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London Stock Fraud Verdict Promotes Higher Conduct

WHAT Britain's press has dubbed the ``financial trial of the century'' should help establish new ethical standards of conduct in the ``Square Mile'' - London's financial district. That's a widespread view of the effect of the trial, which ended Aug. 27. A jury found four of the country's most prominent entrepreneurs guilty of an illegal trying illegally to push up Guinness's stock price to help the brewing giant win a 1986 takeover battle for Distillers, a Scottish drink company.

The result was greeted with relief by Andrew Hugh-Smith, chairman of the London Stock Exchange. He said it reinforced the ``widely held belief'' that the City, as the financial district is also known, now had its defenses up against transgressions.

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``Everybody who uses the market now knows that what he is doing can be seen easily in the ordinary course of business. If something odd is happening, it will be picked up by people watching the [computer] screens,'' Mr. Hugh-Smith said.

John Wood, director of the government's Serious Fraud Office, set up to police ethical conduct in the City, described the outcome as ``a vindication of our work'' and compared the case to the insider-trading trial of Ivan Boesky in the United States.

Jonathan Guinness, a former director of the drinks company, said the jury could have come to no other conclusion. ``Had there not been a guilty verdict, it might have been open house for quite a lot of undesirable practices,'' he said.

The Labour Party's trade spokesman, Gordon Brown, called the verdict ``an indictment of boardroom greed'' which he hoped would bring an end to the ``anything goes'' attitude in the City.

The judge who presided at the 113-day trial in Southwark Crown Court, asked rhetorically in his final statement: ``Does the criminal law need to protect markets to try to keep them straight, or should we simply leave it to the fat cats and the law of the jungle?''

He sentenced Ernest Saunders, former chairman of Guinness plc, to five years imprisonment for conspiring to contravene the Fraud Investments Act, false accounting, and theft. Two other co-defendents received lesser sentences. Sentencing of the third co-defendent was postponed for health reasons.

The scandal burst on the Square Mile as the City was launching its ``Big Bang,'' when trading in corporate shares and other transactions were deregulated. It also came toward the end of a period of unprecedented takeover activity which strained to breaking point the City's system of voluntary regulation.

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When the seriousness of the charges against Mr. Saunders became clear, the Thatcher government began putting pressure on the City to accept a rigid statutory framework of control. That is now in place, including a reconstituted Takeover Panel.

The London Stock Exchange is also required by law to be more open about dealings. The Financial Services Act, passed by Parliament while charges against Saunders and his co-defendants were still being prepared, is intended to prevent Guinness takeover-style activity in the future.

Gerry Grimstone, a London merchant banker, said after the verdict: ``What happened then would not happen now. It was a product of its time when anything was possible in City terms with a bit of pressure and push. We have moved into less emotional times.''

During the Guinness takeover trial it became clear that Saunders, along with other managers, was acting without informing the company's board of control.

HUGH-SMITH'S confidence that there are now sufficient safeguards against improper dealing in the Square Mile is not shared by some independent analysts. Rowan Bosworth-Davies, a fraud investigator for the City firm Richards Butler, and a former Scotland Yard fraud squad detective, says 30 percent of all fraud in the City goes unreported.

``The present regime of control does not go far enough,'' he says. ``The Serious Fraud Office is underfunded and has difficulty recruiting qualified staff. In the United States fraud investigation is a prestige job. It is not in Britain.'' Mr. Bosworth-Davies believes the British government should create a British equivalent of the US Securities and Exchanges Commission. This view is not widely shared in the City.

When the trial verdict was announced, Saunders stated that he was penniless, and was living on under $100 a week social security. At the peak of his career he earned over $500,000 a year.

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