Jeremy Warner's Outlook: Smith takes aim at 'FT' after seeing off the FSA

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The Independent Online

Wherever Terry Smith goes wandering, controversy is never far behind. Yet the chief executive of Collins Stewart Tullett, one of Britain's fastest growing, independent investment banks, has stuck to his guns in his high profile battle with an embittered former employee, James Middleweek, and emerged victorious.

Wherever Terry Smith goes wandering, controversy is never far behind. Yet the chief executive of Collins Stewart Tullett, one of Britain's fastest growing, independent investment banks, has stuck to his guns in his high profile battle with an embittered former employee, James Middleweek, and emerged victorious.

Eagle-eyed critics of the City's most famously pugilistic boss were quick to point out that the Financial Services Authority's statement clearing Collins Stewart of insider dealing and all sorts of other untoward activities may not have amounted to the clean bill of health claimed. Down in the footnotes to the statement, the FSA notes that if matters are identified which are of concern but do not warrant public disciplinary action, the FSA may issue a private warning to the individual or firm.

Presumably, this rider was added for a purpose, since it is not the FSA's usual practice to include such a caveat. If so, this is an extraordinarily grudging way of going about clearing a company of a matter which has caused considerable reputational damage.

Either Collins Stewart is guilty of all or some of Mr Middleweek's allegations or it is not. The FSA has decided to drop its investigation without moving to disciplinary proceedings, so we must assume Collins Stewart is innocent of all charges. To then attempt to cast doubt on the verdict is vindictive and ill judged. A basic principle of British justice is that having been found not guilty the accused emerges without a stain on his character. The FSA seems to have gone out of its way to leave a lingering doubt.

We can only assume that this is explained by the fact that the FSA and Terry Smith have history. Mr Smith has been outspoken in his criticisms of the FSA for overly oppressive and onerous regulation. He has also fought a long-running battle with the City regulator over the entirely unrelated issue of voluntary compensation for the split-caps investment trusts scandal, resisting all attempts by the FSA to bulldoze him and others into submission. His intransigence has infuriated John Tiner, the FSA's chief executive, who has made winning a voluntary settlement of the débâcle something of a personal crusade.

Yet grudging though the verdict might have been, it was clear enough. The cloud that has been hanging over Collins Stewart ever since Mr Middleweek popped up with his list of alleged misdemeanours, as an act of blackmail if Mr Smith is to believed, has been finally lifted. The same cannot be said of the Financial Times, which must have received yesterday's news with dismay. The FT regurgitated Mr Middleweek's allegations more or less in full, drawing on a document filed as an annex to a writ Mr Middleweek had lodged with the High Court which it believed to be covered by legal privilege.

This may not have been the case, which would force the FT to defend any libel on the grounds that disclosure of the allegations was in the public interest. So far Mr Smith has resisted all attempts to settle out of court. Indeed, he's suing for record damages of £230.5m, a figure which is arrived at by calculating the company's loss of stock market value relative to peers after the allegations emerged. Nobody believes he can win such a sum, but he's determined to have his day in court and if he can rub the FT's nose in it for what he believes was deliberately vindicative journalism, so much the better. Yesterday's developments will further strengthen his resolve.

¿ Citigroup's shame

As one FSA investigation concludes, another begins. The FSA yesterday put its preliminary inquiry into Citigroup's bear raid on the European government bond market onto a formal footing. On the face of it, Citigroup, didn't do anything that could be construed as obviously illegal, but its behaviour was questionable in the extreme, and there is just the outside possibility that it may have fallen foul of the rules on market abuse.

Mayhem was caused in the European government bond and bond derivative markets on 2 August when Citigroup dumped €11bn worth of eurozone paper on the market in a series of trades spread over just two minutes. Predictably, prices fell, at which point Citigroup bought back €4bn of the bonds it had just sold. If this wasn't an attempt to manipulate the market for profit, it is hard to see what would be. Citigroup has yet to offer any kind of convincing alternative explanation.

As it happens, the profit made on these trades was not particularly large. Certainly, the reputational damage Citigroup has suffered as a result far outweighs any short-term monetary gain. The episode has already led to a severe tightening of the rules governing the way eurozone bonds are traded. The City is always complaining about ever more oppressive regulation, but in this instance, Citigroup only has itself to blame. It was as if the traders sat down together and thought, "what can we do today that will really piss everyone off?".

"I know," one clever spark would have said. "Let's trounce the market for eurozone bonds". This is the sort of thing traders like to do. The most worrying feature of this particular episode is that there appeared to be no controls at Citigroup to stop them.

¿ Pre-emption rights

The British biotech industry is stepping up its campaign among investors and regulators to be removed from the usual rules governing pre-emption rights. These state that if a company issues new shares amounting to more than 5 per cent of the total in any one year, or 7.5 per cent over three years, then it must do so by way of a rights issue to existing shareholders. The purpose of the rule is to protect shareholders against the possibility of disadvantageous dilution.

In a rights issue, the traditional way of raising new capital in Britain, shareholders that don't wish to subscribe have their rights sold in the market and are thereby compensated for any dilution that might incur. The rights are not sold if the company raises its money by way of "open offer and placing", but the pre-emption rights still exist and there are strict rules governing the size of discount that can be used.

The biotech industry, which perhaps more than any other requires constant infusions of new capital to stay afloat, has long thought these rules inappropriate and unnecessarily onerous. Biotech CEOs point to the United States, where there are no pre-emption rights yet raising new money for biotech investment seems to be so much easier than it is here. This puts British biotechs at a competitive disadvantage, with less flexibility and a higher cost of capital. Indeed some CEOs go further to claim that the pre-emption issue is one of the main reasons the UK biotech industry isn't as well developed as it is in the United States.

Well maybe, but personally I doubt there's any link at all. The US biotech sector is mature by comparison with its European counterpart, which has simply not been at it for as long. As a consequence, there's a greater familiarity with the biotech industry's capital needs and a bigger appetite to fund them. It may also be the case that US biotech companies are on the whole just a whole lot better than their European counterparts. Lack of pre-emption rights in the US certainly makes it possible to raise new capital more swiftly, but it isn't any cheaper. To the contrary, Wall Street commissions on new issues are generally more expensive than they are here.

Indeed the sort of reasons biotech CEOs cite for wanting a dispensation from pre-emption rights is precisely why they exist. One CEO points to a case where he could have brought in a big US investor to fund the buyout of a partner, making the process swifter and arguably less costly, but for the existence of pre-emption rights. This no doubt would have been extraordinarily good for the US investor, who would have been able to buy in on favourable terms, but it is hard to see how it benefits existing shareholders, who are diluted accordingly.

I wish the biotech industry luck with its campaign, but doubt it will make much progress. Pre-emption rights are there for a purpose, and on the whole it is a pretty good one.

jeremy.warner@independent.co.uk

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