Eurotunnel: Deep Deceit?
It's one of the greatest engineering feats in history, a tunnel under the English Channel that lets high-speed trains zip from London to Paris in only three hours. But six years after the tunnel opened, a scandal over its financing threatens to stain some of the Continent's leading banks and even reach across the Atlantic.
A French magistrate is conducting a criminal investigation of alleged insider trading and misinformation to shareholders of Eurotunnel, the publicly traded company that built and operates the tunnel. Six current and former top Eurotunnel managers are targets of the investigation. Three European banks and Tiger Management, the collapsed U.S.-based hedge fund started by Julian H. Robertson Jr., also appear to be targets. There's no indication Robertson himself is a target. A spokesman for Robertson and Tiger Management, which is now in liquidation after massive losses and investor withdrawals, declined comment, other than to say that the company was last contacted by French authorities regarding Eurotunnel in 1998.
What happens next is up to the French investigating magistrate, Dominique de Talance--and she is not talking. While French magistrates have prosecutorial functions, they have wider latitude than their U.S. counterparts, and their inquiries can take years. So far, no criminal charges have been filed, and they may never be. But if they are, and a French court finds the accused guilty, total fines could run to $1.7 billion.
Knowledge of the investigation comes from some of the targeted executives. Eurotunnel Executive Chairman Patrick Ponsolle confirms that de Talance recently notified him and other company officials that they are being formally investigated for allegedly giving investors misleading information about the financial health of Eurotunnel.
Business Week has obtained a document offering exclusive details of the magistrate's probe. The document summarizes a report prepared by two securities specialists working for de Talance. The report does not reach any conclusions about whether laws were broken, or about whether anyone should be charged. But it does lay out the concerns driving the investigation.
The affair had its beginnings in a May, 1994, additional share issue that raised $1.3 billion for Eurotunnel. The company's initial public offering was in 1987. The report obtained by Business Week concluded that the prospectus for the 1994 issue contained numerous errors in its overly rosy picture of expected revenues. Eurotunnel officials insist they didn't mislead shareholders. "I feel completely serene," Ponsolle says. "Our predictions were made in good faith."
But the report also notes that Tiger Management, Swiss Banking Corp., and France's Credit Lyonnais and Credit Agricole Indosuez reaped big profits on selling Eurotunnel stock during the four months preceding the new share issue. The preparers of the report interviewed officials at the banks and at Tiger about why these shares were sold; and were not satisfied with their explanations.
The tunnel's struggles have long generated controversy. Cost overruns of some $9 billion have battered Eurotunnel shares, which are widely held by individual investors in France. Eurotunnel's connection with its banks was also unusual. To meet its huge financing needs, Eurotunnel cobbled together a consortium of 220 lenders. Some of the banks also underwrote Eurotunnel share issues in 1987, 1990, and 1994. Directors of at least six banks served on Eurotunnel's board of directors during those years.
Thus, the banks were getting nonpublic information about Eurotunnel at the same time their equities divisions were trading Eurotunnel shares. Banks are legally barred from passing along such information to their traders. But Christian Cambier, a fund manager and shareholder who now serves on Eurotunnel's board, says opportunities for insider deals abounded. "It was a mess," he says. "The directors were so close to the banks, instead of working for Eurotunnel they worked for their own banks." Cambier filed a complaint with the Paris Bourse in 1994. Bourse officials eventually handed over the task of investigating the allegations to the magistrates. The banks have declined to talk to Business Week about Cambier's comments.
The magistrate's probe focuses on the first 5 months of 1994, when Eurotunnel was scrambling for more funds. In early January, the company asked its bankers for additional loans and agreed to seek a capital increase that would inevitably drive down the share price. At the time, the plans for the share issue had not been publicly announced.
But Paris Bourse records show that soon after the January discussions, Tiger Management, SBC, Credit Lyonnais, and Indosuez began selling off millions of Eurotunnel shares. Tiger sold the most shares, 11 million. The magistrate's report speculates that the banks and Tiger were unloading shares on the expectation that the price would drop. The stock did fall in 1994, from $8 in January to $3.90 at the time of the May 26 share issue.
In their report, the investigators cited several instances during early 1994 when the banks and Tiger sold large blocks of Eurotunnel shares shortly after their representatives had met with people who had inside knowledge of the forthcoming share issue. For example, the report says that on May 19, then-Eurotunnel Chief Financial Officer Graham Corbett met with James Lyle, then a managing director of Tiger Management. According to the report, the hedge fund sold 1.75 million Eurotunnel shares on May 19 and 20. On May 24, the next trading day, the share price dropped 10%. Lyle now runs Millgate Partners, a U.S. hedge fund. Lyle was reported to be in Europe, and efforts to reach him were unsuccessful.
Corbett says he doesn't recall what was discussed at the meeting. But, he says, "it is simply inconceivable that from either side we would have had any interest in discussing insider information. All of us were acutely conscious of the need not to discuss anything that was not in the public domain." If Lyle had obtained insider information, Corbett says, he would have been legally prohibited from trading Eurotunnel shares. According to the report, Lyle told investigators that the trades were based on an analyst's report that was widely available.
Eurotunnel says the company has no evidence that insider trading occurred. However, the company joined in Cambier's 1994 complaint, to position itself to collect damages in case the investigation uncovers illegal trades.
The Association for Eurotunnel Shares, a shareholders' group that Cambier headed when he filed the complaint, plans to file a lawsuit against the banks and against Tiger. Cambier, a Paris-based fund manager who personally owns 500,000 Eurotunnel shares, has been a longtime advocate for the company's small shareholders and was recently named to Eurotunnel's board of directors. The association estimates insiders netted about $176 million from questionable trades.
Magistrate de Talance, meanwhile, has set no timetable for completing her work. If she does conclude that charges are warranted, she will hand her dossier over to French prosecutors. An interesting point is how French prosecutors would go after Tiger. If officers of the fund were criminally charged, they could face extradition to France. But French authorities could have difficulty collecting fines on Tiger after all of its assets are distributed to investors.
Ironically, news of the investigation comes as Eurotunnel seems finally to be turning a financial corner. In March, the company said it trimmed its losses in 1999 to $224 million, almost 30% less than in 1998. But that's scant consolation to thousands of small investors. "This company seduced hundreds of thousands of people," says Danielle Bobin, a Paris public-works employee who bought 6,000 Eurotunnel shares 12 years ago for $18,000. Now the shares are worth $6,000. For Bobin and fellow shareholders, what once looked like the deal of a lifetime may never pay off.