Morgan Grenfell Asset Management

WHEN ACCUSED Morgan Grenfell rogue trader Peter Young appeared for his court hearing in a red sweater, matching red skirt, black high heels, and red lipstick, it certainly made a great stir in London financial circles. How did the esteemed firm, British successor firm to the original J.S. Morgan and Co. and a component of the House of Morgan find itself in this ignominious position?

For over 100 years, Morgan Grenfell concentrated on the merchant banking business as established by Junius Morgan. Then, in an effort to keep current, the firm established a subsidiary, Morgan Grenfell Asset Management. It was this successful subsidiary which was traumatized by a scandal involving the rogue employee.

Young established outsized positions in a number of speculative small companies, including in July 1995, Xavier, a small Canadian company with questionable investments in oil fields in southern Russia and western Siberia, and a $30 million stake in a company called Solv-Ex, in March 1996. Solvex assets included plans to exploit Canadian Athabasca tar sands for oil through innovative chemical processing. Young's purchases came just the day before a report that the Federal Bureau of Investigation and the Securities and Exchange Commission were investigating Solv-ex due to the possible involvement of convicted stock swindlers, which triggered massive selling of the company's stock.

In fact, Solvex had been a speculative company for over a decade, and the efficacy of the company's touted new technologies was highly questionable. The promoters consistently used the traditional con man's technique of obfuscation: creation of so many conflicting reviews and outside analyst's reports that the truth was impossible to really determine, especially for the uninitiated.

Further damaging was the disclosure that Young had set up paired holding companies in order to circumvent British securities and investment regulations, which prohibit a single fund from owning more than 10 percent of any company. Morgan Grenfell became suspicious of the large quantities of unlisted shares, and concurrent with investigations by London regulators, the company shut down trading in three funds, until parent company Deutsch Bank (which had only recently purchased Morgan Grenfell) replaced the questionable assets with $300 million in cash. However when trading resumed, investors removed $400 million of assets. The estimated cost of this fiasco was perhaps $800 million including fines and compensation paid to the government and investors.

Morgan Grenfell's own investigations began in September 1996. Most substantive issues took a back seat to the image of Young, the rogue trader in pantyhose. Many suspected him of putting on a show in order to get the charges against him dropped. However when he attempted self-inflicted castration, the court did find him mentally ill, and prosecutors eventually lost the case against indicted co-conspirators.