The Anglo File: Europe Safe for Investors Despite World Online Fiasco

The incident says a lot about the greed that epitomizes an Internet-frenzied bull market.
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LONDON -- If you believe the current press about the fiasco over the IPO of Dutch Internet service provider

World Online

, European equity markets are medieval when it comes to issues like transparency and shareholder rights. In that light, Nina Brink -- the ISP's chief executive who fell on her sword Thursday over selling a chunk of her shares before the IPO -- is no better than a feudal lord with World Online's investors reduced to wretched serfs.

On closer inspection, however, World Online says less about the state of European bourses and more about the boundless greed that has come to epitomize this Internet-frenzied bull market. In reality, investing in Europe today is just as safe as buying shares of U.S.-listed companies.

"Europe is pretty much on equal footing with the U.S. and the U.K.," says Scott Clemons, who has been investing in international markets for the past 10 years, most recently as the manager of

Brown Brothers Harriman's 59 Wall Street European Equity

fund. "At the moment, I have no regulatory concerns about investing in Europe."

That wasn't always the case. In the 1980s, for instance, insider trading was considered acceptable in countries like Germany. Today, there are stringent laws aimed at preventing insider transactions and Germany's securities watchdog,

BAWe

, has not been shy about exercising its authority.

Although European countries have made strides toward improving shareholder rights and transparency, critics argue that the Continent has moved too slowly. They point to World Online with wagging fingers and say the outrageous stunt by Brink would never have happened in the U.S.

While certain criticism relating to Europe's tendency to allow politics to derail efforts at improving capital markets is warranted, World Online is a poorly chosen poster child for these ills.

Buyer Beware

Shareholders who have filed lawsuits against World Online and its underwriters

ABN Amro

and

Goldman Sachs

take issue with a veiled reference to Brink's stock sales in the company's prospectus. Brink "transferred" (read: sold) 6.53% of her shares to

Baystar Capital

, a U.S. hedge fund that wasn't restricted by the usual lockup agreements. Baystar sold more than a million World Online shares in the first few days of trading.

Moreover, many shareholders say that since it was published just two weeks before the offering they never saw the prospectus. Now they are angry that shares are worth far less than what they paid for them. The shares were initially offered at 43 euros and were trading at 18.35 euros midafternoon on Friday.

Brink's dealings from a moral standpoint stink. Yet, investors, so greedy for the next Internet grand slam that they buy into an IPO without reading the prospectus, have only themselves to blame.

"It's a case of buyer beware," Clemons says. "I don't think World Online is as important as everyone's making it out to be. There will always be examples of this type of thing, but they happen in the U.S., too. You could never write securities legislation to prevent that."

Plenty of shareholders in U.S. companies have lost big bucks thanks to fraudulent accounting schemes, insider trading and other shady dealings. Most spectacularly was

Cendant's

(CD)

admission that one of its subsidiaries engaged in fraudulent accounting practices to inflate earnings. The regulatory arm of the

National Association of Securities Dealers

has already filed some 1,128 formal complaints against companies this year, more than it filed for the whole of 1999. As of February, it had expelled eight.

To be sure, the U.S. capital markets have flourished, in part because of the free flow of information and the high value placed on shareholder rights. Assets in domestic equity funds as of March 31 totaled $3.5 trillion, compared with just $564 billion in foreign funds, according to fund tracker

Morningstar

.

Bolstering investor confidence is the 65-year-old

Securities and Exchange Commission

, which has gone a long way toward edifying shareholder rights and keeping companies honest. Europe still lacks such a Continent-spanning body.

Well-Oiled Machine

However, that too is changing thanks to the

European Commission

, which is intent on drawing up new ground rules. As far back as 1997, the securities regulators of the various EU countries set up a

Forum of European Securities Commissions

to address these issues.

Although tangible progress has been minimal, that's OK with U.S. money managers like Clemons, who says he's perfectly happy dealing with various bourses for different countries. Unifying standards, he says, are almost superfluous until there is a pan-European exchange.

Tim Frazer, an M&A lawyer for the multinational law firm

Arnold & Porter

, agrees.

"Harmonizing would be advantageous but it is perfectly easy to do business in Europe," Frazer says. "It is like a vast factory floor, and you just have to know which bodies to go to for each item. It's a fairly slick and well-oiled machine."

That's why much of the recent scrutiny is unfounded. For instance, although Europe is penalized for being plodding, it is equally ridiculed when it tries to step into the modern era. Until recently, European exchanges like Amsterdam required companies to have a three-year history before they would be eligible for listing, which ruled out many Internet start-ups. Amsterdam recently relaxed its rules and now requires 12 months of financial history, which is about on par with the

Nasdaq

.

Critics suggest that had the Amsterdam stock exchange retained its more stringent guidelines, it would have avoided the World Online embarrassment -- prompting

The Wall Street Journal

to publish a recent story headlined "Troubled Offering Is Warning Signal to Europe's Major Stock Exchanges."

The real warning is that investors should be aware of what they're buying -- no matter where they're buying it.