Gag watchdogs, says Treasury

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The Treasury yesterday called for a clampdown on announcements by industry watchdogs during the share sales of companies they regulate. The blackout period is recommended in a formal report into the stock market fiasco triggered by the electricity regulator Stephen Littlechild during the March share sale of National Power and PowerGen.

At that time shares in both companies and the general electricity sector plunged after Mr Littlechild announced he would review electricity charges. The move wiped pounds 3bn off share values within hours.

The Treasury report published yesterday clears the Government of blame. But in laying out the events surrounding the sale, there is a thinly veiled attack on Professor Littlechild.

The Treasury's internal investigation showed that although Professor Littlechild warned the Government in advance that he might make a statement, he "had no settled intention to do so", even on the eve of the sale when he spoke to Michael Heseltine, then President of the Board of Trade.

The report concludes that there was "no wrongdoing" on the part of the Government and its advisers in proceeding with the sale. But it admits that Treasury officials failed to consult with their ministers on the issue on the weekend immediately before dealings in the shares began.

The chaos enraged investors and resulted in demands by the Stock Exchange that the handling of the sale by ministers and officials be investigated by the Treasury. Labour accused the Government of insider trading and the Exchange, which had carried out its own detailed investigation, is believed to have found enough evidence to justify referring the Government's actions to the Securities and Futures Authority, the watchdog that oversees the stock market. But because of immunity under the Financial Services Act, the Treasury cannot be pursued by the regulators.

In a letter to the Stock Exchange, released last night by the Treasury, Sir Terence Burns, Permanent Secretary, said: "It is clear to the Chancellor and to me from this detailed record that there is no evidence of wrongdoing. We are satisfied that Treasury officials behaved conscientiously throughout this major operation. Key decisions were taken with the benefit of professional advice.

"I am satisfied that officials' conclusions were reached in good faith and after proper consultation with advisers. At no stage did officials feel under any pressure to go ahead with the sale regardless. Great care was taken to ensure throughout the period leading up to the sale that the prospectus accurately reflected the regulatory position."

The Treasury and its advisers took the view that because Professor Littlechild was referring to prices charged by regional electricity firms, the profitabilty and regulatory position of the generators was unaffected.

Sir Terence admits: "In the event, there was a much greater-than-anticipated impact on the generators' share prices, although the partly-paid shares have since performed robustly."

The Treasury report calls on the Exchange to advise on a "blackout period" for regulators around the time of future share sales. It also suggests that "regulators may wish to review the extent to which they have access to appropriate expertise in the operation of the stock market and related matters."

Labour last night branded the report a "whitewash". Brian Wilson, trade and industry spokesman, said: "It is never very satisfactory to ask the Treasury to investigate itself. Most observers, and particularly those who were stung, will see this as a whitewash.

"The simple fact is that information which was relevant and available was not released prior to the sell-off, with very significant consequences."