Impact of legal advice on court cases in the spotlight

IN THE wake of Bill Shipsey’s report on Jim Flavin and insider dealing by DCC plc, there has been quite a bit of discussion in print and on the internet concerning the impact of legal advice in cases of suspected white-collar crimes or company law offences.

In particular, the debate has focused on the potential implication for ongoing inquiries involving the banking sector.

Seán FitzPatrick’s movement of his personal loans on and off the books of Anglo Irish Bank, with the annual help of Irish Nationwide, is the subject of ongoing inquiry.

So, too, is how Anglo and Irish Life Permanent treated large sums of money that were travelling back and forth between them, giving a positive glow to Anglo’s books. Also being investigated is who did what when Seán Quinn was unravelling his enormous contract-for-difference (CFD) stake in Anglo, and a number of the bank’s more substantial clients agreed to row in and purchase shares that would have otherwise come on to the market, using funds loaned to them by the bank.

No doubt legal advice was involved in most if not all of these scandals.

The question arises as to what weight should be given to the fact that advice was given, both in deciding whether charges should be brought in a particular case and in any court hearing that might occur.

In the Flavin/DCC case, Shipsey’s report deals with two issues on which legal advice was given. The first is the movement of DCC’s large shareholding in Fyffes plc to a DCC subsidiary called Lotus Green, set up as part of a tax structure. This occurred in 1995.

The second issue concerns the sale of these shares in February 2000 for €106 million at a time when, as the Supreme Court later ruled, Flavin, the then chief executive of DCC, was in possession of insider information on Fyffes, by way of his being a non-executive director of that company.

In relation to the first matter, Alvin Price of William Fry informed DCC that it was his view that the transfer of the shares to Lotus Green did not trigger an obligation under section 67 of the Companies Act to notify Fyffes. Shipsey in his report concluded that the advice was wrong – Lotus Green had an obligation to notify Fyffes – but said it was correct for DCC to have sought advice, the advice was given in good faith and it was reasonable for DCC’s executives to accept the advice that was offered.

The second piece of legal advice considered by Shipsey was covered in a note written by Price on January 31st, 2000. Flavin had called him, he recorded, to discuss the possible sale of the Fyffes stake. The note begins with discussion of a related matter and proceeds to the issue of insider information. “He said he had examined his conscience with regard to any price-sensitive information and felt he didn’t have any,” Price recorded.

Price was not given the details of the trading information that Flavin had. The note recorded how the share price had risen in recent times because of Fyffes’s worldoffruit.com project and that there had been recent briefings for analysts, so the market had “up-to-date information”.

Price recorded that Flavin told him that trading during the first two months of the financial year (November and December 1999) “had not been all that wonderful”, but that two relatively poor months would not have been unusual in the past. “Having discussed the matter with him, we confirmed that we share his view that there did not appear to be any legal obstacle to their proceeding with a full disposal of the shareholding,” Price wrote.

DCC sold its Fyffes shares in early February 2000 and, when Fyffes issued a trading statement to the market on March 20th, the share price fell by 25 per cent. On March 21st, Flavin contacted Price and sought a copy of his memo.

Ms Justice Mary Laffoy, the judge in the High Court case taken by Fyffes against Flavin and DCC, found that the only reasonable inference to be drawn was that Flavin was motivated (on March 21st) by concern that the share sales might not be in compliance with the law.

Flavin also, in the run-up to the share sales, consulted DCC’s compliance officer, Michael Scholefield, giving him similar information to that given to Price. In court, Fyffes argued that the nature of Flavin’s approach to Price and Scholefield supported its argument that Flavin knew he had price-sensitive information.

Ms Justice Laffoy, in her judgment, said Fyffes had argued that Flavin’s compliance process “was a sham” and that he had made a deliberate decision not to disclose all the information he had. “However, I am not satisfied that it would be a proper inference to draw that Mr Flavin deliberately misrepresented the import [of the trading information] when seeking advice from Mr Price and Mr Scholefield,” the judge said.

“The question which arises is whether the process engaged in bolsters either the [Flavin/ DCC] case that the information was not price sensitive, or the [Fyffes] case that it was. In my view, it does neither. It is a neutral factor.”

Shipsey, in his report, found that Flavin’s belief that the information he had was not price-sensitive was genuinely held. Flavin did not deal without considering whether he or DCC were free to sell the shares, and acted with care.

The Director of Corporate Enforcement, Paul Appleby, who sought Shipsey’s appointment, said after Shipsey’s report that his inquiries into DCC were now at an end.