Final verdict on the Guinness affair: `A cynical disregard of laws, contempt for the truth and common honesty'

A remarkable insight into the free wheeling, cavalier and flagrantly dishonest practices that were allowed to flourish in the City in the the mid-1980s was on display for the first time yesterday with publication of the Government's long awaited report on the Guinness affair. Eleven years after Department of Trade and Industry inspectors were sent into the company, most of those caught up in the scandal have since reestablished themselves and continue to occupy prosperous and high powered positions in the City and commerce. Despite the inspectors' strictures and the pounds 3.2m cost of the investigation, further regulatory action seems unlikely.

David Donaldson QC and Ian Watt, the DTI inspectors, express the hope that their account of cynical disregard for the law, cavalier misuse of company monies, and contempt for the truth and common honesty, will go some way at least to reducing their recurrence in the future.

In an eloquently written chronology of one of Britain's worst ever post war financial scandals, the inspectors confess to being completely unprepared for the enormity of what they discovered. "Even at this remove in time, some in the City may experience shock at what they see, and perhaps recognise, in the mirror of this report".

Particular criticism is reserved for Ernest Saunders, the former Guinness chairman, who the inspectors say knew about all aspects of the share support operation that formed the heart of the scandal. They also conclude that the pounds 3m which passed through his numbered Swiss bank account was all along intended for Mr Saunders's own personal benefit, despite his protestations to the contrary.

Mr Saunders condemned the report as "blinkered and politically motivated" while another player in the affair, Lord Spens, dismissed it as "fatally flawed".

Margaret Beckett, President of the Board of Trade, said that on advice she had decided not to proceed against any of those named for disqualification as company directors. Mrs Beckett claimed that her hands were tied because the judge in the first Guinness trial, Mr Justice Henry, had already said on the basis of the similar evidence that those convicted should not be disqualified.

The inspectors conclude that without the illegal share support operation mounted by Mr Saunders and others during the company's battle for control of Distillers, the rival bidder, the Argyll supermarkets group, would probably have won.

"The ordinary reader will, we think, readily see that much of what went on was wrong by any tolerable moral standards and may well conclude, as we do, that if there remains any doubt whether such practices are prohibited, then that doubt should be removed by appropriate further amendments to the legislation and regulation", the 309 page report concludes.

According to the inspectors there were 15 separate supporters. During the course of the bid they purchased approximately a third of Guinness's entire share capital. Some of them, and those that had recruited them, were later rewarded with multi million pound success fees, generally paid offshore or through Swiss bank accounts.

During the course of the investigation it became clear that documents had been tampered with or destroyed or removed from the jurisdiction, most of them after the inspectors had been appointed. In addition, a number of false documents were created to corroborate a certain version of events.

"From the start we were faced constantly with untruthful, incomplete and sharply conflicting testmony", the inspectors say. We found ourselves unable to accept many accounts of events. Conversely we were confronted with the reverse problem, where witnesses had alligned their stories and evidence".

The inspectors invite regulators, including the Takeover Panel, the Stock Exchange, the Securities and Futures Association, and the Bank of England, to determine whether any of the participants are not fit and proper persons to operate in the financial services industry or merit some lesser degree of disciplinary action. However, seasoned observors of the City were saying last night that further action so long after the event was unlikely. "They'll go through the motions, but nobody will be struck off", said one participant. "A chapter of history has been closed".

At the heart of the Guinness scandal was a concerted campaign to boost the Guinness share price and maintain it at a contrived level by the large- scale purchase of Guinness shares. This was achieved by offering indemnities and multi million pound success fees to supporters and those who recruited them. The inspectors say that there can be no doubt "that this market support operation was an enterprise of deception".

During the course of their investigation the inspectors "gained the impression that the use of indemnities in takeover situations was far from unknown, though at least in more genteel City circles they were regarded as bad form or worse.

"We find it hard to accept that anyone could seriously have believed that the use of indemnities was within the spirit of the City Takeover Code. In most cases the supportive purchases of Guinness shares were procured by an offer of an indemnity, backed by a success fee".

