Jim Flavin's Three Mistakes

I think that I can confidently say that Mr Flavin has made many more than three (but perhaps not as many as I have). However, I am confining myself here to setting out what I see as his three key errors in the transaction which gave rise to the action against his company (DCC plc) by Fyffes plc.

Failure to Use the Legal Shield

The law of which Mr Flavin fell foul provided a mechanism which, had it been used, would have protected him and DCC from Fyffes'action.The provision is here.

The Inspector's report reveals that in 1995, Michael Scholefield, DCC's compliance officer, actually suggested using this mechanism. Unfortunately, the idea was not followed up.

Talking to the Buyers

Within DCC, only Mr Flavin had the information which was later deemed price-sensitive. Had he referred the first call from Kyran McLaughlin (representing the first group of eventual buyers of the Fyffes' shares) to Fergal O'Dwyer or another director of Lotus Green, it is likely that the outcome of the court case would have been different.

Insufficient Legal Advice

Mr Flavin discussed his awareness of the information with Mr Scholefield and with the company's solicitor, Alvin Price of William Fry, but he did not fully share with either of them the exact nature of the information. He did not seek a meeting with, or formal opinion from, senior counsel.

Even if more extensive consultation had not changed the advice given, he would have been less likely to have been subject to the criticism that he had merely "gone through the motions".

How a Journalist Came to Understand Jim Flavin's Position

You are a journalist. You are lucky enough to receive a story exclusively which turns out to be sensational and publishable. Following publication, your paper's circulation and advertising rates rise dramatically. You earn satisfying amounts of extra cash on TV and radio talking about the story, and from commissioned articles all over the world. You are promoted to a more senior position.

The story is about the boss, Mr Big, of major company A plc which was attempting to take-over a slightly less major one, B plc.

The take-over is aborted, and the boss, though denying the story, loses the confidence of his board and retires. Shortly afterwards, B plc is taken over by C plc. It so happens that members of your family, but not you, own lots of shares in C plc. You didn't know about the shares. No-one knew at the time of publication of your story that C plc was remotely likely to buy B plc.

Not so long after that, it emerges that your story was a massive hoax, in which you were a totally innocent dupe like everyone else.

Mr Big comes after you, alleging that you were not innocent at all, that you dreamed the whole thing up yourself, and that you among other things defamed and defrauded him to promote your own career and earn money both for yourself and for your family. He sues for defamation and demands that you be prosecuted for fraud.

The defamation action proceeds, but the police are "still investigating the case".

You, and only you, know the full truth, which is that you are actually totally innocent, in the sense that you believed that your story was true, and that you genuinely had no idea that C plc was owned in part by your family. You also knew all along, though, that your anonymous informant was involved with C plc. You have never disclosed her identity - even to your editor. You didn't disclose her connections because you did not think that they were relevant, although the paper's legal adviser had suggested that you might need to examine your conscience. Notwithstanding all that, you defend that because you say, and many agree with you, that you not possibly have realised how really relevant it was.

The defamation action comes on for trial. You successfully defend it in the High Court, on the basis of the new "reasonable publication" defence created by the Defamation Act 2009.It is quite clear that even the Reynolds privilege would not have sufficed under the pre-2009 legal position. The judge is very unhappy that enormous damage has been done to a lot of lives by your false story, but agrees that you were bona fide fairly careful and lays some emphasis on the fact that your editor and you spent hours discussing the legalities of publishing with solicitor and senior counsel before deciding to publish.

In her judgment, the judge also forensically (your fave word, until the appeal !) examines the evidence for Mr Big's assertions that you were motivated by malice against him, that your informant perpetrated the hoax in order to stymie the A plc/B plc deal, that you knew this, and that you happily went along with it because it suited your family members. She clearly and emphatically finds that each and every one of these claims is at variance with the evidence.

