Then EADS co-chief executive Noel Forgeard, left, and Arnaud Lagardere, the French defense-to-media group Lagardere chairman and CEO
October was supposed to be a month of celebration for Airbus. This is the month, after all, when the European airplane manufacturer is finally set to start delivering its chronically overdue super-jumbo, the A380. Instead, the company has hit turbulence again. This time, however, it's not production delays and boardroom infighting, it's news that market regulatory officials are investigating a potentially massive insider trading scandal at EADS, Airbus's parent. According to documents cited in French press accounts, as many as 1,200 people may wind up targeted by legal action, including some of the loftiest members of France's business and political elite.
On Tuesday, the daily Le Figaro published details of a preliminary report by France's Financial Markets Authority (AMF) investigating the sale of stock options by EADS executives between November 2005 and March 2006. The paper said that initial findings in the on-going inquiry — which both the AMF and French legal officials declined to comment on — had turned its attention to 21 current and former EADS executives, and as many as 1,200 other shareholders who may have used inside knowledge of troubles with the A380 program to dump millions worth of stock before that bad news was revealed in June 2006. When that information was disclosed publicly, EADS' share price plunged by 26%, and marked the beginning of recurring setbacks, revelations about dysfunctional management structures, and a restructuring plan that will cut more than 10,000 jobs.
While the renewed allegations of insider trading represent yet another blow to Airbus and may put more downward pressure on EADS share prices, it won't constitute a long-term threat to the company's future — especially if the A380 proves popular with airlines. However, according to Anne Maréchal, a former official with Paris's stock market now working with law firm DLA Piper, if convictions for insider trading have been very rare in France until now, there's reason to believe some may result in the EADS case. "The AMF isn't required to file a report with prosecutors unless it has sufficient evidence of serious legal infraction, which appears to have been its motivation in this instance," Maréchal explains. "Given the large number of people reportedly involved, it would be difficult to believe there would be no convictions if laws were indeed broken. Details in the Figaro report suggest the EADS affair could be the largest case of insider trading France has ever seen.
Among the most surprising executives Le Figaro cites as targeted by the AMF inquiry is Arnaud Lagardère, a former EADS co-chairman whose defense and press group still owns 7.5% of EADS. Lagardère — who has not only denied any wrongdoing, but has threatened litigation to address damage done to his reputation by the reports — is also a personal friend of French President Nicolas Sarkozy, who once famously called the businessman "my brother." In addition to Lagardère, three other former co-chairmen and co-chief executives have been named in media reports as inquiry suspects, as have a number of current EADS and Airbus officials.
Also named by Le Figero: Thierry Breton, who prior to last June's legislative elections served as Economy Minister for the last conservative government. Breton is described in the AMF finding as having received a memo from an unidentified source in December 2005, warning EADS would be entering "a zone of turbulence." The memo to Breton also purportedly urged the French government to lower its 15% stake in the group before flying got rough for EADS, which would allow the state to "profit from the current value of shares, which incorporates only the good news of the last financial year." Breton responded to the Le Figaro report stressing the state's "conduct was irreproachable" at the time, and pointed out France sold no EADS stocks then or since.
Pundits and leftist politicians have responded by saying that even if Breton and other government officials did not act on information that rough times were ahead for EADS, they must have known months before the public did. And in that time, Airbus executives had sold millions in stock options — though all have maintained they did so legally, and after consulting company compliance officials. Among those was Noël Forgeard, who as co-president of EADS exercised around $14 million in stock options he and his children held in March 2006 — netting capital gains of over $3 million, just three months before the group share price tanked. Like other officials named in past and the new reports, Forgeard has consistently denied any wrongdoing in the transaction, and stressed it was made without knowledge of looming trouble for Airbus or EADS share prices.
Should investigators be able to build a case to prosecute in the EADS scandal, lawyer Maréchal says they face the daunting task of proving executives had inside knowledge that motivated their stock deals at the time of transaction. Maréchal says that has often been difficult to do under French law, explaining why there have thus far only been two major insider trading convictions: cases involving canning group Pechiney, and bank Société Général in the late 1980s. Maréchal says sentencing in those cases suggests anyone eventually condemned for illegal trading of EADS stock will face stiff fines rather than actual jail time. "But the maximum financial penalties can run up to 10 times the profit illegally earned in the trade," she notes.