If there is one person that should never be accused of insider dealing, it is the head of a stock exchange. But that is exactly what has happened in Germany.

On 1 February, German prosecutors raided the Frankfurt apartment of Deutsche Borse Chief Executive Carsten Kengeter and the company’s head offices amid a probe into suspected insider share dealing ahead of the group’s planned merger with the London Stock Exchange (LSE).

The Frankfurt prosecutor’s inquiry centres on Kengeter’s purchase of Deutsche Borse shares worth about €4.5m on 14 December 2015. The transaction was straightforward—but the timing of it may not be. Just two months later, on 23 February 2016, Deutsche Borse and the LSE unveiled their merger plans, an announcement that boosted the company share price by 11 percent. As such, Kengeter’s shares purchase looks suspiciously fortuitous enough for prosecutors to probe the possibility that there may have been some kind of “sounding out” about a merger being lined up before he invested nearly the equivalent of his annual salary in company stock.

The Frankfurt prosecutor’s office has said that its investigation relates to whether talks about a merger took place between the management of Deutsche Borse and the LSE between July and early December 2015. Prosecutors have said that the searches of the company’s headquarters and Kengeter’s Frankfurt apartment were “intended to clarify the course of the negotiations until 23 February 2016” when the merger plans were made public.

Kengeter was not present during the raids. He was in London after attending the company’s annual reception the evening before. Under the planned merger, Kengeter would retain his position as CEO.

Deutsche Borse is adamant that no wrongdoing has occurred. Its Chairman Joachim Faber has said that the accusations against Kengeter were “without foundation” and “untenable,” claiming that merger discussions with the London market between the two chairmen and chief executives did not begin until the second half of January 2016.

A Deutsche Borse spokesman said Kengeter had always been “transparent” about the share purchase.

In a statement released on 1 February—the same day that the raids took place— Deutsche Borse said that Kengeter’s share purchase was carried out “in implementation of the executive board’s remuneration programme as approved by the supervisory board.” The statement also said that both “Deutsche Borse and the CEO fully co-operate with the public prosecutor.”

On 2 February the LSE backed its German counterpart, saying: “LSE welcomes the strong statement of support by Joachim Faber, chairman of the supervisory board of Deutsche Borse, who has described the allegations related to Carsten Kengeter as without foundation. We look forward to working towards completion of our proposed merger.”

“There is potential dual jurisdiction in this case, and the U.K.’s Financial Conduct Authority could potentially get involved.”

Claire Shaw, Consultant Solicitor, Keystone Law

Most companies have policies in place that allow and encourage their chief executives to buy shares in their own organisations: It is a way of incentivising them to ensure improved company performance and that the goals of the corporate strategy are met. However, there is nothing surer than the announcement of a merger or acquisition to make a company’s share price rise immediately, even if the long-term benefits of the deal take years longer to realise (if it ever pays off at all, that is, as most mergers fail).

According to Deutsche Borse’s financial report for 2015, the supervisory board offered Kengeter a “one-time only” opportunity to purchase up to €4.5m worth of shares as part of the company’s co-performance investment plan under its remuneration scheme. A section on page 128 of the report says that Kengeter used the full cash limit—close to his annual salary of €5m—and duly bought 68,987 shares on 14 December 2015. As part of the deal, the earliest he can sell any of them is not until 31 December 2019, which is the end of Borse’s 2019 financial year.

EU rules regarding how executives buy shares and disclose that information to the market appear to have been followed. Under Article 19 of the EU Markets Abuse Directive, which came into force last July and spells out managers’ disclosure obligations regarding financial transactions, no “person discharging managerial responsibilities” can buy shares or conduct a financial transaction with the aim of benefitting personally within 30 days of an announcement that the company is legally obliged to make—in this instance, an intention to merge. On the face of it, Kengeter has therefore acted appropriately as he conducted his share purchase two months before notice was given.

On 7 February, following an internal review of the circumstances surrounding the purchase and consultations with external experts, Borse issued another statement that said the supervisory board had held an extraordinary meeting the day before and “unanimously” expressed its “full confidence” in Kengeter. The statement said that following “extensive” conversations with external experts and a renewed analysis of the processes in the year 2015, the “assessment resulted in the joint finding that no merger negotiations with the LSEG have taken place in the year 2015.”


