"Even small things can grow through unity" - that was the guiding theme of a venerable old guild in London at which Deutsche Börse, operator of the Frankfurt stock exchange, hosted its annual reception at the beginning of this week.
Chief executive Carsten Kengeter incorporated the saying into his welcome speech, to underline the big opportunities offered by the planned merger with the London Stock Exchange. Small things could grow into big things, he said.
This statement could turn out to be true - but not the way Mr. Kengeter had hoped. The public prosecutor's office is investigating the Deutsche Börse chief's stock dealings, following allegations that he took advantage of insider information when purchasing shares in his own company.
Investigators searched Mr. Kengeter's office at the group's headquarters in Eschborn, near Frankfurt, on Wednesday, as well as his apartment in Frankfurt. Now Mr. Kengeter not only has to win the support of regulators and the government for the planned merger, but must also convince the public prosecutor's office that he is innocent.
Mr. Kengeter is regarded as a fighter who always gives his all in both his professional and private life. He runs mountain marathons and enjoys Alpine ski racing. Shortly after taking up his post in Eschborn he concluded several takeovers. His biggest project to date was revealed in February 2016: "Luna" as it is referred to at Deutsche Börse, is the proposed merger with the London Stock Exchange, or LSE that would create a European stock market giant.
It would be one of the world's largest marketplaces, on a par with U.S. rivals ICE and CME. The merged company would be worth €25 billion ($27 billion) and would be headquartered in London; Mr. Kengeter would become chief executive of the new group.
It's essentially about whether there was already a specific intention to merge before he bought the shares. That would be insider information. André Szesny, commercial criminal law specialist, Heuking Kühn Lüer Wojtek
The decision to locate the holding company in the British capital has been heavily criticized since the Brexit vote. Supervisors and politicians in the German state of Hesse, where Deutsche Börse is based, fear a significant loss of control if important decisions about Deutsche Börse's future are made by the umbrella company in Britain. They are refusing to agree to this. Observers expect Mr. Kengeter to have to improve the deal if he wants to prevent it from being vetoed by Hesse.
Investors have so far avoided criticizing Mr. Kengeter and have not called into question his future as head of Deutsche Börse. "There's still too much confusion to judge whether Mr. Kengeter has done something wrong or possibly the supervisory board, it's far too early for that," a fund manager said. However, the situation could change if the investigators' suspicions are confirmed.
"This development has come as a surprise to me," said Gerhard Schick, financial policy spokesperson for the Green Party. "If the public prosecutor's office is investigating, there must be serious question marks. It won't help the planned stock market merger."
What is the problem? Mr. Kengeter bought shares in Deutsche Börse worth a total of €4.5 million in three tranches in December 2015, before the mega-deal with the LSE was officially announced. The purchases were no secret; in September 2015, the supervisory board had specifically granted Mr. Kengeter the option to take part in an executive board remuneration program known as the Co-Performance Investment Plan, or CPIP. In exchange for his stock purchases, Mr. Kengeter was promised performance shares, whose value is linked to the group's success.
However, investigators are unlikely to be appeased by the fact that Mr. Kengeter was acting on the basis of a supervisory board resolution. "Remuneration programs are not a license for insider trading," said lawyer Heiko Ahlbrecht from local law firm Wessing & Partner, which specializes in white collar crime. The public prosecutor's office believes that Mr. Kengeter was already aware of negotiations with the LSE when he bought the shares.
It refers to talks that are said to have taken place between top managers of the two companies "in the period from July, August to early December 2015." The discussions are reported to have concerned "a possible merger of the two companies and the question of the possible location for the holding company." This insider information is reported to have been available to Mr. Kengeter when he purchased the shares.
André Szesny, a commercial criminal law specialist at the law firm Heuking Kühn Lüer Wojtek, said: "It's essentially about whether there was already a specific intention to merge before Mr. Kengeter bought the shares. That would be insider information of relevance to the share price, and issuers must inform both BaFin [the German stock market regulator] and the public of this immediately. Mere exploratory talks, on the other hand, are not problematic." He went on to say: "As a general rule, such cases do not involve insider trading."
A spokesperson for Deutsche Börse declined to comment on when Mr. Kengeter obtained insider information, citing ongoing proceedings. The group said it wants to cooperate "fully" with the public prosecutor's office. Joachim Faber, chairman of the supervisory board, has backed Mr. Kengeter over the share purchases, saying: "The allegations are unfounded." Mr. Faber insisted that Mr. Kengeter bought the shares as part of the remuneration program and that the heads of the executive and supervisory boards of the two companies did not decide until the second half of January 2016 to commence negotiations about a merger.
Mr. Kengeter also has to keep the shares for several years; he won't be allowed to sell them before the end of 2019. Those defending him say that this makes it less likely he bought the shares as a result of insider knowledge about a merger. The group's legal and compliance departments, whose task is to ensure compliance with the rules on good corporate governance, are reported not to have objected to the purchases.
Employee representatives do not believe the 49-year-old deliberately engaged in insider trading. "I think he bought the shares trusting fully in Deutsche Börse's regulations," a staff representative told Handelsblatt. The LSE has also stood up for Deutsche Börse, saying it welcomes the support shown by Mr. Faber and that it looks forward to further collaboration with a view to completing the planned merger.
The European Commission is expected to decide on the planned merger in March. The LSE has already announced that it will sell its French clearing subsidiary to rival Euronext, in order to allay concerns in Brussels.
Deutsche Börse will then have to convince the government of Hesse of the advantages of the merger. Sources familiar with the situation say it will not be easy to relocate the holding company, as politicians would prefer. This is because shareholders in both companies have approved plans in which the head office would be in London. To avoid another vote, Deutsche Börse is reported to be considering a different solution: it could provide guarantees to protect the company's Eschborn site and preserve jobs in Eschborn. However, sources close to the company say it will only start worrying about this option once it gets the go-ahead from Brussels.
Michael Brächer has been a financial editor in the investment team in Frankfurt since January 2013. Katharina Slodczyk is Handelsblatt’s London correspondent. Frank Drost covers financial policy and regulation for Handelsblatt from Berlin and Volker Votsmeier is an editor with Handelsblatt’s investigative reporting team. To contact the authors: [email protected], [email protected], [email protected], [email protected]