Frankfurt's Neuer Markt became the dominant exchange for European tech shares after it opened in March, 1997. One key to its success: a standard for openness that shamed even blue-chip indexes like the DAX. Neuer Markt startups have always had to report earnings quarterly, for example, while blue chips like Volkswagen only recently started doing investors the favor.
But the Neuer Markt's 70% plunge from its March high has exposed an uncomfortable truth: In the disclosure department, the exchange still lags behind its peers in the U.S. and Britain. Now the Deutsche Borse, which runs the NM as well as the exchange for more established companies, wants to change that. Come March, the Borse will begin requiring top managers of Neuer Markt companies to inform shareholders when they buy or sell shares. Violators can be fined heavily by the Borse or kicked off the exchange.
That's a positive step. But it's not enough to restore the Neuer Markt's credibility among Germany's millions of novice investors. The new rule leaves out other listings--DAX companies, for example. This is a time when the government must take a bolder role as regulator of the securities markets and a framer of securities laws that have real teeth.
RED FLAG. A case in point is Thomas Haffa, CEO of EM.TV & Merchandising. After a 94% dive in EM.TV shares, Haffa has gone from Neuer Markt hero to heel faster than one of the Formula One races his company promotes. Now Haffa has admitted to Germany's Der Spiegel that, in January and February, 2000, he unloaded a "small bloc" of his stake in EM.TV, which owns the worldwide rights to the Muppets and other programming. Guess it depends on how you define "small." Haffa collected $17.8 million. As Alfred Roelli, chief of private banking investment strategy at Deutsche Bank, points out, if news of Haffa's sale of shares had come early in the year, it "definitely" would have raised a red flag.
In the U.S., the Securities & Exchange Commission's disclosure rules would have ensured that investors knew about Haffa's sale soon afterward. And theoretically, now that the Deutsche Borse has passed new rules, Haffa and other insiders at Neuer Markt companies must disclose future share sales, too.
Yet the Borse is a private firm, and its range of sanctions is too limited to provide the guarantees shareholders deserve. Sure, it can fine corporate members of its exchanges and threaten to delist them for violating the new rules on disclosure. In fact, the exchange is raising the maximum penalty from $9,000 to $90,000.
But by corporate standards, that's a parking ticket. And the company pays, not the executive. So the fine falls indirectly on the very shareholders who were deceived. And would the Borse actually move to delist a high-profile company like EM.TV, still a key holding for Neuer Markt investors? That's highly doubtful. In fact, the Borse rarely fines companies, even for routine violations such as filing late earnings reports.
The government must act as watchdog. Before the 2002 national elections, Parliament is expected to pass the latest in a series of laws modernizing the framework for financial markets. That's an opportunity for lawmakers to force disclosure of managers' share sales and adopt criminal penalties for abuses. Enforcement should be handled by Germany's Federal Securities Trading Commission, or BAWe.
While it's at it, Berlin should give the agency more clout and resources. Compared with the SEC, the BAWe is as scary as a troop of small-town constables. When it wants to seize documents, it must enlist local prosecutors, who are often busy with other cases. It's no surprise that no one has ever gone to jail for insider trading in Germany. And there's no reason tougher disclosure rules should apply only to Neuer Markt stocks. Companies such as Deutsche Telekom are increasingly handing out stock options to top managers. It's not necessarily a vote of no confidence when a manager sells shares--maybe he just wants a new yacht. Still, investors have a right to know.
For a country that didn't outlaw insider trading until 1995, Germany has come a long way. But the events surrounding EM.TV show Germany is making a painful transition from the days when stock trading was the province of the elite. Germany's economy cannot advance without the confidence of individual shareholders, who have started risking their savings in equities. It's time those small investors had the facts--and the government's protection.