During the trial, Mr Big's legal team made an issue of whether the 2009 Act actually applied. It was an entirely technical issue of whether or not the relevant part of the Act had been brought into effect by Ministerial order on the date of publication of your story. (As is fairly standard, the Act has a provision that meant it did not become law until the Minister for Justice made an order bringing it into effect). The High Court judge decided that it had, because the Minister had indeed signed the order, even though it remained sitting on his desk throughout the period that the story ran.

Mr Big appealed to the Supreme Court on this latter point alone. The appeal succeeded, the court taking the opportunity to clarify the important constitutional principle that a document signed in private cannot change the law until promulgated in public. The senior judge made no attempt to hide his dislike of the new Act, and prefaced his judgment with some robust remarks about it being a charter for smart-aleck trust-fund junkies who wanted the freedom to destroy the careers of public figures without ever having to justify their smears cloaked in the language of serving the public interest.

Although you do not have a trust-fund, and the judge was probably unconsciously echoing (it happens) someone else's attack on a well-known former journalist turned successful author, everybody you know seems to take it as an accurate label for yourself. Some of your best friends even take to calling you "TFJ" semi-affectionately, and the nick-name sticks. Worse, everyone - even your own colleagues ! - incorrectly thinks that the whole Supreme Court decided that the High Court judge was wrong to dismiss Mr Big's nasty claims about your good faith.

There is outrage when the DPP announces that you will not be prosecuted.

You suffer a nervous breakdown ("go bananas"), and never write a by-lined story again.

More on Flavin

Brendan Burgess of askabout money has asked me to clarify further some issues in relation to this, arising out of the discussion on his website. I do so below, and I am taking the opportunity to address some other issues that have been raised elsewhere.

The Moral Position

There is no disagreement on this, I think. Neither Jim Flavin, Bill Shipsey, Brendan Burgess, the High Court nor I have ever suggested that it is morally acceptable for someone in possession of inside information to profit from trading on it. When Fennelly J. said in the passage that has been quoted so often and so tendentiously

To trade on the use of inside information is recognised for what it is...a fraud on the market.

he was not announcing a decision on a matter in controversy.

The High Court had found that Mr Flavin did not trade on possession of the information. The Supreme Court was not asked to re-assess that finding, and expressed no opinion upon it.

What has caused some confusion is that the law in force at the time (but repealed even before the trial) required no connection between possession of the price-sensitive information and the decision to engage in any transaction, so that one could contravene the law without being in the wrong "morally".

The Factual Position

There is very little, if any, disagreement on this,either.

The case that Mr Flavin and his company, DCC, lost was a claim by Fyffes that the sale by DCC of its shareholding in Fyffes had taken place in breach of section 108 of the Companies Act, 1990, and that damages were due as a result. It was not a criminal prosecution. For Mr Flavin's side, the possible outcomes were:

• A. Successful resistance to Fyffes' claim
• B. Be held to have breached s.108 and to become liable for €42 million

Mr Flavin had seen Fyffes' internal trading accounts for November & December 1999, knew that they were disappointing and did not overlook their potential significance (such as it was). He took legal advice before the share sales were completed in February 2000. The advice was that the information was not price-sensitive. The High Court agreed that it was not, but the Supreme Court differed. I repeat that this was the only decision the Supreme Court took. However, it was sufficient to transform outcome A into outcome B i.e.success into failure for Mr Flavin.

The Director of Corporate Enforcement, like the media and, it has to be said, many independent commentators in academia and elsewhere, was of the view that the trial had exposed potential wrongdoing over and above the s.108 breach. Against the robust opposition of DCC, he persuaded the High Court to appoint Mr Shipsey as an Inspector with powers to obtain testimony on oath from Mr Flavin and from others (including some significant witnesses who had not been called to testify during the trial). The Inspector was then to report on his findings and to recommend further action if he found it appropriate.

His report is what has sparked the current discussion. The report vindicated Mr Flavin and recommended that no further action be taken. Paul Appleby, Director of Corporate Enforcement, did not have to accept this, but he did, as did the High Court.

