I spy spooks in the City

Robert Verkaik investigates the increasing use of private eyes by companies involved in takeover battles
Law firms, more than any other profession, call in private investigators to combat internal fraud or to trace missing assets. Most of the "big five" corporate investigation agencies are widely used by City lawyers.

Bill Waite, associate managing director and regional counsel for Kroll, the international private investigators, says 4 per cent of his firm's corporate investigation is work that comes directly from solicitors. Another 20 per cent is instructions from solicitors acting on behalf of clients.

Mr Waite, a barrister once with the Serious Fraud Office, believes fraud in solicitors' offices has increased, making firms more security conscious. There were also salutory lessons from the recession that have left senior partners keeping a tighter reign on partnership finances. "Some solicitors have substantial debts and employ us for asset-tracing and fee recovery work, especially where they need to recover funds outside the jurisdiction," he says.

Kroll and the other corporate investigation firms are far removed from the one-man gumshoe outfits that have sprung up all over the country. After the Gulf war, the Kuwaiti government instructed Kroll to trace Saddam Hussein's assets around the world. And when Ferdinand Marcos was deposed, the Philippine government used Kroll to find the millions of dollars he was supposed to have deposited in secret foreign bank accounts. In many of these bigger investigations, Kroll instructs specialist lawyers to work with a team of international investigators.

Another of the big five, Karratu International, has not only advised in two of the last six high-profile City takeovers but has also acted directly for a City law firm. In that case, Karratu was asked to investigate the commercial strength of a smaller firm to pave the way for a merger offer.

Paul Karratu, managing director of Karratu International, says: "They are the first to advise the client to employ a corporate investigator, but they don't always do it themselves. Why should solicitors be any different from anyone else? They tend to work on the basis that theirs is an upright and honourable business."

Mr Karratu says the important part of investigating a law firm is discovering the partners' true view of the merger. "Unlike any one else, the work tends to follow the solicitor around. If the partners are unhappy about a takeover, the merger isn't going to be so worthwhile."

Mr Karratu says this is always the danger in corporate takeover bids. Most partners may be happy with the proposed deal, but the "key profit- making department" might intend to walk out as soon as the deal is completed. "It's important that our client knows this," he says.

Mr Karratu will not say how investigators canvas such opinion without giving away the fact that the firm is being investigated. "That would be giving away tricks of the trade."

The key to a successful corporate investigation is not being found out, he says. "Sometimes, the first the company knows about the investigation is when I'm giving my evidence in the witness stand. That's a great feeling."

About 75 per cent of Karratu's work comes from solicitors, mainly City and big provincial practices. "Law firms work closely with corporate investigators when they're advising on due diligence and pre-acquisition searches," Mr Karratu says. "If figures don't add up after an auditor's valuation or the lawyers simply aren't comfortable about what the directors are telling them, it usually means initiating a corporate investigation."

Karratu and many of the other firms would like this to become standard practice rather than only acting after suspicions have been aroused.

Dan Mace is a corporate finance partner at Lovell White Durrant, which headed a team of lawyers advising Granada in its hostile bid for Forte. He believes the more frequent use of investigators is in cross-border transactions where companies have difficulty negotiating foreign commercial environments.

He says their real value is at the pre-bid stage as part of company planning. "In a public bid situation, you have access to public information about the target company. It's reasonable and quite proper to instruct corporate investigators to find out more."

For many years US commercial lawyers have been employing corporate investigators on a much more standard basis. But in Mr Karratu's experience it is British corporate investigators who tend to conduct their investigations inside the law. "When we're acting for the other side of an American takeover and get to see how the American corporate investigators operate, it isn't always so legal."

Mr Karratu says that in the Dixons-Kingfisher takeover battle investigators had even gone as far as bugging the boardroom. "Now," he says, "whenever we're advising in a defensive capacity, we always check the boardroom for bugs."