Fearing That "Muck Will Stick"

By Steven Holmes/London

Wall Street is not the only financial district with a horrendous image problem these days. The venerable collection of banks and investment houses known as the City of London is also embroiled in a shocking stock-trading scandal. Investigators are still probing deeply into allegations of wrongdoing surrounding the $4 billion takeover last year of Distillers, the British manufacturer of Johnnie Walker Scotch and Gordon's gin, by Guinness, the Anglo-Irish brewer and distiller. The sensational affair has already ruined the careers of some of Britain's best-known businessmen, and may bring regulatory retaliation on the City.

The scandal could also have serious political repercussions for the financial community's traditional allies in the Conservative Party of Prime Minister Margaret Thatcher, who must call national elections by the summer of 1988. "There's bound to be political fallout," says a prominent London banker. "The muck will be raked by the media and the opposition parties, and some of it will stick." Though no government official has been implicated, Roy Hattersley, deputy leader of the opposition Labor Party, has charged that support for the City's "sleazy undercurrent of corruption is the inevitable extension of Tory economic philosophy."

The full details of the Guinness scandal have not been revealed, but the investigation centers on the company's battle with Argyll Group, a Scottish supermarket chain, for control of Distillers. Both rivals had offered Distillers' shareholders a mix of stock and cash. During the contest, however, an unexplained flurry of trading raised the price of Guinness's shares. That boosted the value of Guinness's bid and helped it win Distillers. In the process, though, Guinness allegedly made large illegal purchases of its own stock and paid off other investors to do the same. Among those traders who may have had a secret alliance with Guinness was New York Financier Ivan Boesky, who reportedly confessed his role after being nabbed for his insider-trading activities in the U.S.

So far, seven top executives of Guinness and of Morgan Grenfell, the London bank that acted as the brewer's financial adviser, have been asked to resign as a result of the scandal, which has been dubbed "Guinnessgate" by some British newspapers. Among those fired: Guinness Chairman Earnest Saunders and Morgan Grenfell Chief Executive Christopher Reeves. Some of the executives could face criminal prosecution, and Guinness has already been hit by lawsuits from Distillers' shareholders.

But it is the political ramifications that City leaders fear most of all. Though the affair involves complex financial transactions that are little understood by the general public, the scandal could sting the Tories, who are running neck and neck with the Labor Party in opinion polls. "Watergate was amazingly complex, and people didn't follow the minute details," says Peter Kellner, political columnist for the liberal New Statesman magazine. "But there came a time when it wasn't the detail that mattered, but the general stink."

The Conservatives stress that they are vigorously cracking down on financial chicanery. It was they and not Labor, the Tories point out, who outlawed insider trading in 1980. Moreover, because of the comprehensive financial- services law passed last November by the Conservative-led Parliament, judges can now jail those who, under oath, refuse to answer questions that involve insider trading. "Ours is the party of law-and-order," asserted Chancellor of the Exchequer Nigel Lawson in the House of Commons. "The government is determined to prevent, detect and punish wrongdoing wherever it may occur." His speech was greeted by hoots and guffaws from the opposition.

The City is afraid that the spreading mess of Guinness will force the Conservatives to clamp down on the number of mergers, which has gone up 160% in the past three years. Snaps Liberal Party Leader David Steel: "This endless shuffling about of assets has done nothing to improve the basic efficiency and capacity of British manufacturing." Already, takeover fever has abated. "There are no megabids running at all," says Kenneth Morton, an executive director with the Hill Samuel Group. "There's no doubt that people's attitudes have changed." Last month BTR, one of Britain's most aggressive raiders, backed away from a contested takeover of Pilkington, a highly successful glassmaker. Though BTR insists that its decision was based entirely on commercial considerations, others believe that the company was reading the political winds.

City officials are also concerned that the government might abandon its belief that the financial sector should be largely self-regulated. Under the new law, virtually all of Britain's financial-services areas, including securities, Eurobonds, commodities and foreign exchange, will be governed by a series of self-regulatory organizations. Their activity, in turn, will be supervised by the Securities Investment Board, a private-sector body whose decisions are backed by the force of the law. Says SIB Chairman Sir Kenneth Berrill: "The aim in the U.K. was to get the rules applied and interpreted by practitioners, and not by lawyers." Now, even some Conservative Party members feel that a tough U.S.-style Securities and Exchange Commission is needed. Says former Prime Minister Edward Heath: "I do not believe that the City is any longer capable of self-regulation."

Whatever set of regulations emerges, it will take time to undo the severe damage to the City of London's reputation. For many Brits, the Guinness affair has reaffirmed a deeply felt suspicion of the City. Recently, 80% of those surveyed in a Gallup poll believed that the charges of "shady dealings" and "corruption" applied to "many" City companies. "I always felt there are bigger rogues at the top than there are at the bottom," says George Payne, a foreman at British Road Services' Oxford depot. "So this is no surprise to me."