Baring The Truth Behind Morgan Grenfell Debacle

Yet despite the arrival of the Serious Fraud Office, the answer still remains tantalisingly out of reach. Next week, Morgan Grenfell will attempt to draw a line under the damaging affair by announcing the resignation of a group of senior executives. It will also detail the measures it has taken to try to stop any other fund manager fooling his bosses quite so spectacularly as Young did.

One explanation for Young's efforts to circumvent rules on unit trusts is that he lost his sense of reason. Pressures mounted on him last year to the point where his extraordinary efforts to conceal investments from his employer were matched by equally bizarre behaviour in his private life.

 

Harmanna Young, his wife, has told of incidents such as Young's purchase of 30 jars of pickled gherkins. Young's solicitors have also gained an injunction to prevent publication of certain photographs. However, fraud investigators from Ernst and Young, led by David Sherwin, have also been examining the possibility that Young gained financially from his deception. Young has firmly denied any such illegal activity, and the SFO has yet to bring any criminal charges against him. Ernst and Young's attention has centred on a web of Luxembourg holding companies set up by Young, with the help of a Swiss legal firm called Wyler & Wolf.

This group of companies enabled him to circumvent regulations stopping a unit trust holding more than 10 per cent of a single company. Young's apparent motive for this was that he was so keen to invest in a number of technology companies that he used the holding companies to conceal exactly how much of these technology companies was held in the two unit trusts.

He did so deceptively simply, by setting up half a dozen pairs of unlisted holding companies. The first three were set up in August 1995, when Young came close to the 10 per cent limit. On the face of it, Morgan Grenfell owned between 5 and 10 per cent of these companies. However, each member of a pair had a cross-holding of the remaining 90 to 95 per cent of the other's equity. This meant that Morgan Grenfell in effect owned all of the companies without realising it.

Young used these companies to acquire large stakes in his favoured investments. The end result was that the unit trusts secretly held substantial proportions of many companies around the world. Young used a similar technique earlier this year when he set up fresh group of paired companies so that he could switch investments around, giving the impression that he was reducing his unlisted holdings. So far, so straightforward. But there is one element unaccounted for in all this. Like a genetic structure missing a gene, there is an oddity in the Luxembourg holding companies. On December 22 last year, Young set up a company called Litia Produktion. This is like all the others except in one respect: it does not seem to have a pair. This implies the existence of a hidden company. The most promising candidate is another company that does not appear to be owned by Morgan Grenfell. It was set up on the same date, and has similar directors.

It is called Russ Oil and Technology, and it has been at the heart of the investigations made by Ernst and Young. Russ Oil and Technology is an odd company. Despite all efforts, it is clear neither who owns it, nor what it owns. A few of its shares have been linked to Young. However, this may not mean an enormous amount. They are bearer shares and may only constitute a small proportion of Russ's equity. This mystery is deepened by a transaction last February in which Russ's capital was doubled, using a convertible bond in shares of SensNor, a Norwegian technology company.