Rulings not incompatible but are hardly a perfect fit

OPINION:AT THE outset of his ruling on the Fyffes/DCC case in July 2007, Mr Justice Nial Fennelly let rip. "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.", writes COLM KEENA

Fyffes had taken a civil case against DCC and its executive chairman, Jim Flavin, alleging insider dealing. The High Court had held in favour of DCC, and the Supreme Court was giving its view on the matter.

If you’d been Flavin sitting in court waiting to hear its finding, Mr Justice Fennelly’s comments wouldn’t have come as a comfort. We can only presume their effect was intentional and reflected the strength of the judge’s view.

The €108 million trade at the centre of the Fyffes/DCC insider dealing case was considered for 87 days in the High Court, and a decision was then given by Ms Justice Mary Laffoy. The 2005 judgment ran to 365 pages.

At the heart of the matter was negative trading information that was available to Flavin by way of his being a non-executive director of Fyffes, but not available to the market.

Mr Justice Fennelly had the following to say: “The appeal turns on the assessment of the likely price effects of a limited body of comparatively simple facts. In large measure, as I will be saying later, they are the sort of facts upon which common-sense judgments and opinions can be formed without the input of an extraordinary degree of expertise.”

Having reviewed various matters involved, he said; “On this appeal, I would find as a fact that the information contained in the November/December trading figures would, if it had been generally available on the dates of the share sales, have been likely materially to affect the price of Fyffes shares.”

Mrs Justice Susan Denham in her ruling also granted the appeal as did Mr Justice Finnegan in his ruling and Ms Justice Fidelma Macken in hers. Mr Justice Hugh Geoghegan agreed with his colleagues. The court’s five judges found the information was price sensitive, and that a commonsense evaluation told you so.

The shares were sold by DCC in early February 2000. On March 20th Fyffes issued a statement to the market on its trading situation and over two days its share price fell by 25 per cent. A 10 per cent change is considered material for insider dealing cases.

Ms Justice Laffoy, in her ruling, had decided that this event was not of evidential value. The Supreme Court judges did not agree with her.

The negative trading statement issued to the market in March 2000, and the resultant heavy fall in Fyffes’ share price, led to a lot of questioning, at the time, about the DCC sale.

The Garda became involved as did the Stock Exchange and the Director of Public Prosecutions. Concerns about a possible criminal case against Flavin were in the air when Fyffes decided to take its civil case against Flavin and DCC.

No criminal prosecutions have ever been taken, and no doubt never will be.

In 2008 the Director of Corporate Enforcement, Paul Appleby, told the High Court he had concerns about people who “actively participated” in insider trading continuing to hold leading roles in Irish corporate life. That, he said, would give cause for belief that “insider dealing involves minimal reputational risk”.

He sought the appointment of an inspector to DCC, the court approved the appointment of Bill Shipsey SC, and this prompted the resignation of Flavin from the company he had founded.

Shipsey has now reported and the board of DCC is delighted. No doubt Flavin is too. The report not only finds that there is no basis for taking a company law case against Flavin, or anyone else in DCC, but it takes the trouble to generously praise the standard of business ethics in the plc.

Of Flavin Shipsey said he “impressed me as somebody who was not only fully conscious and aware of his obligations and responsibilities ... but also very well informed and knowledgeable of his obligation”. He noted Ms Justice Laffoy’s finding that “dishonesty was not established in the evidence”.

The civil action taken by Fyffes required only that it show that Flavin had dealt while in possession of information that was price sensitive. A criminal insider dealing case requires that the prosecution show that the person charged acted knowingly.

Disqualification cases taken under company law require that the court be persuaded that a person failed to act to the standards required by company law.

Shipsey’s report has found that Flavin’s decision to trade when in possession of the negative trading information was a genuine error in that he had wrongly concluded that the information he had in his possession was not price sensitive. “Having questioned him at great length, I have concluded that Mr Flavin genuinely believed that he was not in possession of price sensitive information ... The suggestion that the dealing was intentionally wrongful ... can be dispelled.”

Given Shipsey’s report, Appleby has accepted that no further action will be taken.

There is no incompatibility between the Supreme Court finding – that Flavin had information that was price sensitive when he dealt – and Shipsey’s conclusion – that this was a genuine error on Flavin’s part.

However, the two findings don’t make a perfect fit.

The High Court found that Flavin dealt because he was approached, and that he did so because of his assessment at the time that Fyffes’ shares were overvalued, as a result of the dotcom bubble and Fyffes’ then involvement in an internet venture, worldoffruit.com.

Flavin was spot on. He had been trading in shares since his schooldays, was one of the big successes of the Irish corporate world, and had been involved in plcs since the 1970s. He was and is an expert in corporate governance.

Even though he wasn’t motivated by the trading reports, he should not have traded if he felt he was in possession of price sensitive information. The Supreme Court found that a commonsense analysis showed the reports to be price sensitive.

Flavin has said that this was not apparent to him at the time, and others have agreed with him. Shipsey has said Flavin made a “costly error” and that Appleby’s “understandable apprehension” arising from the High Court case was “largely unfounded”.

No one is disputing the correctness of the Supreme Court’s finding. Overall, therefore, it comes down to accepting that what was apparent to the judges in 2007, wasn’t apparent to the experienced expert in 2000, or Ms Justice Laffoy during 2004 and 2005.

Colm Keena is Public Affairs Correspondent of The Irish Times