Insider dealing bad, tax avoidance good
Fyffes clearly lost the insider trading case it took against DCC and Jim Flavin – decided upon by Justice Mary Laffoy in the High Court just before Christmas – but Flavin's claim of "vindication" rings just a bit hollow.
Mary Laffoy sat through weeks of evidence, worked through mountains of written material and delivered a 367-page judgement. So it has to be respected when she decided that Flavin had not dealt illegally in Fyffes shares by using price-sensitive information available to him as a non-executive director of that company.
Flavin said he was "obviously pleased" by this. "This is terribly important for my reputation and that of DCC." He made it clear that the most important part of the case was defeating the allegation of insider trading.
Insider dealing is considered an appalling sin in business circles and Flavin would have been destroyed had it been established.
Tax avoidance, on the other hand, is not even a venal sin, let alone a mortal one. Finding ways of reducing a company's tax liability is considered a duty by executives, a badge of honour when completed successfully. They insist, correctly, that it is legal behaviour, as distinct from tax evasion. Morality and ethics don't apply when the law is followed.
In reaching her decision on insider trading Laffoy also had to decide first if Flavin had been involved directly in selling the DCC shares in Fyffes.
In 1995 DCC had come up with a construct where its shareholding in Fyffes was held through a Dutch registered company called Lotus Green. This meant that when the shares were eventually sold the amount of capital gains tax payable would be reduced greatly.
For this to work legally though it had to be shown that Lotus Green acted entirely independently of DCC. The evidence in the case showed this to be a fiction.
For the scheme to work the management of Lotus Green had to be in Holland. There was evidence in court of fictitious letters, and of minutes being adjusted in order to make sure written records were "in accord with the underlying fundamentals in relation to a tax situation". Names were changed on documents written by DCC executives. Evidence was given of Flavin laughing when he told a stockbroker over the phone that he would have relay an offer to Lotus Green.
Justice Laffoy found that Flavin had in fact dealt in the shares and she referred to the "absurdity" of the DCC case that Lotus Green, and not Mr Flavin, had dealt in the shares. "The reality is that he assumed authority to act exclusively in the negotiations leading to the sales. In fact, he assumed total control on the sell side and the prospective buyers did not have any access to any other decision-maker, if there was any. I infer from the evidence that there was none."
The profit made on the share sales was €85 million but a 20 per cent tax bill was avoided, unless the Revenue Commissioners now seek and gain the tax.
Yet in the wake of the High Court judgement Flavin said it was the belief of the DCC board that the ruling did not have tax consequences for DCC.
He said the finding that he had dealt and that he controlled the dealing was "irrelevant" given the finding that the information at issue was not price sensitive. "She found so strongly in relation to price sensitivity. We won the key issue. We won the case, that's it."
Some stockbrokers and tax consultants were quoted in newspapers in the following days as agreeing with his position. It will be a scandal if the Revenue does not pursue €17 million in unpaid capital gains tax, given what Laffoy has said.