Storm Brewing

One early morning last week, two inspectors from London's department of trade and industry arrived unannounced at the West End headquarters of a major British corporation. They demanded to see the company's books. Within hours, rumors had linked the unusual investigation to disgraced Wall Street Arbitrager Ivan Boesky, and a whiff of panic spread throughout the London Stock Exchange. By the end of the day securities listed in the closely watched Financial Times index had dropped in value by 1.5%, or nearly $6 billion. Thus began for London's City a week that rapidly worsened.

At the center of the turmoil was Guinness PLC, brewer of Ireland's national beer and one of Britain's oldest (founded in 1759) and most respected firms. Following an announcement that the department of trade was examining unspecified "circumstances suggesting misconduct" connected with the company, Guinness share prices dropped precipitously. A record 19 million shares changed hands on Monday alone, at one point wiping nearly $500 million off the company's market value. By Friday the stock closed at $4.13 a share, off more than 12% for the week.

Uncertainty added to the fears. Starved for facts from the authorities, nobody--not even Guinness--seemed to know what the trade department's probe was all about. "I know of no reason why the department has decided to investigate Guinness, absolutely none," said Chief Executive Ernest Saunders. "My conscience is clear."

But by midweek it was apparent that the inquiry was focusing on a series of unusual stock transactions that had surrounded a bitter takeover fight earlier this year for control of the Distillers Company, makers of Gordon's Gin and Johnnie Walker scotch. Two companies were bidding for Distillers, Guinness and a supermarket chain called the Argyll Group. Both bidders had offered Distillers' shareholders a mix of stock and cash. But shortly before the contest was over, a sudden and mysterious flurry of trading raised the value of Guinness's stock while lowering Argyll's. Its offer thus sweetened, the giant brewery acquired Distillers in April for $3.8 billion.

Boesky may have been involved in the takeover fight, but his role is unclear. He is rumored to have held $100 million worth of stock in Distillers, and at one point he talked to representatives of the Argyll Group about what he could do to help their efforts. More intriguing, perhaps, are reports that the U.S. Securities and Exchange Commission, which nabbed Boesky for illegal insider trading in the U.S., delivered a packet of information to the London investigators shortly before their Guinness probe was launched.

One thing is certain: the British government is serious about putting London's financial house in order. The usually dormant trade department has announced no fewer than three major investigations in the past month. Last week it issued a new summons against Geoffrey Collier, one of London's leading securities brokers, for allegedly using privileged knowledge of an impending takeover for his personal profit. Said Corporate and Consumer Affairs Minister Michael Howard: "No one can be in any doubt that we regard insider dealing as a thoroughly pernicious practice ... that we are determined to do all in our power to root out."