Sparks fly in Fyffes/DCC legal case

The insider share-dealing High Court action initiated by Fyffes, Europe's largest fruit importer, against DCC, DCC chief executive Jim Flavin, Lotus Green (a DCC subsidiary) and SL Investments, is unique and the proceedings will be followed closely by the investment community and budding entrepreneurs.

It is unique for a number of reasons. First, the allegations, denials and counter-allegations are being made openly through the media. Second, it is the first civil insider-dealing action to be taken under the Companies Act, 1990. Third, the action is against Fyffes's former mentor (Mr Flavin) who was responsible for some of Fyffes's major developments. And fourth, the action is, in effect, indirectly against the interests of some major institutional investors.

DCC was set up by institutional shareholders with the intention of investing in a number of companies. Today, just 39 of the 2,946 shareholders own 84 per cent of the equity; the bulk of the shareholders own just 4.6 per cent of the company, according to DCC's last annual return.

The action, therefore, hits at the heart of the institutional fraternity, though Fyffes, which has some large institutional shareholders, is actively seeking the support of the institutions that bought DCC's block of Fyffes shares.

Under the Companies Act 1990, insider dealing is both a civil and a criminal offence. The civil wrong creates a liability to compensate any party to the transaction who was not in possession of the information and with liability to account to the company for any profit in the transaction. A convicted person is prohibited from dealing for 12 months from the conviction.

If a criminal action results from the Garda Bureau of Fraud Investigation's investigation of the share dealings, the civil action is likely to be postponed.

While no action has so far been taken, the penalties on conviction are severe. On summary conviction, there could be imprisonment for 12 months or a fine not exceeding €1,279 (£1,006), or both. On indictment, the penalties are imprisonment for up to 10 years or a fine not exceeding €254,000, or both.

It is easier to succeed in a civil case, which decides on the balance of probability, than a criminal case, where the case has to be proved beyond reasonable doubt

The civil action is to be vigorously rejected by Mr Flavin and the other parties.

The €85 million claim by Fyffes relates to the sale by DCC of a 10.2 per cent stake in Fyffes in February 2000, just weeks before it announced a profit warning.

Fyffes monetary claim is based on the difference between the €21.7 million cost of the 31 million shareholding when acquired in 1981 and the realisation of €106.7 million when it was sold in February. The block of shares was sold on four separate dates in February at prices between €3.20 and €3.90.

The statement of claim documents presented by Fyffes this week allege that, as a non-executive director, Mr Flavin had detailed financial information on Fyffes's trading position for November and December, and that he took advantage of this information to procure the sale of DCC's stake in February 2000 at a profit of €85 million.

Mr Flavin has rejected the claim that he had price-sensitive information.

A source close to DCC noted that the market knew about the deteriorating situation, which may well be used in its defence.

ABN Amro noted on January 14th, 2000, two weeks before the sale by DCC, that Fyffes shares had rallied strongly on recognition of its internet potential "but in blatant disregard to the recent profits warnings of its competitors Dole, Chiquita and Del Monte Fresh Produce".

Also DCC is expected to question why, if Fyffes believed there was price-sensitive information that should have been communicated to the market, the company gave its executive director, Mr John Ellis, permission to sell 45,000 Fyffes shares on January 26th, a week before DCC's first sale. Fyffes reacted by claiming that DCC had failed to answer the core issue.

Mr Flavin has also denied he passed any price-sensitive information to Lotus Green, the Dutch subsidiary of DCC. Lotus was set up to sell DCC's stake in Fyffes - as a Dutch company any capital gain would be tax-free. There are three Dutch directors on the board together with DCC finance director Feargal O'Dwyer. These directors are expected to strongly deny they had any insider information. Mr Flavin was not on the board.

The claims and counter-claims,will be addressed in the High Court, which will decide on their merits.

The heated words between the parties are in sharp contrast to relatively tranquil days up to the late 1980s, when DCC and Fyffes appeared to be running in tandem. But in the 1990s, relations between Mr Flavin, whose DCC has always adopted a hands-on approach, and some of the McCann family, which had executive responsibility for running Fyffes, was hardly cosy, indeed sometimes vexed. Following DCC's sale of Fyffes share two years ago Mr Flavin resigned from the Fyffes board.

In a general comment, and with no reference to the Fyffes/DCC case, it should be said that claims of insider share dealing should always be investigated and if people have a case to answer they should, of course, be prosecuted. That is particularly true if they operate a cosy club where the nod and wink work. Equally, frivolous claims should not be entertained and, as investors well know, it is easy to be clever about a share price in retrospect.