12/03/2014
NEWS STORY
Last month Mr Justice Newey, a judge in London's High Court delivered what can only be described as a bitter-sweet victory in a case which had been brought against Formula One boss Bernie Ecclestone. Although Ecclestone won the case Mr Newey ruled that he paid a bribe to steer the sale of F1 to the private equity firm CVC. Ecclestone is due to be put on trial in Germany next month over this very matter so it may seem like Mr Newey's comments don't stand him in good stead. However, in fact, this may be far from the truth.
To understand the reason for this let's start with a recap. At the heart of Ecclestone's legal troubles is a $44m payment to Gerhard Gribkowsky, the former chief risk officer at German bank BayernLB (BLB). Ecclestone provided $22.8m of the money with the remaining $21.2m coming from his Bambino family trust. Gribkowsky was responsible for selling a 47.2% stake in F1, which was owned by BLB, and in 2006 it was purchased by CVC. Bambino and F1's two remaining shareholders, the investment banks JP Morgan and Lehman Brothers, followed BLB and sold to CVC giving it control of F1.
German prosecutors believe that the $44m payment to Gribkowsky was a bribe so that he would agree to sell to CVC as it had committed to retaining Ecclestone as F1's boss.
The alleged bribe was central to the related case last month which was brought by German media rights firm Constantin Medien. It claimed that it lost out through the sale to CVC as it had an agreement entitling it to 10% of the proceeds if the stake sold for more than $1.1bn. Constantin got nothing as CVC paid $814m but it argued that higher bidders would have come forward if the sale had not been engineered by Ecclestone, Gribkowsky, Bambino and its former lawyer Stephen Mullens.
They successfully defended the claim from Constantin but that is not the end of the legal battles. Next month Ecclestone is due to face criminal charges in Munich that the payment to Gribkowsky was a bribe. In 2012 the same court in Munich ruled that Gribkowsky had received a bribe and sentenced him to eight and a half years in prison.
In his judgement last month Mr Newey ruled against Constantin and said that "it was no part of Mr Ecclestone's purpose (or Mr Mullens') for BLB's shares to be sold at an undervalue... no loss to Constantin has been shown to have been caused by the corrupt arrangement with Dr Gribkowsky. That fact is fatal to the claim."
Nevertheless, Mr Newey added that "the payments were a bribe... Mr Ecclestone's aim was to be rid of the Banks. He was strongly averse to their involvement in the Formula One group and was keen that their shares should be transferred to someone more congenial to him."
This sparked widespread reports that the comments will count against Ecclestone in Germany as they add fuel to the argument that he paid a bribe. However, that is only part of the story.
The German prosecutors' case against Gribkowsky was based on the claim that the bribe led to BLB incurring $66.4m of damages. There are two components to this and the first is a commission of $41,443,330 paid by BLB to Ecclestone at the time of the sale to CVC. As Pitpass revealed in October 2012, Ecclestone says the commission was paid in return for him providing a $100m indemnity, requested by CVC, that "all the [F1] books were straight and there was nothing wrong."
The prosecutors believe that the money was in fact paid to compensate for Ecclestone's share of the alleged bribe so it should be paid back to BLB. In response, Ecclestone told Pitpass that "I had enough money to pay Gribkowsky. I didn't need any money from BayernLB." There is little doubt about that.
The second component of the alleged damages incurred by BLB is a $25m payment by the bank to Bambino. Like the payment to Ecclestone, this was also paid at the time that CVC bought F1 and Bambino says it got the money to settle an outstanding debt.
It claims that the debt in question dates back to 1998 when a stock market flotation of F1 was being planned. In order to ensure that the flotation raised as much money as possible, all of the teams needed to sign the Concorde Agreement - the long-term contract which committed them to the sport. In return the teams were offered shares in F1 or $10m in cash. Four of them - Arrows, Benetton, Jordan and Prost - went for the option of cash though it took them a while to get it.
By 2001 the flotation had still not taken place so the teams had not been paid. This led to them demanding the money and Bambino paid the teams directly to stop them taking legal action to get it. This money should have been paid by F1's parent company SLEC so it then had a debt to Bambino.