Explicit changes in the Takeover Code to outlaw the giving of indemnities are recommended and the inspectors question what other changes ought to be made to the Panel to deal with "parties not only prepared to break the rules in secret but then lie in response to the investigator's questions, a task which the Panel's founders never contemplated".

The inspectors are dismissive of Mr Saunder's claim that he knew nothing of the mischief going on under his nose insisting that "he was fully aware of the share support operation and the basis of indemnities and success fees on which it was carried out and authorized the resulting payments which became necessary after the bid.

"It would be easy to regard Mr Saunders as a man corrupted by a milieu. Such an assessement would contain an element of truth. It was not Mr Saunders who conceived the techniques used in the support operation to distort the share price: he learned of them from advisers and acquaintances, and the struggle for Distillers cannot have been the first takeover battle in which they were deployed.

"On the other hand, it was Mr Saunders who decided what company he should keep, and what advice he should accept. Impressed by success - particularly of a financial nature - he listened increasingly to those who cut corners to achieve it. Far from resisting the sirens, he adopted their song. The success of the bid corrupted him further, leading thereafter to unjustifiable favours for cronies and self, and a dubious attitude to the truth.

Even allowing for remuneration on the most generous scale, the pounds 3.35 million which Mr Saunders agreed should be paid to the stock borker, Tony (the Animal) Parnes, was "breathtakingly high", the report says. "It demonstrated a quite wanton approach to his stewardship of company funds, even ignoring the illegalities and improprieties involved in much of the work for which the payment was made.

"Yet stronger adjectives are necessary to characterize Mr Saunders' agreement to the payment of pounds 3 million to Sir Jack Lyons, given the exacerbating feature that Sir Jack did not even a tithe of the work done by Mr Parnes, proper or improper.

On Thomas Ward, the American lawyer believed by many to be the real eminence grise of the affair, the inspectors conclude; "Even on the basis that, as we have concluded, Mr Ward's share of the pounds 5.2 million paid through MAC was originally intended to be pounds 2 million or pounds 2.2 million, and even if his services had been directed uniquely to proper and legal ends, it appears greatly in excess of a proper fee.

"Nor was it a matter for Mr Saunders alone to decide: any payment to a director required a decision of the Board of Directors. Mr Saunders suggested that the Board would inevitably have approved the payment to Mr Ward: even from a comparatively docile Board that would have demanded an extreme and improbable degree of lame acquiescence.

Ernest Saunders is directly accused in the Guinness report of intending to share in the secret pounds 5.2m payment to Mr Ward. Mr Saunders has consistently denied theft, even though pounds 3m of the payment was held for some months in his own numbered Swiss bank account. According to Mr Saunders, he merely "lent" this account to Mr Ward, for whom the entire pounds 5.2m was meant as a reward for his assistance during the bid.

The inspectors express extreme scepticism about this account. "The natural inference to be drawn from the transfer of the pounds 3m plus interest to Mr Saunders' account with Union Bank of Switzerland is in our assessment the correct one; pounds 3m of the pounds 5.2m payment was intended for the benefit of Mr Saunders", the inspectors conclude.

"It would have required almost superhuman powers of self denial for Mr Saunders to agree payment of huge sums to Sir Jack Lyons, Mr Parnes and Mr Ward while he, the architect and dynamo of the successful bid, recieved nothing but his regular salary.

The inspectors give four reasons for believing that the pounds 3m was always intended for Mr Saunders. First, the amount transferred into his account was in the exact sum of pounds 3m plus accumulated interest on pounds 3m "suggesting strongly that the pounds 3m was regarded as a discreet part of the original monies".

Second, the money remained initially in sterling, later being diversified into a mixed currency basket. Had the money been regarded as Mr Ward's tax escrow, as he claimed, the natural thing would have been to convert it into dollars, the currency of the tax liability. Third, if it was intended for payment of Mr Ward's US tax liabilities, why was it not simply transferred to a big US bank pending payment.

"Finally, it defies belief that anyone would deposit over pounds 3m in the bank account of another, with no control over the operation of that account, and no written acknowledgement of the ownership of the money. One did not even need to hypothesize a possible rupture of amicable relations between the two men to envisage the problems which could arise; it would be sufficient for Mr Saunders to die suddenly".