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Swiss Bank dealt blow over Trafalgar bid

Mary Fagan
Monday 13 February 1995 19:02 EST
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Swiss Bank Corporation has been dealt a severe blow by the Securities and Investments Board over the use of controversial share option contracts in the £1.2bn bid by Trafalgar House, SBC's client, for Northern Electric.

The SIB said that the use of such "contracts for differences" could result in a breach of its principles and may result in regulatory action under the Financial Services Act.

The SIB does not name Swiss Bank Corporation or any specific bid. However is comes as the Securities and Futures Authority continues an inquiry into the use of contracts for differences in the Northern bid.

The contracts, between SBC and Trafalgar, allowed Trafalgar to benefit from the movements of the share price of Northern and some other electricity companies.

Separately, SBC's market-making arm took stakes in Northern and Yorkshire Electricity. There is no suggestion that the Swiss Bank market makers were told about the impending bid.

The SIB said: "Irrespective of the position under the criminal law, authorised firms must observe SIB's principles in their securities businesses, in particular those obliging firms to observe high standards of fair dealing and of market conduct." The SIB's concern is where parties to contracts for differences possess unpublished price sensitive information and where one party - or an associate in its group - might deal in securities affected by that information in order to hedge exposure under the contract.

The SIB said that the advice "is general and not intended as any criticism of any party in respect of any past transaction".

It also said that the board did not wish to discourage innovation but that firms should consult the regulatory authorities in any situation where there is a risk of breaching the principles.

Swiss Bank said: "We have noted the SIB guidance and we will be complying with it at all times seeking guidance on all those leading edge transactions which warrant it."

The bank has repeatedly stressed that it was cleared by the Takeover Panel and the Stock Exchange prior to the use of the contracts.

The Stock Exchange has subsequently exonerated Swiss Bank but said that the rules regarding contracts for difference may need to be changed.

Jack Cunningham, shadow trade and industry secretary, called on the Government to make its position on Swiss Bank clear. No decision has been taken by the Department of Trade and Industry on whether a formal investigation should be launched.

Northern is being forced to write to shareholders to retract statements made in a defence document last week which raised questions concerning the financial viability of the Trafalgar House group.

The circular is to be sent following a threat of legal action from Trafalgar for defamation. It marks the latest round in the increasingly bitter bid battle.

Nigel Rich, chief executive of Trafalgar, said: "During the course of our offer Northern Electric have made misleading statements about our financial condition. This time they really went too far."

The war of words raged as the companies await the publication of a decision by Michael Heseltine, President of the Board of Trade, on whether the bid should be referred to the Monopolies and Mergers Commission.

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