Can Europe stop the ‘new ignominy’?

That’s the cycle in Europe’s high-tech markets, as government probers burrow into the accounts of the Continent’s former highfliers, companies that dazzled investors with hot stocks, hot technologies, and hot talk. What officials are investigating isn’t pretty: evidence of everything from deception to plain stupidity. The latest probe, by Munich prosecutors, looks at suspicions that top managers of EM.TV & Merchandising, the German media company, misled investors about company finances in violation of securities law.

Call it the New Ignominy. The number of investigations so far is small, but they have generated the kind of headlines guaranteed to rattle investors already pummeled by huge declines in share prices. If handled right, the probes could bring maturity to Europe’s disorderly high-tech markets. But if governments don’t tighten rules enough, or if they fail to nail the worst offenders, the probes could sour investors just learning market capitalism.

The probes are taking on icon after icon. EM.TV was a Neuer Markt headliner. But at yearend, German prosecutors started a preliminary investigation of CEO Thomas Haffa and his brother, ex-CFO Florian Haffa, on suspicion they gave false projections of sales and profit. Officials are also asking whether Florian Haffa’s sale of EM.TV shares constitutes illegal insider trading. ‘EM.TV was one of the workhorses,’ says Peter Thilo Hasler, a Neuer Markt analyst at HypoVereinsbank in Munich. ‘People thought they were protected from big surprises.’ Both Haffas deny any wrongdoing.

Not all the cases are high-profile. Take Gerhard Harlos and Alexander Hafele, the CEO and deputy CEO of Germany’s Infomatec. The managers of the Augsburg maker of interactive-TV equipment are cooling their heels in jail while prosecutors investigate allegations they issued false information to drive up the company stock price and then sell at a profit. One possible scam, prosecutors say, was presenting a new ‘Surfstation’ at a 1999 shareholders’ meeting. It was really nifty – but prosecutors allege the Internet appliance was made by somebody else and simply garnished with an Infomatec logo. Harlos and Hafele contest the charges.

Virgilio Degiovanni is the ex-chairman of Freedomland, an Internet TV service that listed on Milan’s Nuovo Mercato in April. It was a market darling. But now prosecutors say 20% of the 62,414 subscriber contracts declared a year ago may be falsified. Shares have dropped 80% from their peak, even though Degiovanni denies the accusations.

Maybe Degiovanni should trade notes with Rudolf Zawrel. Authorities are probing whether Zawrel, the boss of Germany’s Gigabell, another Net-and-telecom services outfit, waited too long to tell investors the company was headed for bankruptcy. They’re also looking into possible insider trading and suspicions that managers concealed assets from creditors. Zawrel denies wrongdoing.

Now jittery investors are throwing away European tech shares at the first sign of trouble, and the growing perception that these high-tech exchanges were petri dishes for fraud just adds to the fear. ‘[European] institutional investors have known about the risks for a long time,’ says Volker Borghoff, a Neuer Markt analyst at DG Bank in Frankfurt. ‘But the foreign institutional investors are a bit shocked.’

To rebuild credibility, exchanges are tightening up rules for members, forcing companies to give investors more data about where their money is going. Effective Jan. 1, the Neuer Markt requires listed companies to issue more extensive quarterly financials. Embarrassed, banks will scrutinize companies more carefully before taking them public. ‘A lot of companies came on the Neuer Markt before they were ready,’ says Friedrich Diel, director of Frankfurt-Trust Investment in Frankfurt. ‘In the future, companies like that won’t have a chance.’

Getting convictions won’t always be easy. Former World Online CEO Nina Brink became a prime example of New Economy hubris after revelations that she sold her stake in the Internet access provider just before a disastrous initial public offering. Now Dutch prosecutors must prove Brink knowingly misled investors – which Brink denies – and so damaged the stock price. That’s tough, considering that stocks in many reputable companies tanked, too. But if the case against World Online just teaches buyers to beware, it won’t be in vain. Europe’s investors can use a lesson in healthy skepticism.

This article first appeared in Business Week magazine.

By Jack Ewing
With William Echikson in Brussels and Kate Carlisle in Rome

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