Discussion

Neither Mr Flavin, the High Court, Bill Shipsey, Brendan Burgess nor I have said, or suggested, that the result in the Supreme Court should be ignored or set aside. It hasn't been: the €42 million has been paid.

There is no finding of either High or Supreme Court that has been flouted in this case, and Mr Shipsey's report in no way over-rules any court decision. What it does is to correct the verdict of media opinion. Unlike the latter, the quality of the investigation and analysis is high.

It seems to me that the critics want to mis-interpret the Supreme Court and to pick-and-choose from the findings of the High Court, all the while coruscating Bill Shipsey on the basis of the false, indeed ridiculous, allegation that he has done the same.

This is impudence of a high order, reflective of a pernicious "group-think" that cannot tolerate its rash pre-judgements being exposed as invalid. The same group-think is already indicating that it will not accept the results of any inquiry into the Bank/Economic/Financial Crisis unless they endorse the verdicts already pronounced by the gurus of the moment.

I have not addressed all questions arising in this controversy yet, and will post again before the weekend.

Footnote: All of my comments on the Shipsey report relate to the "insider/price sensitive information" issue only. I have paid no attention to the tax issue, for example, and it should not be presumed that I agree with the Inspector's views on that, or otherwise.

Never Mind the Facts...

As well as having no connection to the parties, I have, as far as I know, no connection to any members of their families or to their current employees, or to anyone who gave evidence in the case, except that I was present at a meeting with Michael Scholefield in 1988, and had some very brief interaction with him then. I am personally acquainted with many members of the legal teams for both sides, and with the Inspector, but have never discussed the case with any of them.

There is a lot of quite fair and balanced reportage in today's "Irish Times" on the Jim Flavin story on which I posted yesterday. This makes all the more astonishing the line taken by the paper's leader writer, who clearly needs to revisit the undisputed facts of the case, and to get advice on what the law is.

The Irish media consensus view of the Fyffes/DCC case is as follows

Greedy evil bastbusinessman Jim Flavin (GEBJF) sees a set of Fyffes internal accounts and realises that the share price is headed for a fall

GEBJF decides to sell his shares to some sad innocent dupes (SIDs)

GEBJF finds SIDs and persuades them to buy the shares

The share price duly falls.

The outraged SIDs demand justice

GEBJF is prosecuted for the crime of insider trading

GEBJF pulls every trick that he can think of, and nearly gets away but is found guilty and ordered to pay the investors back

The Supreme Court describes GEBJF's behaviour as a fraud on the market

It also says that GEBJF is guilty of a CRIMINAL OFFENCE (no less)

I pause here to try to remember if destruction of evidence is also a CRIMINAL OFFENCE.

"The authorities" don't have the bottle to punish GEBJF properly but...

... the cool,clean hero a.k.a. Paul Appleby does what he can, only to be thwarted by a smarmy barrister...

...who hasn't read the script astoundingly gets it all wrong.

A major problem with this narrative is that it does not fit the facts available at all (but note that I am not - could not possibly be - certifying Mr Flavin as the "poster-boy" for all that is true, good and wholesome, never mind the epitome, as "The Irish Times" would have it, of corporate probity).

For one example, the High Court found as a fact that

the evidence is not open to the interpretation that Mr. Flavin used the [price-sensitive information to decide to sell]...On any view of the evidence, that information simply had no bearing on the Share Sales

There was no appeal against that finding, and the Supreme Court did not question it. That being so, the "Irish Times" leader-writer may wish to consider how a moral issue could possibly arise, at least in respect of Mr Flavin's behaviour.

For a further example, while Fennelly J. did use the phrase " a fraud on the market", he did so in an introductory paragraph, and he did not characterise Mr Flavin's conduct in that way. Nor did he - or any other judge - so much as even suggest that Mr Flavin was guilty of any criminal offence. The only issue for the Supreme Court to decide was the "technical" one of whether the information Mr Flavin had was "price-sensitive", and while they emphatically, and unanimously, decided that it was, it does not necessarily follow either that they were unquestionably correct or that those who differed from that conclusion were morally impaired.

