19/08/2013
NEWS STORY
Last month it came to light that Bernie Ecclestone had been charged in the long-running bribery investigation over the sale of Formula One in 2006 to present owner, the private equity firm CVC. No sooner had the news come out than the internet was awash with reports of Ecclestone's demise. As Pitpass has pointed out, although Ecclestone has been charged with paying a bribe, the reports of his demise were more than a little premature.
The reason the media was jumping the gun is that the case has been brought against Ecclestone in Germany where if someone is charged with a crime it does not automatically mean they are going to court as it does in the UK. Instead, a judge will decide whether the case should go to trial and Ecclestone's lawyers have until around September to file a rebuttal of the charges against him. They are outlined in detail in a 256-page indictment which has not been seen by any UK media outlet until now.
Writing in the Daily Telegraph, Pitpass' business editor Christian Sylt reveals the key claims against Ecclestone and the questions that they raise. Sylt will not say how he got hold of the indictment save for the fact that it came from outside the UK. The claims in it shed new light on a case which has already been gone over time and time again in minute detail.
Before we get into the two big new allegations, let's have a quick recap on the background. At the heart of the case is £28.2m ($44m) which was paid to German banker Gerhard Gribkowsky by Ecclestone and his offshore Bambino family trust in 2006 and 2007. Gribkowsky was chief risk officer of German bank BayernLB which owned a 47.2% stake in F1. Prosecutors believe that the payment to Gribkowsky was a bribe so that he would agree to sell the stake to CVC. The private equity firm was allegedly Ecclestone's preferred buyer as it had made it clear that it would retain him as the boss of F1.
In June last year Gribkowsky was sentenced to eight and a half years in prison for receiving a bribe which spurred the prosecutors to come after Ecclestone.
He denies bribing Gribkowsky and instead, he revealed to Sylt in July 2011 that the money was paid after the banker threatened him. In specific, Ecclestone says that Gribkowsky threatened to tell the UK's tax authority H.M. Revenue & Customs (HMRC) that he was in control of the Bambino trust. It may not sound like a severe threat but it had particular significance to Ecclestone.
The most valuable assets in F1 are the rights to broadcast the sport and host races. They generate £975m ($1.5bn) in annual revenue and on 19 December 1995 F1's governing body the FIA agreed to transfer them to F.O.C.A. Administration which was 100% owned by Ecclestone. On 6 February the following year Ecclestone transferred all the shares in F.O.C.A. Administration to his then-wife Slavica who put them in the Liechtenstein-based SLEC Trust and Bambino Trust. In 1998 they moved the shares into the Bambino Trust's subsidiary in Jersey, Bambino Holdings, which became the ultimate 100% owner of F1.
Over the following 15 years Bambino has raised at least £2.7bn ($4.2bn) from dividends, selling shares in F1 and loans secured on the sport's future revenues. Since Bambino Holdings and the trusts are based offshore, no UK tax has been paid on the money which flowed into them. In contrast, Ecclestone is a UK citizen who resides in London and is domiciled there. Accordingly, he would be liable to pay tax on the money in the trust if he was found to be in control of it which he strongly denies.
Ecclestone says that although Gribkowsky's claim that he controlled the trust was false, it would have caused him a huge amount of trouble if it had been reported to HMRC. This is because at the time that Gribkowsky made the threat, HMRC was carrying out investigations into the tax affairs of Ecclestone and his wife.
One of the issues being investigated was whether the trust structures, including Bambino Holdings, were genuinely independent of Ecclestone. An adverse finding would have resulted in Ecclestone being forced to pay so much tax that he says it would have bankrupted him.
As he said when he appeared as a witness during Gribkowsky's trial "the tax risk would have exceeded £2bn." It shows how much was at stake and if Gribkowsky had followed through with his threat the onus would have been on Ecclestone to prove that he did not control the trust. He says he paid Gribkowsky because his false allegations would have triggered a lengthy and costly investigation which brings us to the first key claim in the indictment.
Allegation 1: There is a lack of proof to support Ecclestone's defence
By 2004 75% of F1 was held by Speed Investments, a company owned by three banks: BayernLB, JP Morgan and Lehman Brothers. The remaining 25% was owned by Bambino which was at odds with its fellow shareholders. The banks believed that although Bambino held a minority stake in F1 it had control through having more directors than it should have had on the boards of the key companies in the sport.
On 1 March 2004 Speed Investments took legal action in London against Bambino and Formula One Holdings (FOH), the F1 parent company which the banks claimed they did not control. At the heart of the case was whether Ecclestone and the trust's legal adviser Stephen Mullens had been appointed by Bambino as its ‘B directors'. The banks claimed that they had been and were therefore extra directors which Bambino should not have had. Ecclestone and Mullens denied this and said they had been appointed by neither the banks nor Bambino.
The banks won the case and Mr Justice Park ruled that "Mr Ecclestone and Mr Mullens on 12 May 2000 became B directors of FOH and have been B directors ever since." However, he added that "Mr Ecclestone could be a B director without being a representative of Bambino."
Ecclestone disputed the outcome of the case and a few days after the ruling said "the judge is totally out of order, talking about me being appointed by a company called Bambino, which I am not. We are just about to write to him to put him straight on that."
The result stood on the record regardless and the banks were reportedly going to use it in further legal action to gain control of the companies underneath FOH which actually ran F1. Chief of these was Formula One Administration (FOA) as it directly held the rights to F1. However, in the end something else drove the banks to sue. On 20 December 2004 a voting share in FOA was transferred to Ecclestone without the banks' authorisation. It granted him 50% of the voting rights on the FOA board, which meant that resolutions could no longer be passed without his approval.
