Outlook: High-profile failure gets SFO chief off to a faltering start

Saunders/WestLB; S&N outgunned
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The Independent Online

Criminal trials are designed to establish the guilt or innocence of the defendant, not to determine whether it was right to bring the prosecution in the first place. Thus it was that Andrew Regan was yesterday acquitted, finally, of theft and bribery in the Co-op saga after six years, three trials and a cost to the taxpayer running into many millions of pounds.

The Serious Fraud Office, which brought the prosecution, is right to argue that it should be judged on its overall record, which shows a conviction rate of 71 per cent, and not on the outcome of one case. It is also right to argue that it cannot be blamed each time a prosecution fails. If it had to guarantee success in advance every time it laid charges, it would never bring anyone to court.

Nevertheless, the SFO is developing an unfortunate habit of losing most of the high-profile cases it brings and winning only the obscure ones. This hardly helps its cause when it is arguing for more funds and more staff in the fight against fraud.

Compared with its high-profile failures ­ Blue Arrow, Maxwell, Wickes and now Regan ­ its victories look less impressive. True, there was Guinness and Stephen Hinchliffe. But who remembers Dennis Cook, Graham Hammond and "those two Australian ladies" as an SFO spokesperson put it yesterday when going through its roll call of successes?

The SFO's pursuit of Mr Regan was dogged from the start. The second trial had to be abandoned amid suggestions of attempts at jury nobbling and the jury in the trial which ended yesterday had to be put under police protection. But the SFO compounded its poor record with some more poor judgement of its own ­ notably the decision to grant immunity from prosecution to Ronald Zimet, one of the key players in the affair, in return for his agreeing to testify against Mr Regan.

Ordinarily, the SFO's new director, Robert Wardle, would escape the rap for the Regan fiasco on the grounds that he only took over the job in April while the prosecution was launched four years ago. However, before becoming the SFO's director, Mr Wardle was the case controller in charge of the Regan prosecution and so the blame lies squarely with him. It is not the most auspicious start to his tenure at the SFO.


Robin Saunders outlasted the previous chief executive of WestLB and, who knows, she may still be around when the current interim one hands over the reins next year to his permanent replacement at the German bank.

Then again, maybe not. Johannes Ringel, the new man who is temporarily in the hot seat at WestLB, had this to say yesterday when questioned about the future of the fallen star of the bank's principal finance arm in London. "Robin is part of our exercise to improve the value of the portfolio we have in principal finance. We have involved two investment banks, which assessed the portfolio and both independently came to the conclusion that we have a valuable portfolio there. Robin has to support us to make even more out of it."

That settles that then. The charitable explanation would have been that something was lost in the translation were it not for the fact that the interview was conducted in English in the first place. So is Mr Ringel saying WestLB has a valuable portfolio which it intends to keep or which it intends to sell? And is he suggesting that Ms Saunders has a lot to contribute or is he saying she has not been pulling her weight sufficiently? The answer to these questions is no clearer than Jürgen Sengera was asked in May if Ms Saunders still had the bank's support and he gave the delphic response: wait for the results of the investigation.

Well, the investigation, at least WestLB's internal one, has been completed and a dismal picture it painted too of the bank's internal controls. WestLB now awaits the outcome of the criminal investigation launched by federal prosecutors in Germany.

Ms Saunders herself escaped relatively unscathed from the internal inquiry although the value of her principal finance portfolio has not. Including yesterday's latest write-off, her ill-fated venture into the television rental business through the re-financing of BoxClever has cost the German bank ¤600m. WestLB is going to have to cut more jobs at home and abroad to pay for the mistakes. As to whether it will finally draw a line under Ms Saunders and her principal finance unit, perhaps the best clue lies in Mr Ringel's concluding comments. These clearly indicate that WestLB intends to forsake its global ambitions and return to being a German savings bank. Does that mean Ms Saunders could best "support" WestLB by taking the principal finance unit off its hands? Yes, maybe, but don't ask Mr Ringel when.

S&N outgunned

SIR CHRISTOPHER O'Donnell has assiduously cultivated a reputation for parsimony at the helm of Smith & Nephew, so the £20m-plus bill he has been left with after his failed bid for Centerpulse will disappoint his followers in the City as much as it must disappoint him personally.

Back in March, when the then-plain old Mr O'Donnell launched his agreed deal with the Swiss hips, knees and teeth manufacturer, he brushed off suggestions that the miserly premium to the Centerpulse share price would tempt in rival bidders. He joked that he was paying "a massive premium. This is Smith & Nephew, remember".

How much more prudent would it have been to have stood down the lawyers, financiers, accountants and media advisers at an earlier stage? It has been clear to all that S&N could not outgun Zimmer, the US company which, despite being smaller than its UK rival, enjoyed the overwhelming advantages of a stronger balance sheet and more highly rated paper. In the end, with currency movements and his own share price moving against him, Sir Christopher couldn't even muster a second bid that might push his rival into overpaying.

So the aggressive suits from Nowheresville, Indiana emerge the victors and Centerpulse becomes a US company. In truth, the Swiss group fits more neatly with Zimmer, which is looking to establish an European presence to bolster its positions in the US and Asia.

Sir Christopher is being unrealistic if he thinks S&N can simply continue as before. This drawn-out saga has cruelly exposed the weak rating given to S&N shares in comparison to its peers, and the reason for that discrepancy, which is the UK company's lower margins. The acquisition of Centerpulse would have solved much of the problem. Instead, investors are being asked once again to be patient. Savings will be squeezed out through a variety of internal programmes but it will take years to get even the high-margin orthopaedics division towards the industry average.

Sir Christopher's remodelling of Smith & Nephew over the past five years has boosted group margins mainly by jettisoning historic businesses such as Elastoplast and Lillets tampons.

But more radical surgery may now be needed. As well as a mid-tier but highly innovative orthopaedics business, the group is also left with a wound management arm, which deals in skin grafts and high-performance bandages, and a keyhole surgery equipment business. Both bring down the group average margin, have had trading disappointments recently, and could be sold off.

Sir Christopher backed out from the bid auction with Zimmer because he couldn't take the heat. Unless S&N's chronic discount to its overseas peers is tackled, he may find that things start to get a lot hotter.