Heat on DTI after Astra fraud case is dropped: Was the case referred to the wrong investigating body to avoid an embarrassing inquiry over arms trade with Iraq?

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SENIOR City figures close to Astra, the arms and fireworks group caught up in the Iraqi Supergun scandal, suspect the Department of Trade and Industry may have deliberately referred the case to the wrong police department to avoid further embarrassment for the Government.

The DTI handed over a dossier on Astra to the Serious Fraud Office last September. However, a City figure close to the company believes the case should have been referred to the Metropolitan Police fraud squad instead.

The DTI said on Thursday that there would be no criminal investigation into the events preceding the collapse of Astra, despite a highly critical DTI report, which found fault with the directors of the firm, its financial advisers, its accountants and the Stock Exchange. An Astra subsidiary, PRB, was involved in making the shells for the Iraqi supergun project.

Among the areas highlighted by the DTI inspectors was a false invoice used to inflate the group's profits by pounds 216,000 when it reversed into the publicly quoted Sumner group in 1986. The report was deeply critical of Astra's chairman, Gerald James, and its managing director, Chris Gumbley, over this invoice, which was described as fraudulent. The DTI said that it had passed the inspectors' findings to the Serious Fraud Office, which decided that there were no grounds for an SFO investigation.

A senior City source told the Independent on Sunday that the SFO was not investigating the case because the alleged fraud was too small, and that the DTI knew this when it passed on the file. He said the file should have been passed to the Metropolitan Police fraud squad, which would have been more likely to investigate. 'There was a deliberate mistake made so that Gerald James did not get his day in court to make accusations about Supergun under privilege,' the source said.

The SFO would not say why it chose not to investigate Astra, and the DTI categorically denied the charges.

'The SFO was the appropriate body,' a spokeswoman for the department said. 'It investigates large and complex frauds, under which this would have qualified, and frauds where the investigation is in the public interest, which also covers this case.'

The DTI's 545-page report states that Astra inflated its profits over a number of years, and launched a rights issue in 1989, when it faced a problem with working capital that the firm's advisers failed to bring to the attention of shareholders.

Among those criticised are PaineWebber, the US securities firm that acted as financial adviser to Astra, and its auditor, Stoy Hayward. However, there has been some surprise at the failure to criticise the firm's solicitors, Baileys Shaw & Gillett.

The report notes that at the time of the 1989 issue, Astra had been in breach of its banking covenants for a number of months. This should have been revealed in the issue document but was not. The inspectors do not criticise Baileys for failing to discover the problem and say that Stoy is to blame.

However, a senior lawyer at one of the top 10 legal firms said he believed it was Baileys' job to satisfy itself that the document was accurate.

Baileys was also the legal adviser to Astra's stockbroker, Hichens Harrison, which helped to prepare the rights issue document, and a Baileys partner, Laurence Kingswood, was a non-executive director of Astra. The DTI inspectors argue that this relationship meant that Baileys faced a potentially serious conflict of interest when advising Astra. Mr Kingswood was unavailable for comment. Baileys was also unable to comment.

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