On 5 January 2005 Speed filed a lawsuit in London against Bambino, Ecclestone and FOA to get back control of the company. The indictment in Germany against Ecclestone acknowledges that "in line with BayernLB's strategy, management board member Dr. Gribkowsky endeavoured to create pressure in connection with the FOA litigation against Bambino and the Accused by repeatedly insinuating to the Accused and Bambino at the beginning of 2005 that the Accused himself and not Slavica, his wife at that time, was the so-called settlor of the Bambino Trust and was therefore effectively in charge of the trust which - if this were true - would have had negative implications for the Accused and also for the Bambino Trust in view of the tax audits underway at that time."
It reflects Ecclestone's comments that after the FOH case, Gribkowsky "said to me ‘I could have gone much farther and deeper but I didn't and, you know, I wondered if it ever happened again what would I say.'"
The strategy clearly worked because Ecclestone, Bambino and the banks signed a settlement agreement on 28 August 2005 which gave control of FOA back to Speed Investments and accordingly the legal action was dropped.
The indictment confirms that "the insinuations made by Dr. Gribkowsky constituted a nuisance for the Accused since the tax investigations could take longer in the face of such information." Nevertheless, it adds that "this did not however present a real threat for separate tax treatment of the Accused and the Bambino Trust on the part of the British tax authorities, since Dr. Gribkowsky and BayernLB had no specific proof of any such connection." This raises one big question.
Let's get this straight. The prosecutors acknowledge that Gribkowsky suggested Ecclestone was in control of the trust and, although he had no proof about this, the threat that it could be revealed was so strong that it led to Ecclestone settling the FOA court case. However, the prosecutors claim that Ecclestone could not possibly have paid Gribkowsky to keep this quiet because he did not have any proof. If the prosecutors think that having proof was such a significant point then why was Gribkowsky's threat successful in the context of the FOA litigation?
The argument seems to be circular because if the prosecutors believe that Gribkowsky could not have used the threat to get money from Ecclestone, since he lacked proof, then surely they should believe that the threat would not have had any effect in the context of the FOA case. The problem is they acknowledge that the threat was made "in line with BayernLB's strategy" in the FOA case, which went in their favour, yet they claim the same threat could not have been used to extract money from Ecclestone.
There is also the question of whether any proof would be needed. Ecclestone says that proof would not have been needed as HMRC has to investigate any tip-off, particularly if it comes from a company insider such as Gribkowsky.
"He could have written a letter to the revenue," he says. "They can't say we don't believe it. If I wrote to the revenue and said that you are moonlighting they would have to look into it."
The indictment is not clear about when Ecclestone allegedly bribed Gribkowsky as it claims that they came to an agreement "in April/May 2005." However, as Sylt has already reported, Ecclestone's lawyer Sven Thomas says that there is no record of this meeting taking place.
Allegation 2: Ecclestone bribed Gribkowsky even though he did not have the power to sell to CVC
Another big question fuelled by the indictment concerns the prosecutors' claim that Ecclestone paid the bribe to Gribkowsky even though he did not have the power to give the green light to the sale to CVC.
The indictment states that CVC co-founder Donald Mackenzie "had tentatively proposed an enterprise value of $1 billion, which would have resulted in a purchase price of approx $460 million for the interest held by BayernLB. Based on previous offers from third parties, the Accused knew that BayernLB was not prepared to sell its shares in response to offers of around $400 to 500 million and anticipated that not even Dr. Gribkowsky could convince BayernLB to accept this price."
According to the indictment, Ecclestone himself had to step in to help the deal get the green light.
It states that Ecclestone encouraged CVC to pay more as he allegedly "made it clear to CVC's representative, Mr Mackenzie, that the purchase offer should be based on an enterprise value of $2 billion which, in terms of the interest held by BayernLB, represented a purchase price of almost $1 billion."
The indictment adds that Ecclestone "also helped to arrange part of the financing for the envisaged total purchase price, namely for an amount of $600 - 650 million, via the Royal Bank of Scotland, which confirmed the possibility of granting an equivalent loan. Mr Mackenzie had made it clear to the Accused that, based on an enterprise value of $2 billion, CVC would need partial financing in order to fund the entire purchase price."
So, let's get this one straight too. The prosecutors claim that even though Gribkowsky himself could not ensure that F1 was sold to CVC Ecclestone and Bambino paid him £28.2m in the hope that it would end up buying the sport. Then, because Gribkowsky didn't have the power to put the deal through, Ecclestone had to step in himself to get the deal done, even though he had allegedly paid £28.2m for someone else to ensure this happened.
There were multiple bidders and although CVC made the highest offer US investment firm Bluewaters claims that it agreed to pay 10% more than anyone else. It is suing Ecclestone in the New York Supreme Court as it believes that it was rebuffed by Gribkowsky as he had been bribed.
The indictment in Germany claims that Gribkowsky did not take advantage of "the serious interest in buying shown on the part of Bluewaters Holdings LLP...to negotiate with CVC...in order to obtain the best possible price for BayernLB. On the contrary, he abandoned this negotiating position."
If Gribkowsky did not sell to the highest bidder it would have disadvantaged not only BayernLB but also Bambino as it owned a 25% stake in F1.
Although Ecclestone stresses that he does not control the trust, his family benefits from it. This raises the question of why he would have wanted it to lose out as a result of him allegedly bribing Gribkowsky to sell to CVC. It puzzles Ecclestone too as he asks "what advantage was there for me paying him money to sell the shares for cheap?"
One thing that is for sure is that the case is far from cut and dry as the indictment seems to raise as many questions as answers. The biggest of them all of course is whether the case will go to trial and we don't have to wait long to find out the answer.