Insider Trading

Still On the Hook

Carsten Kengeter
Not out of the woods yet: Deutsche Börse boss Carsten Kengeter. Source: DPA

When a company is prepared to pay a €10.5 million ($12.5 million) legal settlement, executives probably have better things to do than hold speeches about corporate governance. This was certainly true for Joachim Faber, supervisory board chairman of German stock-exchange operator Deutsche Börse. On Wednesday, Mr. Faber cancelled a conference appearance in order to decide how to respond to allegations that its chief executive had engaged in insider trading.

CEO Carsten Kengeter has been under investigation since February, when it emerged he purchased Deutsche Börse stock shortly before his company launched a takeover bid for the London Stock Exchange. While the bid eventually collapsed, the announcement initially sent the stock soaring.

Mr. Faber and the other board members have firmly rejected prosecutors’ allegations, yet they all voted in favor of a settlement with prosecutors Wednesday night. A spokesperson for Deutsche Börse said the company hopes it can finally “put the serious burden of the investigation” behind it. Observers noted an extended investigation could have easily lasted another two years, diverting valuable resources from Deutsche Börse’s core business.

That doesn’t mean the matter is over – not by a long shot. Even after the government settles with Deutsche Börse, Mr. Kengeter won’t be in the clear. Once prosecutors have finished with him, state and federal regulators will look into whether Mr. Kengeter can still be considered “reliable” as the company’s boss. And Deutsche Börse’s shareholders? They’re also looking for the boss to be punished.

Even if the government settles with Deutsche Börse, Mr. Kengeter won't be in the clear.

Because the transfer of Deutsche Börse stock to Mr. Kengeter was part of a board-approved compensation program, the settlement would only apply to allegations against the company. Mr. Kengeter is still on the hook, though board members have said they expected the case to be dropped – for a price.

That price could be “a medium six-figure amount,” suggesting a fine of €400,000 to €600,000 for Mr. Kengeter, although German prosecutors are tight-lipped about the outcome. “I can’t say when and how the proceedings against Mr. Kengeter will be concluded,” said chief prosecutor Nadja Niesen. Beyond the prosecutors, Deutsche Börse expects regulators to decide on a course of action by mid-November.

Until then, Mr. Kengeter will surely be keen to secure an extension of his contract, set to expire next March. Mr. Faber said the boards would decide how to proceed once state and federal officials complete their reviews. He has also said that if Mr. Kengeter is cleared of charges, the company will hold onto him. But other members of the supervisory board see things differently.

“The company bought itself a 'Get Out of Jail Free' card, and shareholders are picking up the tab.”

A stockholder in Deutsche Börse

“For me, a contract extension is still a long ways off,” one person who was privy to the boardroom discussions told Handelsblatt. “First, we have to review what happened here in the last two years. We can’t simply proceed as normal.”

Deutsche Börse’s works council, for its part, has voiced its displeasure over the company’s legal troubles, and some employees are dismayed over the deal prosecutors cut with the company. In their eyes, Mr. Faber was the one to propose the compensation program for Mr. Kengeter, who then loaded up on company stock. “I don’t see why the company as a whole has to be held accountable for this,” an employee told Handelsblatt.

The settlement hit a nerve with investors, too. “The company bought itself a ‘Get Out of Jail Free’ card, and shareholders are picking up the tab,” one of Deutsche Börse’s largest stockholders complained. That same person called for Mr. Kengeter’s bonus to be slashed to compensate for the cost of the deal with prosecutors. “It would be a farce if shareholders were left to pay the fine and the CEO still got a full bonus,” he said.

The investor may actually get what he wants. Deutsche Börse’s supervisory board plans to cap a bonus scheme for CEO Carsten Kengeter, four people familiar with the matter told Handelsblatt.

Despite the withering headlines, Deutsche Börse's stock price has risen by around 75 percent since Mr. Kengeter was appointed.

“The damage to [Deutsche Börse’s] reputation is already immense,” said Ingo Speich, a portfolio manager at Union Investment. “Shareholders cannot be expected to foot the bill. This approach is unacceptable.”

While they might want him to pay up, most investors still appear to support Mr. Kengeter as CEO. The way they see it, Deutsche Börse’s attempt to acquire the London Stock Exchange was worth a shot. They also view favorably the company’s plans to expand its data and technology business.

“The strategy that Mr. Kengeter has pursued for Deutsche Börse is respectable,” said one large investor, adding that he would support a renewal of the CEO’s contract as long as there’s no resistance from the supervisory board.

Another major shareholder pointed out that despite the withering headlines, the exchange’s performance has been excellent. Since Mr. Kengeter was appointed in October 2014, the company’s stock price has risen by around 75 percent.

Mr. Kengeter himself is optimistic of his prospects at Deutsche Börse. In an internal memo, he told employees that he was sure the investigations against him would be dropped and that the company would get back to business as usual. “We still have a lot to do,” he wrote.


Andreas Kröner covers finance for Handelsblatt out of Frankfurt. Chris Cottrell adapted this story for Handelsblatt Global. To contact the author: kroener@handelsblatt.com

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