The gambler inside ...

The tussle for M&S highlights the temptations that come with privileged information.

by Patience Wheatcroft, business and City editor of The Times
Last Updated: 31 Aug 2010

What do Piers Morgan, Jeffrey Archer and Stuart Rose have in common?

The flamboyant former editor of the Daily Mirror, one of the country's most famous former jailbirds and the chief executive of Marks & Spencer might seem an incongruous trio. Yet they are linked by allegations of insider dealing.

The authorities, having examined their share buying, decided not to press charges against Morgan or Archer. Last month, the Financial Services Authority probed the torrid trading in M&S shares that preceded news of Philip Green's intention to bid for the firm. Rose has now been exonerated.

Proven cases of insider trading are rarities. Since the Financial Services and Markets Act of 2000 hit the statute books, only a couple of insider trading cases have been successfully prosecuted. The first involved Robert Middlemiss, finance director of Profile Media Group, who was fined £15,000 for selling shares knowing the company would shortly be reporting profits well below market expectations. The inside knowledge was easily proved and the moral of the tale was clear: finance directors cannot argue ignorance of the numbers without branding themselves so incompetent as to be unemployable. The second case attracted a similar fine only last month.

But circumstances are rarely so cut and dried. Morgan's decision to buy shares in a company just before his tipsters recommended it to readers roused suspicions, but did not make him an insider trader. Archer's decision to buy shares in Anglia Television just before the announcement of a price-enhancing merger was pounced on by sceptics, who pointed out that Archer's wife, as a director of Anglia, would have known about the bid. But the Department of Trade & Industry concluded that this did not mean her husband had the information. The woman famously dubbed 'fragrant' by the judge in one of Archer's court cases must also have been discreet.

Not so long ago, no-one would have been surprised to find a director's spouse buying shares after a cosy chat about the company. Until 1980, insider trading was not illegal and many would have thought it silly to risk buying shares without the benefit of inside information. Today, however, those with inside knowledge of a firm must be careful about buying its shares.

But what constitutes inside knowledge? The fact that share prices almost always move upwards before a takeover bid is announced would suggest that buyers have an idea that something might be afoot, but they may be merely guessing or listening to rumours. Analysis of the share prices of UK companies between 1995 and 2002 in the month before bids were revealed showed that the average rise was 4.1%. That there were not dozens of insider trading cases as a result indicates either that many investors are clever at interpreting market rumours, or how difficult it is to pin down insider trading. The surprising astuteness of investors is even more prevalent outside the UK. The average increase in the target company's share price in the month before a bid was 10.1% in Europe and 11.3% in America.

Stuart Rose famously bought 100,000 shares in M&S within moments of putting down the phone after a conversation with Philip Green. Days later came news of Green's intended bid. Both men agree that M&S was not mentioned during the conversation. Then Rose has a drink with Michael Spencer, a friend and co-director of a restaurant chain, and Spencer buys £5.5 million of derivatives known as 'contracts for difference' in M&S shares.

The two had discussed M&S, but then just about everyone in the City had been talking about the ailing retailer and its possible future ever since it parted company with its chairman, Luc Vandevelde.

Several other hefty bets were made in M&S stock in the second half of June, and the FSA is examining these. Whether the inquiry will reveal anything more than lucky punters at work remains to be seen. But the episode highlights the fact that the stock market is a casino just as much as a means of raising capital for business.

Spencer is a gambler. He made his fortune through founding Icap, essentially a sophisticated City betting shop. For one of the City's richest men, placing a £5.5 million wager is not a particularly unusual event. There is a risk involved, but Spencer thrives on risk. With his 100,000-share bet, Rose is not in the same league, but when he instructed his broker to buy the stock, he had concluded that the risk of its price falling further was slight; that he was risking a slur on his reputation does not appear to have featured in his thinking.

Risk-taking is what all these episodes seem to have in common. Both Morgan, in his choice of what photographs to publish, and Archer, in his choice of stories to tell the court, show this consistency in their approach to these and related matters - both are risk-takers on a grand scale.

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