Telefonica's Alierta Faces Insider-Trading Case Over 1998 Sale

Telefonica SA Chairman Cesar Alierta will defend himself against criminal charges that he illegaly traded shares of a tobacco company he ran more than 10 years ago at a trial that starts in Madrid today.

Spain’s prosecutor will seek a jail term of 4 1/2 years for the 63-year-old Alierta in the case over share transactions at Spanish cigarette maker Tabacalera SA in 1997 and 1998, according to court filings.

The trial is a distraction for Telefonica, Europe’s second- largest phone company, as it faces facing shrinking economies in Europe, and slower growth in Latin America. The case has taken a circuitous route to trial as Alierta had won the dismissal of the case in 2005 only to see it reinstated after a 2007 ruling by the nation’s supreme court.

“Taking into account past cases you can expect that the trial will probably end without any sentence being handed down,” Miguel Iribarren, a law professor at the Universidad de Oviedo and author of a book on corporate disclosures in Spain. “The facts point toward insider trading, but proving it is extremely difficult.”

Alierta earned 309.9 million pesetas ($2.5 million) trading shares of Tabacalera before a tobacco price increase and the announcement of the acquisition of Florida-based cigar maker Havatampa Inc., according to a court filing by anticorruption prosecutor Alejandro Luzon.

Alierta declined to be interviewed for the story and the company also declined to comment, a Telefonica spokesman said. He hasn’t yet entered a plea.

Telefonica Tenure

Alierta, who became Telefonica chairman in 2000, has focused on expanding the company’s presence in Europe, strengthening its position in Latin America and increasing dividends. In 2006, he completed Telefonica’s biggest purchase ever, the 17.7 billion-pound ($25.9 billion) takeover of O2 Plc, Britain’s largest mobile-phone company by customers.

The trial won’t have an effect on the company, which has fallen 22 percent over the last year in Madrid trading, said Luis Benguerel, a trader at Interbrokers Espanola SA in Barcelona.

“Investors are more worried about the economic outlook,” he said.

A Madrid court dismissed the lawsuit in 2005 as too much time had elapsed since the alleged violations. The prosecutor and investor group Auge challenged the decision and the Supreme Court allowed the case to proceed. Spain’s top prosecutor in 2002 saw no evidence of wrongdoing and the country’s market regulator also investigated and dismissed the case in 1999.

Creaciones Baluarte

Alierta “severely damaged the general interest, by breaching the trust of economic agents and the transparency and orderly functioning of the stock market,” Luzon said in his opinion filed with the court.

The shares were acquired by an investment company called Creaciones Baluarte SA, which Alierta later sold to his nephew, the document says. To buy the Tabacalera shares, Alierta and his wife Ana Cristina Placer were awarded a 400 million-peseta loan from Banco Urquijo SA, the document says. Alierta had previously worked for the Spanish lender for more than a decade.

Tabacalera’s stock more than doubled from the day before the first shares were bought and the last shares were sold, compared with a 37 percent increase in Spain’s benchmark IBEX 35 index, the document says.

Tabacalera is now part of Imperial Tobacco Group Plc.

(Published by Bloomberg - April 14, 2009)