. There is no excuse for bad manners, a bullying approach and a lack of courtesy, appreciation and respect for your elders...I do not know if your moodiness is random or related to other business hassles, but it is painful to deal with."
Jim Flavin: Founder and managing director of DCC plc, Jim Flavin (left) was a senior adviser to Fyffes and Neil McCann for more than 20 years. He bought his first share when only 19 years old. He told the court he was always an independent type of man. As Fyffes grew in size and the McCann family shareholding fell in percentage terms, Flavin said he became concerned about the family's level of control. The McCanns, in turn, had concerns about Flavin and DCC getting "creeping control" over Fyffes. Flavin was also involved in moves aimed at setting remuneration levels for David and Carl McCann. He believed his difficult relationship with the McCanns "provides part of the explanation for the timing, manner and mode of prosecution of these proceedings," he told the court.
Fyffes v DCC: the core issues
There are two core issues which Ms Justice Mary Laffoy must decide on:
Was the information DCC plc managing director Jim Flavin had in his possession in February 2000 price-sensitive information?
Did Jim Flavin deal or was he merely, as he claims, acting as a conduit for the DCC subsidiary, Lotus Green?