14 December 2015: Deutsche Borse CEO Carsten Kengeter buys €4.5m worth of shares in the company, as he has the right to do under his contract as a “one-off” purchase.
23 February 2016: LSE and Deutsche Borse merger plans are made public for the first time.
1 February 2017: German prosecutors carry out raids at Kengeter’s private residence and offices on suspicion of insider trading. Deutsche Borse releases statement saying that the supervisory board knew of—and approved of —the purchase.
2 February 2017: LSE issues statement of support.
6 February 2017: Supervisory board holds extraordinary meeting to review the procedures surrounding the share purchase in 2015, and consult on external expert advice: finds that no merger discussions with LSE took place in 2015.
7 February 2017: Deutsche Borse issues statement to say that the supervisory board “unanimously” has “full confidence” in Kengeter.
10 February 2017: Der Spiegel publishes story suggesting that in November 2015—shortly before he bought his shares—Kengeter told Lars-Hendrik Roeller, an economic advisor to Chancellor Angela Merkel, that he was “basically in agreement” with the LSE over a planned merger.
11 February 2017: Deutsche Borse issues statement that it will no longer comment while the investigation is ongoing.
—Neil Hodge

Such confidence has since been dashed. German news magazine Der Spiegel reported on 10 February that Kengeter discussed LSE merger plans with a government official shortly before he bought his shares. The article claims that Kengeter told Lars-Hendrik Roeller, an economic advisor to Chancellor Angela Merkel, in November 2015 that he was “basically in agreement” with the LSE over a planned merger.

If such a conversation took place, this would confirm investigators’ suspicions that merger talks between executives at the two stock market operators began prior to 2016—possibly as early as July or August 2015 and ran until early December 2015. It would then raise questions about how advanced such discussions became, what level of detail was discussed, and what impact this information had on Kengeter’s decision to buy the shares when he did, and how he may have personally profited from such commercially sensitive knowledge.

Following the report in Der Spiegel, on 11 February Borse issued a further statement—set to be its last for the time being (if it has the choice, that is). The terse, 61-word statement simply reiterated that the supervisory board unanimously backed its CEO, that Borse was fully co-operating with prosecutors, and that it would not be making any further comment while the investigation is ongoing.

The investigation raises awkward questions about governance at Borse and makes Kengeter’s share purchase look supremely lucky.

The investigation also comes at a critical time, as Deutsche Borse and LSE are in a decisive phase in their effort to create Europe’s dominant stock exchange operator, a feat that has eluded previous CEOs who have seen previous tie-up attempts flounder twice in 2000 and 2005. The merger—if approved by the European Commission—will create one of the world’s biggest groups for stock listings and market data, tying the Frankfurt-dominated Eurozone to a post-Brexit London. To try to gain the Commission’s approval, the LSE confirmed in January that the proposed sale of its French clearing arm LCH to Euronext for €510m is the sole remedy it will present to address antitrust concerns.

There is a lot riding on the deal being given the “green light” by Brussels. The Commission was set to give a decision in March, but it has extended its review by 15 working days and will now deliver its decision on 3 April, according to a 7 February statement released by the LSE. Any further embarrassing or awkward revelations between now and then would be very unwelcome.

Based on what little detail has emerged so far, experts do not believe that the current investigation will derail the planned merger, but Kengeter’s future may be less certain, especially if the allegations lead to a conviction. Such a serious case of insider trading—if proven—could at best force Kengeter to give up any gains from the purchase. At worst, it could result in a prison sentence.

Raj Chada, a criminal defence lawyer at London law firm Hodge Jones & Allen, says that determining “what Kengeter knew, and when” will be paramount to proving a case of insider trading against him. “Even if a merger was mooted in summer 2015, but not treated seriously until January 2016, it is unlikely to get past the legal requirement for the information to be ‘specific’,” he says.

Claire Shaw, formerly an investigator at the U.K. Serious Fraud Office and now a consultant solicitor at law firm Keystone Law, says that the claims made in the Der Spiegel report would not constitute much evidence of insider dealing, however interesting.

“Who would give evidence of the conversation? I suspect a government official would plead national security/not in the public interest,” says Shaw. “If the government official was told the deal was a ‘done deal,’ what inferences can you draw from this—that every insider knew at that time that this was the case?” She adds that trying to prove a case based on such evidence “could get quite messy” and would “depend on the exact nature of the information imparted in the conversation” as to whether a conviction is possible.

However, Shaw adds that there is the possibility that U.K. authorities could also investigate the matter if evidence of a conspiracy emerges. “There is potential dual jurisdiction in this case, and the U.K.’s Financial Conduct Authority (FCA) could potentially get involved,” says Shaw.

“The United Kingdom recognises the concept of double jeopardy, so it is unlikely that Kengeter would face prosecution for the same criminality based on the same factual nexus in two jurisdictions. It may be, however, that the case uncovers a conspiracy, so Kengeter could face the substantive allegation of insider dealing in Germany and be named by the FCA as a co-conspirator with another person charged in the U.K., for example,” she says.