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A pernicious (and illegal) practice in the shady investment underworld is that of share ramping -- trying to manipulate the free-market market price of a share by underhand means in order to gain some advantage.

It's a common tactic employed by Boiler Rooms, whose aim is usually to con large numbers of innocent punters into buying low-value shares and thus boost the price, so those in on the scam can sell out at a nice profit, leaving the scammed punters holding the baby when the price inevitably collapses again.

Ramping can also, for example, be effective in defending a company against a takeover -- if the share price can be boosted, it can head off the takeover altogether, or at least raise the price that must be offered. And similarly, ramping the price of the bidder can sway things back in its favour, making it easier to raise the capital needed.

Takeover

Although ramping rarely works with large companies (which have so many shareholders that it would take massive efforts to budge the share price), that's exactly what the Chief Executive of Guinness, Ernest Saunders, together with several accomplices, managed to pull off in 1986.

At the time, Guinness was engaged in a battle to take over the Scottish drinks company, Distillers, which was not performing well at the time. To beat the other bidder on the scene, the supermarket group Argyll, Guinness had to come in with a bid of £2.2b (eventually raised to a successful figure of £2.7b), funded by a massive issue of new shares.

For the new share issue to attract enough investors at a high-enough price, it was essential that the market price of existing shares did not fall (which they will sometimes do when a company launches a large new share offering -- Guinness shareholders may well have compared the dilution of the existing shares unfavourably in relation to the proposed acquisition).

But quite remarkably, the share instead price rose sharply, and the takeover went smoothly.

Spilled beans

What was not known at the time, but which was revealed not long afterwards during plea-bargaining by stock trader Ivan Boesky in a trial on various counts of insider dealing, was that Ernest Saunders, financier Jack Lyons, city trader Anthony Parnes, and businessman Gerald Ronson (now infamous in history as The Guinness Four), had been orchestrating a campaign to fraudulently ramp the shares.

The strategy was to pay a number of investors to buy Guinness shares, and to issue them with guarantees in the event that the share price should fall. In all, it turned out that Guinness paid in excess of $35m to investors in a number of countries to buy a total of $300m dollars worth of Guinness shares. Sunders had managed the whole affair, and had kept the rest of the Guinness board ignorant of his scheming.

Bang to rights

All four were prosecuted. Ernest Saunders, the mastermind of the affair, was jailed for 5 years for false accounting, conspiracy and theft (but that was reduced on appeal). Jack Lyons was fined £4m, Anthony Parnes was jailed for 30 months (again, reduced on appeal), and Gerald Ronson was banged up for a year and fined £5m (which was, at the time, the largest ever fine imposed in a British criminal case).

While the activities were illegal, we might wonder who actually lost out -- after all, the takeover was successful, with Guinness having been Distillers' favoured bidder, and lots of people made money. In fact, at the time, the defendants argued that supporting a share price in the way they did was a long-standing strategy (which it probably was -- unless the law acts to stop them, it seems there will be someone out there who'll try every scam in the book to make money). And, with three of the four (and Boesky) being Jewish, there were allegations of a degree of anti-semitism in the pursuit of the case.

But, apart from Argyll, who lost out to unfair competition, everyone who bought shares in the open market during the period they were being ramped were victims, having paid illegally inflated prices. Amongst the larger investors at the time was J Rothschild Holdings, which bought more than £25m during the takeover period -- whether that was a deliberate attempt to support the bid is uncertain, but Rothschild received no payments or guarantees and was not implicated in the scandal.