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London Whale, Adoboli-Type Losses Drive Shares Most, Report Says

Rogue traders, corruption, money laundering and tax fraud can have the greatest short-term negative impact on companies’ shares, according to a review of how crises affect listed firms and their board make-up.

So-called behavioral crises “spook markets the most,” with shares at times falling by more than 50 percent on news breaking of company or employee misconduct, according to the report by law firm Freshfields Bruckhaus Deringer LLP.

“Executives at firms affected by a behavioral issues should typically prepare for an up-front hit on their share prices, whereas those dealing with an operational matter are probably going to be in repair mode for the long term,” Chris Pugh, global head of dispute resolution at Freshfields, said in a statement that accompanied the release of the report today.

JPMorgan Chase & Co. fell as much as 24 percent in the month after it disclosed a multi-billion-dollar trading loss at its chief investment office where Bruno Iksil, the so-called London Whale, worked. UBS AG tumbled nearly 11 percent on Sept. 15, 2011, after announcing it may be unprofitable after a loss from unauthorized trading by Kweku Adoboli.

“A double-digit decline in a stock price in a single day is a significant event,” said Tom Naratil, chief financial officer of UBS, when he testified at Adoboli’s trial in October.

Recalls, Disasters

The report published by London-based Freshfields analyzed 78 significant corporate events since August 2007 at companies listed across 16 stock markets worldwide including the London Stock Exchange and the New York Stock Exchange.

While large-scale product recalls or environmental disasters have a more “modest impact” in the first 48 hours of a crisis, they cause the worst long-term effect on stock value, according to the research.

BP Plc, Europe’s second-biggest oil company, fell 22 percent in 2010, its biggest annual drop, according to data compiled by Bloomberg that goes back as far as 1989. The company spent much of the year battling with regulators and shareholders in the wake of the Gulf of Mexico oil spill.

Knight Capital Group Inc. fell 75 percent to $2.58 from $10.33 in the two days following a trading malfunction. It was bailed out by six financial companies in August after losing more than $450 million. The company has now received takeover offers from Getco LLC and Virtu Financial LLC, according to a person familiar with the situation.

More than a quarter of companies affected by corporate crises, including litigation or the announcement of a hostile bid, see an initial drop in value on the first day but tend to recover the fastest, with just one-in-seven companies suffering six months later, according to the report.

About 15 percent of senior executive board members whose companies are hit by a share slump stepped down within six months, compared with 8 percent at unaffected companies.

“The speed at which a company’s executives are dragged to face the ‘court of public, and financial markets, opinion’ largely depends on the type of crisis,” Pugh said.

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