Montagu fine rattles City: Advisers fear more huge penalties

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The Independent Online
'THERE but for the grace of God go I', many were saying in the City last week as Mr Justice Gatehouse ruled that Samuel Montagu had to pay at least pounds 172m in damages to the creditors of the collapsed British & Commonwealth Holdings.

Almost all merchant banks have skeletons in their closets, and for the most part the bones stay hidden. The award, and its size, has sent a shudder through the City and could open the floodgates for other legal battles against merchant bankers and securities houses.

Already SG Warburg is facing a writ of similar proportions over its advice on the merger of Yeoman, the Irish leasing company, with UK rival CLF. Barclays de Zoete Wedd is also likely to be hit with a writ resulting from the collapse of British & Commonwealth. The fear is there are more on the way, and the City will find that - as on Wall Street - a fat fee is often the first step on the route to a fat writ.

The award against Montagu - which is being appealed - is large by any measure. Had the liability not been assumed by Hongkong & Shanghai Banking Corporation when it took over the Midland Bank group last year, it would have almost wiped out Montagu's pounds 250m of capital. For Montagu, the irony is that this, the largest award ever against a UK merchant bank, hinged on a brief statement made during a late-night meeting in the middle of a high-pressure takeover bid.

Montagu was acting for Quadrex, a Delaware-registered firm controlled by financier Gary Klesch (who is still very much at large with his 'distressed debt' trading company, Klesch & Co). Ian McIntosh, Montagu's head of corporate finance, who had taken control of the deal because a colleague was away on holiday, was asked by Richard Heley, of B&C's merchant bank BZW, whether Quadrex had its finance in place to fund the pounds 275m deal.

Mr McIntosh replied: 'They're good for the money.' He later repeated the phrase in front of Quadrex's lawyers, Herbert Smith. According to the evidence in the trial, Mr McIntosh and Herbert Smith then agreed that the phrase was risky.

This was because, while Quadrex had received approval for a loan from its bank, Citicorp, it was subject to a range of onerous conditions, many of which Quadrex was ultimately unable to satisfy.

At a cost of nearly pounds 35m a word, the bluff banker has been forced to learn the meaning of dictum mea pactum. It was a lesson John MacArthur, of Kleinwort Benson, had learned a couple of years before, when he represented the Fayeds in their takeover of House of Fraser and found himself criticised by a Department of Trade and Industry inquiry.

Mr MacArthur had told the press, the board and shareholders of House of Fraser that the Fayeds were reputable, established businessmen from Egypt with vast family wealth. They were not. The DTI inspectors said: 'We do not consider that Kleinworts undertook adequate independent verification or inquiry.'

Montagu appears to have been caught up in more than its fair share of scandals in recent years. In the wake of the Quadrex ruling, fingers are being pointed at Montagu for a series of deals. The most prominent was the flotation of Mirror Group Newspapers, another deal subjected to DTI scrutiny.

Montagu also advised Robert Maxwell on other deals. However, it contends it did nothing wrong and points out that other firms - such as Rothschild in the US, Hill Samuel, Goldman Sachs and Bankers Trust - were also all too keen to take Maxwell business. Other Montagu clients that have had a less than happy ride include Owners Abroad, Amber Day, Mecca, WPP and London Clubs.

But it would be unfair to single out Montagu. Even the most blue-blooded of City firms have deals that come back to haunt them. In addition to the Yeoman affair, Warburgs was criticised by the Takeover Panel for advice to William Low in its aborted deal with Budgens. It has also had to write off the best part of pounds 30m of loans to Isosceles, which it advised on the takeover of Gateway and which has since been forced into three financial reconstructions. Then there was Warburgs' invention of the Euro-convertible preference share with a put option, a complex instrument that messed up the finances of companies as diverse as Saatchi & Saatchi, Next and London International Group.

Schroders, seen by many as the most impressive of the City merchant banks, has had to contend with disasters such as Hartstone Group, Albert Fisher, Birse and TVS in the past couple of years, not to mention its role in the unsuccessful flotation of GPA Group.

Faces at NM Rothschild will redden when clients such as Greycoat, Polly Peck or Spring Ram are mentioned. The list goes on, and nobody is safe (see panel).

But why do so few of these deals end up in court? For a start, there is no history of class actions in the UK, where investors club together to sue a merchant bank, broker or accountant for their advice in a deal or flotation.

Second, there is an element of knock for knock, with City brokers or bankers quietly undertaking to cut institutional investors into a good deal as compensation for the bad deal they have just had to bear.

Finally, the British legal process is often so cumbersome that it takes an age to get to court. Even when you do, you may well end up with a decision as perverse as that in the case of Caparo Industries v Dickman, where it was found that auditors only have a duty of care to existing shareholders, not those proposing to invest in a company.

The Quadrex case, though, may mark the beginnings of a change. Already merchant banks are becoming more careful about their client-vetting procedures, and deals are becoming more legalistic.

No more is it: 'My word is my bond.' It has become: 'My legal document, notated and agreed by counsel and approved by head office, is my bond.'

Deals best forgotten

HERE is a list of some of the deals the bankers would rather forget.

BZW: British & Commonwealth; Markheath; Rush & Tomkins; Speyhawk

Barings: BET; Davies & Newman; Ferranti/ISC

Charterhouse: Berisfords; Broad Street Group; Lonrho; Lowndes Queensway; Queens Moat Houses

County NatWest: Blue Arrow; Buckingham International; Caird Group; Invesco MIM

Robert Fleming: Imry; International Signal; NSM; Rosehaugh; Suter

Goldman Sachs: GPA Group; Maxwell interests; National Home Loans; Storehouse

Hambros: Acsis; Aitken Hume; Tace

Hill Samuel: Control Securities; Hawthorn Leslie; Imry; Maxwell interests; MTM

Kleinwort Benson: Fayeds; Amstrad; CH Industrials; First National Finance; Premier Oil; Trafalgar House

Lazard: Anglia Secure Homes; LEP Transport; Tiphook; Trafalgar House

Samuel Montagu: Amber Day; Mirror Group; Quadrex; WPP

Morgan Grenfell: Eurotunnel; Guinness; Hunterprint; LIT Holdings; Maxwell family; Ratners; Tiphook

NM Rothschild: Atlantic Computers; First National Finance; Greycoat; Mountleigh; Polly Peck; Spring Ram

Schroders: Alexon; Birse Group; Albert Fisher; GPA Group; Hartstone; Thomas Robinson; TVS

UBS: Blue Arrow; Broadwell Land; Brown & Jackson; Control Securities; Imry; International Business Communications

SG Warburg: Cannon Street Investments; Coloroll; B Elliott; Eurodisney; Eurotunnel; Granada; Isosceles/Gateway; William Low/Budgens; Rosehaugh; Saatchi & Saatchi; Sheraton Securities; Yeoman Leasing

(Photograph omitted)

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