Rolls-Royce calls in top law firm to deal with fraud investigation

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Rolls-Royce has called in a leading law firm to help it deal with bribery allegations and a serious fraud office (SFO) investigation.

Slaughter and May has been brought in while the SFO investigates allegations of bribery and corruption at the FTSE 100 engineer.

Rolls-Royce was initially accused of paying bribes to win contracts in China and Indonesia, but it has also been linked to the corruption scandal facing Brazil’s state-owned oil company, Petrobras, and the SFO has said it is looking into several of the UK company’s divisions.

The news that Slaughter and May, one of the UK’s top five law firms, is working with Rolls-Royce underlines the seriousness with which the company is treating the investigation, launched in December 2013.

Rolls-Royce hired the New York law firm Debevoise & Plimpton in 2012 to conduct an internal investigation after the SFO requested information from the company when a whistleblower made allegations about its conduct in China and Indonesia. This investigation led to Rolls-Royce handing further information to the SFO, which launched a formal inquiry into the company.

It is understood Slaughter and May was initially hired by Rolls-Royce two years ago as its joint legal counsel, meaning it worked for the company on financial transactions. However, it is now also advising Rolls-Royce on the corruption allegations, with leading litigation partners drafted in, and is thought to be the company’s principal adviser.

Slaughter and May has a history of helping major British companies deal with corruption allegations. It defended GlaxoSmithKline, Britain’s biggest pharmaceutical company, over an investigation into its conduct in Iraq during Saddam Hussein’s regime. The Slaughter and May partners Richard Swallow and Jonathan Clark are working with the engine maker on the investigations.

Rolls-Royce, which makes engines for the Airbus A380 superjumbo, has said it is cooperating with the SFO and authorities in Brazil investigating Petrobras.

The company is facing one of the biggest challenges in its history. As well as the SFO investigation, Rolls-Royce has issued four profit warnings in the last year and faces calls to be broken up.

ValueAct, an activist investor, has built a 5.4% stake in the company and wants Rolls-Royce to sell off its marine division, badly affected by the decline in the oil price, to focus on producing engines for civil aeroplanes.

Warren East, the new chief executive of Rolls-Royce, has rejected ValueAct’s calls and refused to offer the investor a seat on the board.

East will outline his strategy for Rolls-Royce at an investor day next Tuesday. However, he gave a glimpse into his plans last week when he issued another profits warning and said the company needed to cut costs to be more agile.

Rolls-Royce blamed its profit warning on falling demand for corporate jets in Brazil, China and south-east Asia, a decline in maintenance and servicing revenues from its engines for large planes, and energy industry customers being affected by the slump in the oil price. The Derby-based group now expects profit “headwinds” of £650m next year, more than double the £300m cut to profits identified earlier in the year.

In response, East wants to reduce costs by up to £200m a year at the same time as improving decision-making, which will lead to Rolls-Royce cutting 2,000 senior manager jobs around the world.

Rolls-Royce is struggling largely as a result of investing in wide-bodied aircraft such as the A380 at a time when demand is focused on narrow-bodied passenger plans. Rolls-Royce abandoned the narrow-bodied market in 2013 when it pulled out of a joint venture with its rival Pratt & Whitney so it could focus on wide-bodied aircraft and the next generation of single-aisle planes that should follow the Airbus A320neo and Boeing 737 Max.

Analysts at Agency Partners said Rolls-Royce faces “existential risks”, including a decline in the use of its older engines – which will reduce the aftermarket sales that Rolls-Royce enjoys – and a general weakening in the aerospace market.

The analysts added: “The last point is important, as the crisis to date has been largely specific to Rolls-Royce and has occurred against the background of unprecedented sustained strength in civil aerospace markets – overlaying a sector downturn on Rolls-Royce own crisis would make life yet more difficult.

“We believe Rolls-Royce is well into a familiar aerospace and defence sector ‘near death experience’ pattern, which suggests that the shares have another 40% and six-plus months to fall.”

All parties declined to comment.

Powered by Guardian.co.ukThis article was written by Graham Ruddick, for theguardian.com on Monday 16th November 2015 19.37 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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