Wall Street is not the only financial district with a horrendous image problem these days. The venerable collection of banks and investment houses known as the City of London is also embroiled in a shocking stock-trading scandal. Investigators are still probing deeply into allegations of wrongdoing surrounding the $4 billion takeover last year of Distillers, the British manufacturer of Johnnie Walker Scotch and Gordon's gin, by Guinness, the Anglo-Irish brewer and distiller. The sensational affair has already ruined the careers of some of Britain's best-known businessmen, and may bring regulatory retaliation on the City.
The scandal could also have serious political repercussions for the financial community's traditional allies in the Conservative Party of Prime Minister Margaret Thatcher, who must call national elections by the summer of 1988. "There's bound to be political fallout," says a prominent London banker. "The muck will be raked by the media and the opposition parties, and some of it will stick." Though no government official has been implicated, Roy Hattersley, deputy leader of the opposition Labor Party, has charged that support for the City's "sleazy undercurrent of corruption is the inevitable extension of Tory economic philosophy."
The full details of the Guinness scandal have not been revealed, but the investigation centers on the company's battle with Argyll Group, a Scottish supermarket chain, for control of Distillers. Both rivals had offered Distillers' shareholders a mix of stock and cash. During the contest, however, an unexplained flurry of trading raised the price of Guinness's shares. That boosted the value of Guinness's bid and helped it win Distillers. In the process, though, Guinness allegedly made large illegal purchases of its own stock and paid off other investors to do the same. Among those traders who may have had a secret alliance with Guinness was New York Financier Ivan Boesky, who reportedly confessed his role after being nabbed for his insider-trading activities in the U.S.
So far, seven top executives of Guinness and of Morgan Grenfell, the London bank that acted as the brewer's financial adviser, have been asked to resign as a result of the scandal, which has been dubbed "Guinnessgate" by some British newspapers. Among those fired: Guinness Chairman Earnest Saunders and Morgan Grenfell Chief Executive Christopher Reeves. Some of the executives could face criminal prosecution, and Guinness has already been hit by lawsuits from Distillers' shareholders.
But it is the political ramifications that City leaders fear most of all. Though the affair involves complex financial transactions that are little understood by the general public, the scandal could sting the Tories, who are running neck and neck with the Labor Party in opinion polls. "Watergate was amazingly complex, and people didn't follow the minute details," says Peter Kellner, political columnist for the liberal New Statesman magazine. "But there came a time when it wasn't the detail that mattered, but the general stink."