24-05-2011: Deminor European Alert on Gagfah S.A.

Suspicions of misleading information and insider trading

 

Deminor is currently investigating elements which led to the announcement on 4 March 2011 by Gagfagh S.A. (ISIN: LU0269583422 - Frankfurt Stock Exchange - hereafter referred to as « Gagfah »). The Luxembourg-based company owns and manages a large portfolio of residential properties (www.gagfah.com).

 

On 4 March 2011, Gagfah released an ad-hoc announcement informing investors that the City of Dresden contemplated legal action against some of its subsidiaries. This legal action related to alleged breaches of certain obligations under the privatization agreement entered into with the City of Dresden in 2006. The claim was formally filed in court on 31 March 2011 and amounts to €1.1 billion (Gagfah's market capitalization before the announcement was €1.9 billion).

 

Following this announcement, the share price of Gagfah lost 9.7 % in one single trading session. There were further losses during the following days and the share price dropped to around €6.00 at the end of March 2011, implying a 30% loss of the share price compared to the days preceding the announcement.

 

About one month before the announcement, the CEO of the company had sold 621,500 shares of Gagfah at €7.5 per share for a total amount of €4,661,250. This was so far the only sale of shares and the largest transaction ever executed by an "insider". The German market regulator, Bafin, launched an investigation into this share transaction by Mr. Brennan.

 

In the course of March 2011, additionalinformation on the dispute with the City of Dresden became available according to which the legal dispute between the City of Dresden and Gagfah would have started much earlier than 4 March 2011 and the company would have long been aware of this serious complaint. Available sources even point to a letter of early 2009 from the City of Dresden to Gagfah in which the City of Dresden announced that it had analyzed the Agreement and that it had identified breaches of the Agreement by Gagfah.

 

The manager in charge of Gagfah's subsidiaries in Dresden had unexpectedly left the company in April 2009 while he was due to resign at the end of July 2009. He was immediately replaced by Mr. William Joseph Brennan, current CEO of Gagfah.

 

Based on the available information, we believe that there are good arguments to support that the information related to the dispute between the City of Dresden and Gagfah and to its developments before 4 March 2011 could qualify as "inside information" which Gagfah should have disclosed immediately instead of waiting until 4 March 2011 to inform the public. In this context, the sale of shares by the CEO a few weeks before the announcement of 4 March 2011 seems even more suspicious.

 

We invite each investor who purchased shares of Gagfah prior to the ad-hoc announcement of 4 March 2011 to contact Deminor in order to be updated - free of charge - on Deminor's further findings in, and intentions on the case. The more precise scope of the relevant period of time will be further defined depending on our investigations and available information.

 

If you would like more information about this case, please contact:

 

Charles Demoulin (Partner): charles.demoulin@deminor.com - + 32 2 674 71 10
Bruno Wagner (Senior Analyst): bruno.wagner@deminor.com - + 49 221 55 405 475