Over the next two years the control of F1 changed as BLB, JP Morgan and Lehman Brothers took control of the sport and they disputed the reason for Bambino's payment of the $40m to the teams. In the end, when F1 was sold to CVC Bambino accepted $25m from BLB in full and final settlement of the debt. BLB owned 62.5% of the banks' shares in F1 so it agreed to pay the corresponding percentage of the $40m.
German prosecutors disagree with Bambino's version of events and claim that the $25m was paid to compensate for its share of the alleged bribe. The indictment against Gribkowsky, which is dated 14 July 2011, states that "in fact, both the commission agreement and the agreement regarding the team payments were part of the agreement reached between the accused and Ecclestone. They served to compensate for the payments promised by Ecclestone to the accused and to let BayernLB economically bear the portion taken on by Bambino. Without the previous agreement Ecclestone would not have required a commission payment or Bambino its share of the team payments from the accused."
The indictment concludes that "BayernLB hereby incurred altogether, as the accused knew and approved, damages to the amount of $66,443,330."
This claim is at the heart of the indictment against Ecclestone which he will be put on trial for next month. The indictment is dated 10 May 2013 and states that BLB accepted to pay Bambino "although credible evidence indicating the legal grounds for such payments was still lacking. BayernLB also accepted this provision since Dr. Gribkowsky presented it as being a prerequisite for the entire transaction... This gave rise to a further damage of USD 25 million for BayernLB."
Constantin's QC, Mr Philip Marshall also used this argument during the recent High Court case in London and the problem facing the German prosecutors is that after hearing evidence connected to this, Mr Newey agreed with Bambino's version of events.
In his judgement Mr Newey states "Mr Marshall argued that the fact that Bambino was paid $25 million in respect of the $40 million Team Payments indicated bribery. Again, I disagree." He added that "it was suggested to Mr Ecclestone in cross-examination that the Team Payments were improper. The evidence before me does not warrant any such conclusion... Bambino has not been shown to have been complicit in the corrupt arrangement."
Let's take stock of that. Mr Newey says that the team payments were not improper and do not indicate bribery. However, according to the indictment against Gribkowsky, the team payments were inherent to the alleged bribe between Ecclestone and Gribkowsky. The indictment against Gribkowsky stated that "both the commission agreement and the agreement regarding the team payments were part of the agreement reached between the accused and Ecclestone." It calls the prosecutors' entire argument into question.
Given that the indictment led to Gribkowsky getting imprisoned, Mr Newey's ruling raises serious questions indeed. If Bambino was not complicit in the corrupt arrangement by receiving the $25m then BLB had obviously not incurred damages by it being paid and Gribkowsky was not liable for it as stated in the indictment.
Interestingly, Gribkowsky confessed and was found guilty so the evidence in Mr Newey's judgement makes one wonder why he did this. According to Mr Newey's ruling Gribkowsky should not have accepted any responsibility for alleged damages caused as a result of the $25m being paid as stated in the indictment. One explanation for Gribkowsky's actions comes from Ecclestone who says he fabricated the confession in order to reduce his sentence.
The upshot is that Mr Newey's ruling on Bambino has a huge impact on Ecclestone's outlook in the trial in Germany and it is not negative as has been reported so far. In fact, the ruling on Bambino puts the prosecutors in somewhat of a Catch 22. The reason for this is that either they decide to acknowledge Mr Newey's judgement and findings or they do not. They can not pick and choose by saying that they like some of the judgement or the findings but don't like other things in it.
If the prosecutors acknowledge the judgement then it undermines their indictment against Gribkowsky which led to him getting imprisoned for eight and a half years. If they don't acknowledge the judgement then they aren't in a position to say that a judge has ruled that Ecclestone paid a bribe.
Either the prosecutors' argument about the alleged bribe is wrong or Mr Newey's judgement is wrong. The two are mutually exclusive.
According to the judgement, the indictments of Gribkowsky and Ecclestone are based on at least one flawed premise which in itself is a significant matter. It plays right into the hands of Ecclestone and Gribkowsky though the former banker is not likely to be as concerned as the F1 boss he is now leaving prison every day and working for a construction firm in Munich.
The bottom line is that when two jurisdictions rule on the same facts there is a chance that the verdicts will contradict each other. That is exactly what has happened here and the last thing the Germans would want in their case against Ecclestone is contradictory facts.
Christian Sylt