DCC plc avoided losses of up to €26 million by selling its stake in Fyffes plc at a time when DCC, but not the stock market, had "alarming" information about the fruit company's trading performance, the High Court was told yesterday.
Had that information been known to the market at the time of the sale of the DCC stake in February 2000, it would have caused a fall in the Fyffes share price and DCC would probably have sold its 31.2 million shares for some 62 to 84 cents less per share, a US expert on corporate governance and former chief executive with the US Securities and Exchanges Commission said.
Prof Kenneth Lehn, professor of finance at the University of Pittsburg, said he had concluded that information available to DCC chief executive Mr Jim Flavin at the time of the sale of the DCC stake was "very definitely" price-sensitive and not generally known in the market.
When the information did become known to the market via a profit warning issued by Fyffes on March 20th, 2000, it led to the largest one-day decline in the Fyffes share price since 1989, he said.
Prof Lehn, an expert witness for Fyffes, was giving evidence on the 34th day of proceedings in which the fruit company alleges "insider dealing" in relation to the sale of DCC's stake in Fyffes over three days in February 2000. The share sales realised a profit of some €85 million for DCC.
The action is against DCC, Mr Flavin and two wholly owned DCC subsidiaries - S&L Investments Ltd and Lotus Green Ltd. The defendants deny the claims and plead the share sales were properly organised by Lotus Green.
Yesterday Mr Paul Sreenan SC took Prof Lehn through the contents and conclusions of his report on the share sale.
Prof Lehn said he understood that Section 108 of the Companies Act 1990 makes it unlawful for insiders to trade in a company's shares while in possession of information "that is not generally available, and which if it were so available, would be likely to materially affect the price of the securities".
He said Mr Flavin had, in January 2000, information about Fyffes trading performance which showed Fyffes was, in the first quarter of the fiscal year 2000 (beginning November 1999), some €13.7 million behind its performance in the same quarter in the previous year.
He said that he had carried out an "exhaustive" search of news stories regarding Fyffes in the period from October 1999 to March 2000.
He had concluded the information available to Mr Flavin was not generally known to the market and was price -sensitive information. Had the market become aware of the information, it would have led to a fall of at least 62 cents in the Fyffes share price - a drop of 18.6 per cent.
When the information did become known through a Fyffes profit warning on March 20th, 2000, the Fyffes share price had fallen by 18.2 per cent on that day and by a further 7.3 per cent on March 21st - a total of 25.5 per cent.
Fyffes's stock return on the day it released that profit warning was the most negative one-day percentage change in its stock price since 1989. Analysts had also revised downwards their forecasts for Fyffes in the wake of the profit warning.
If the market knew what Mr Flavin knew in February 2000, he believed DCC would have sold its shares for between 62 to 84 cents less per share. By trading on the information, DCC avoided losses of between €18.7 million and €26.2 million.
Prof Lehn added that his estimate of the loss avoided by DCC was conservative. He believed that had the market known in February 2000 what Mr Flavin knew, investors would have wanted to sell, rather than buy, Fyffes's stock.
If the market learned, following the public disclosure of the information available to Mr Flavin, that DCC was selling its large block of shares, it was likely DCC would have received less than the stock price that Prof Lehn estimated for Fyffes on the assumption the information was generally available.
Cross-examined by Mr Michael Cush SC, for DCC, Prof Lehn agreed there were no precise figures on Fyffes's trading in the March 20th profit warning.
He said the content and tone of that warning had led to his conclusion that it had caused the fall in the Fyffes share price from March 20th.
Mr Cush suggested the fact that the Fyffes stock price did not fall in the early months of 2000 and that analysts did not change their forecasts for Fyffes, despite being aware of weak banana prices and a weak euro, indicated the information available to Mr Flavin was not price-sensitive.
Prof Lehn disagreed that the market was generally aware in early 2000 of the information available to Mr Flavin.
While agreeing analysts had referred in reports to weak banana prices and a weak euro versus dollar in early 2000, he said it was "absurd" to equate speculation by individual analysts with the information Mr Flavin had.
He agreed that the market would place reliance on what a reliable management said and that Fyffes management had in late 1999 and again in January 2000 predicted that 2000 would be a year of further growth for the company.
The case continues today before Ms Justice Laffoy.