Putting on my own moral hat, given that the courts have decided that no profit was made from use of inside information, I wonder how justice or morality - as distinct from the law - have been served by compelling DCC to hand over tens of hard-earned millions of euro to parties whom I cannot see as being deserving of any of it.

Jim Flavin Gets Some Justice

I do not now, and never have, owned any shares in either DCC plc or Fyffes plc. I do not know, am not related to, and have never met Mr Jim Flavin.

Bill Shipsey S.C.

Today, Bill Shipsey S.C.'s report as court-appointed Inspector into the affairs of DCC and certain related companies has been published. In my opinion, it provides a totally appropriate corrective to the torrent of mis-conceived vilification which descended upon Mr Jim Flavin, DCC's founder and then still its Executive Chairman, in 2007. This traducement followed the Supreme Court's decision, reversing the judgment of Laffoy J. in the High Court, that DCC's sale of its holding in Fyffes was technically "insider-trading".

I have emphasised the word "technically" because it was a more than normally "technical" decision, a consideration which by and in itself should have restrained the nature of the commentary upon it. Briefly, the Supreme Court's decision was that the definition of "price-sensitive information" in the Companies Act 1990 was such that insider-dealing had occurred. This was so even though, at the time of the dealing, all parties (even, it seems, the eventual complainants) agreed, some after taking legal advice, that such dealing was not involved (an opinion that the High Court shared).

Several commentators did not shrink from stating as a fact that the Supreme Court had found Mr Flavin guilty of the criminal offence of insider-trading, proving thereby that they had not looked at the judgments to which they were so anxious to attribute an excessive significance.

Mr Shipsey found

From the Chief Executive down, the officers and employees involved in the transactions in 1995 and 2000 each attempted to do what they understood to be right in all circumstances.

The report indicates that even the purchasers of the shares did not consider that they were victims of any insider-dealing.

Mr Shipsey concludes what in my view any objective observer would have concluded (as I did myself)

I believe that the only effective method of avoiding the adverse consequences which have been visited on DCC and Mr. Flavin by the events which occurred in 2000 would have been to have had in place written arrangements of the type envisaged by Section 108(7) of the 1990 Act.

The sub-section provides that a company will not be insider-trading:

... at any time by reason only of information in the possession of an officer of that company if—

(a) the decision to enter into the transaction was taken on its behalf by a person other than the officer;

(b) it had in operation at that time written arrangements to ensure that the information was not communicated to that person and that no advice relating to the transaction was given to him by a person in possession of the information; and

(c) the information was not so communicated and such advice was not so given.

Failure to put such an arrangement in place, which I suggest would have altered the form but not the substance of the transaction, was a mistake that was to cost the DCC Group over €42 million in costs and damages. As Mr Shipsey notes, it also gave rise to considerable disruption and upset to Mr Flavin and others, not least due to ill-informed commentary in the media which ultimately led to Mr Flavin retiring prematurely. Mr Shipsey does not say so, but the actions of the Director of Corporate Law Enforcement - in an extraordinary intervention, he asked the Supreme Court, in defiance of due process, to disqualify Mr Flavin from acting as a company director - appear to me to have been founded on a view of the case that owed more to over-excited media commentary than to mature consideration of the facts.

The Inspector accepts that a large part of the damage done is effectively irreparable but,

At least, however, the suggestion that the dealing was intentionally wrongful, or that it was evidence of dishonesty on the part of Jim Flavin and of a culture of disrespect for the companies code in DCC can be dispelled...

... The actions of Jim Flavin were not undertaken recklessly or with an absence of care. He was ultimately found to have misjudged the information he had in his possession when he was approached by the stockbrokers with a view to buying the shares, but he did not "deal" without considering whether he or DCC were free to sell the shares.