View from City Road: Warburg has embarrassing questions to answer

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We should start from the assumption that a firm of Warburg's stature in the City would never dream of involving itself in illegal support operations, indemnities and market rigging, even if the gory lessons of Guinness and Blue Arrow had not been set out in all their details in court.

So what on earth was Warburg up to in the Greencore affair, where the Securities and Futures Authority has promised to 'consider the fitness and properness' of our most successful merchant bank? Remember that a finding of not fit and proper against a firm means that it is out of the business concerned.

The first conclusion must surely be that parallels with Guinness and Blue Arrow are tempting, obvious and misleading when you get into the details. What appeared to be indemnities offered to Warburg by J&E Davy, the Irish brokers that organised the botched placing of Greencore shares, included sharing of profit and loss as well as a fee.

This is best described as a type of underwriting, though it was a mutated version of the species, since it was agreed at the 11th hour when Davy was worried that it could not sell the shares without help.

The arrangement was not an indemnity in the Guinness sense of the word - a secret payment to buy shares and rig the market - and the way it was achieved does not seem

to have broken any regulatory rules.

Yesterday Greencore said it had been notified by Warburg that for 24 hours at the end of last month it had had an interest in 10 million shares. This was the maximum amount under the Davy-Warburg deal. In the event, Warburg took a quarter of the maximum agreed.

The real question is not the nature of the arrangement, but why it was not disclosed to the company and thus the market until the last few days. An essential part of the answer will be an examination of what was said while the shares were trading before they were suspended.

Did Davy encourage the view that the placing was a success - which it denies saying - or was the widely reported impression that things had gone well a case of the market jumping to conclusions?

And if it should have been disclosed at the time, who was responsible for telling the market? If it was Davy, why did Warburg, with its vast experience and seasoned compliance officers, not second-guess the Dublin brokers and ensure that the market knew, as it belatedly did when it told Greencore?

These are areas where only lawyers should tread, armed with Section 47 of the Financial Services Act, which deals with disclosure. But common sense says that buyers of Greencore shares before the suspension ought to have been told what special terms other buyers had already been offered by the brokers.

The fact that an Irish minister was told that Warburg was underwriting some of the shares is irrelevant, because it is not the government's job to enforce market rules. The most embarrassing questions may have to be answered in Dublin, but Warburg has a lot more explaining to do here.