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Something's Rotten In France, Spain...


International Business

SOMETHING'S ROTTEN IN FRANCE, SPAIN...

Life in a Brussels jail cell was no doubt a frustrating experience for Didier Pineau-Valencienne, the chairman of France's Schneider, who was finally released on June 7 after 11 days of incarceration. But as he passed the time awaiting a judge's investigation of questionable financial dealings by teaching English to jailmates, the French executive had lots of spiritual company in the outside world.

All over Europe, execs are in trouble with the law. Whistle-blowers and prosecutors have launched a slew of probes into shady practices, which they claim are on the rise in European business. Indeed, Pineau-Valencienne had barely hopped a flight back to Paris when German authorities slapped four executives of Balsam, maker of sports-arena floors and Astroturf, into preventive detention. The four are under investigation for a $1 billion credit fraud against German factoring company Procedo, which has ties to Europe's big banks.

There's reason to think the list of fraud-and-corruption cases will grow. Whether or not Europe's business morality is fraying, its securities laws are stiffening, judges are growing irate, small shareholders are crusading for their rights, and the business press is becoming more aggressive. As a result, Europe's long tradition of burying business abuses is ending, believes Roberto Artoni, a former member of Italy's stock-exchange watchdog agency. "The dam has broken," Artoni says.

DISAPPEARING ACTS. That portends a healthy cleansing for European industry. Companies should ultimately benefit by more easily attracting capital from foreign institutional investors--who are often put off by opaque European financial practices and murky business relationships. But until tighter controls do their work and greater transparency comes, European business faces an unsettling period of accusations and cascading legal actions. The chill is rippling through executive suites. "You see people you knew--who were your contacts--suddenly disappear," laments Deutsche Bank Chief Executive Hilmar Kopper. One such acquaintance is fugitive German developer Jurgen Schneider, suspected of bilking Deutsche Bank and competitors of perhaps $3 billion (no relation to French electrical-equipment maker Schneider).

There may be political fallout as well. Money-grubbing by politicians already has tainted leaders in France and Spain and toppled Italy's government. As the spotlight refocuses on business executives--who often are linked to politicians--the damage could be devastating. Some Paris observers see political motives behind a number of probes linked to French Socialist leaders.

Beyond the Belgian and German cases, managers who will face judicial scrutiny include the four top officers of Mediobanca, a powerful Milan bank. On May 31, Ravenna magistrates issued writs of investigation into Mediobanca's ties with the scandal-ridden Ferruzzi Group--now in Italy's version of Chapter 11. Former Ferruzzi officials claim the bank was privy to Ferruzzi's political slush funds and phony balance sheets.

Italy may be Europe's corruption champion, but cases of fraud, embezzlement, and lesser wrongdoing are emerging almost weekly in France, Germany, Spain, and elsewhere. They range from alleged fraud in the collapse of financial holding company Sasea--the biggest bankruptcy in Switzerland's history--to insider-trading charges filed in late May against Pierre Berge, head of French fashion house Yves Saint Laurent.

Securities watchdogs with sharper teeth are a clear cause of Europe's mounting rap sheets. New powers at France's bourse regulator have helped it triple the number of cases it sends to court since 1990. In Germany, insider trading still isn't a crime, but recent scandals have prompted Bonn to dust off a long-promised bill to make it an offense. The bill is still pending.

A budding militancy among small shareholders across Europe is helping drag executives into court, too. Their complaints against the low price Schneider offered them for stock in two of its subsidiaries touched off the Belgian probe that landed Pineau-Valencienne in jail. A new German law taking effect on July 1 will expand protection for minority shareholders.

"WILD WEST CAPITALISM." More watchdogs and tougher laws aren't the only reasons for Europe's rash of prosecutions. Experts insist there are more white-collar lawbreakers to chase. The Continent's deep economic crisis is one reason. Recession flushes out fraud--as in the case of bankrupt German developer Schneider. Bad times also tempt managers "to commit fraud to hide their business problems," says Tommy Helsby, senior managing director in Germany of Kroll Associates Inc., a U.S. business sleuth.

For many outraged Europeans, the flood of scandal stems from moral decay. Indeed, suggests Pierre Lellouche, a conservative member of France's Parliament, the moral state of European business is reminiscent of the go-go 1980s in the U.S. He thinks Europe's march toward freer markets has lacked necessary controls. "There's lots of drug money around, and people are playing financial games," he says. "Wild West capitalism has come to Europe."

France's Pineau-Valencienne might apply the go-go comparison to European judges and prosecutors. Free on $437,000 bail, he has been indicted for false accounting and other fraud at Schneider's Belgian units--charges he denies. Whatever his guilt or innocence, his case is a striking example of change in the way Europe deals with white-collar crime. Corporate brass who are tempted to cut legal corners should draw a lesson: It may be lonely at the top, but it's even lonelier in the slammer.Stewart Toy, with Gail Edmonson, in Paris, John Rossant in Rome, Peggy Salz-Trautman in Bonn, and Patrick Oster in Brussels


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