Tuesday, November 6, 2012

Formula 1 Hits a Scary Turn

German Prosecutors Near Decision on Bribery Charges Against Circuit's 'Supremo'

Europe's most glamorous sport—known for its dashing drivers, high-tech cars and exotic locales—is heading into a hairpin turn.

Prosecutors in Munich are considering whether to charge Formula One Group Chief Executive Bernie Ecclestone for bribery in connection with $44 million he paid to a banker in 2006-07. A decision, which has been hanging over the sport for months, is expected in the coming weeks.

An indictment of the 82-year-old, known in Formula One as "Supremo," would likely force him out of the sport he has dominated for decades as an owner, manager and public face. More worrisome for Formula One, Mr. Ecclestone's legal troubles threaten to upend the multibillion-dollar racing circuit's ties to major sponsors, teams and fans.

Mr. Ecclestone said last week that he takes the allegations "very seriously" and is "absolutely" not guilty. He has acknowledged making the payment but said he only did so because he was blackmailed.

The recipient of the funds, German banker Gerhard Gribkowsky, said in court that the money was a bribe.

A former top executive at state lender BayernLB, Mr. Gribkowsky said he received the money as payment for arranging the sale of his bank's stake in Formula One to a buyer chosen by Mr. Ecclestone.

Mr. Gribkowsky is serving an eight-year prison term in connection with the events, after admitting to bribery, embezzlement and tax evasion. His lawyer didn't respond to requests for comment for this article.

Formula One racing, in which cars run through the streets of Monaco and other world-wide courses at speeds over 200 miles an hour, was born in Europe after World War II. The circuit is considered by many enthusiasts to represent the pinnacle of auto racing, both in terms of driving skill and engineering.

It also is one of the world's most lucrative sports, with a devoted international following of more than 500 million television viewers a season, according to the company.

Closely held Formula One—which markets TV rights, manages races and negotiates contracts with venues and teams—had revenue of $1.5 billion and earned about $500 million last year, according to the annual industry report Formula Money.

The Munich investigation comes at a sensitive time for Mr. Ecclestone and the circuit. Formula One had planned a $2.5 billion initial public stock offering in Singapore for earlier this year but delayed the offering, in part because of the potential case against Mr. Ecclestone, people close to the deal said.

Formula One also is renegotiating its contracts with racing teams. BMW AG, Ford Motor Co.,Toyota Motor Corp. and Honda Motor Co. have abandoned the circuit in recent years because of the high costs, and some people in the sport are concerned that more big names will follow.

The multinational car makers and other sponsors in the Formula One arena require strict legal compliance by partners with whom they do business and don't want to be associated with corrupt entities. An indictment of Mr. Ecclestone would likely cast a shadow over the circuit and how it has conducted business, people involved with the sport said.

Daimler AG, DAI.XE +1.27% which sponsors a Mercedes-Benz team on the circuit, has increased efforts to crack down on corruption and ethics violations—both within the company and with partners—and has made compliance a top priority since settling a bribery investigation with U.S. authorities in 2010 that was unrelated to Formula One.

Asked whether the investigation of Mr. Ecclestone would prompt the auto maker to reconsider its Formula One involvement, Daimler CEO Dieter Zetsche told reporters this summer that the company requires its partners to abide by the auto maker's compliance policies. Daimler requires "steps to be taken if that's not the case," he said. "That applies to Formula One, too." The company is awaiting clarification and an "evaluation" by authorities in the Ecclestone investigation, a Daimler spokeswoman said.

A spokesman for Ferrari SpA declined to comment but said the team's contract isn't with Mr. Ecclestone directly.

Mr. Ecclestone's lawyers stepped up efforts in recent weeks to persuade prosecutors not to pursue an indictment. The racing mogul said he has offered to visit prosecutors to argue his case in person.

Prosecutors have said in court that they believe Mr. Ecclestone bribed Mr. Gribkowsky.

Mr. Ecclestone, whose net worth was estimated at $2.8 billion by Forbes magazine in March, holds a minority stake in Formula One. But he rules the sport through a web of relationships and alliances that he began building in the 1970s.

The fisherman's son raced cars in the early 1950s in his native England, but his career was cut short by a crash. Mr. Ecclestone later ran his own team and managed several of the sport's most successful drivers. By recognizing the financial opportunities in sponsorships and TV rights, Mr. Ecclestone transformed Formula One into a successful global sport in the 1970s, eventually becoming CEO.

Mr. Ecclestone's relationship with Mr. Gribkowsky dates to 2002, when German media mogul Leo Kirch, who owned a 75% stake in Formula One, filed for bankruptcy. Several banks ended up with large stakes in the company, which Mr. Ecclestone saw as a nuisance.

One of those banks was Bavarian state-owned BayernLB. Mr. Gribkowsky managed the bank's nearly 50% stake in the racing company and quickly started locking horns with Mr. Ecclestone over how to run the franchise, people close to the situation said.The two distrusted each other, these people said.

Mr. Gribkowsky, who was on Formula One's board, was under public pressure to get the bank out of the investment. But Mr. Gribkowsky enjoyed the prestige of helping run the sport, the people said.

Meanwhile, the banks challenged Mr. Ecclestone for more power over Formula One in court and won. "Board meetings in 2004 and 2005 frequently disintegrated into shouting matches in which little got done," one person close to the matter said.

In late 2005 a London businessman introduced Mr. Ecclestone to Donald Mackenzie, a partner at private-equity firm CVC Capital Partners Ltd. Over lunch in London, Mr. Ecclestone vented his frustrations with the setup, describing it as "a mad house," one of the people familiar with the situation said.

Mr. Mackenzie said he would like to buy the banks' stakes. Mr. Ecclestone hesitated but was won over by a recommendation from another CVC-owned company and an offer that would allow Mr. Ecclestone to remain CEO.

CVC and Mr. Mackenzie denied any knowledge of bribes or illegal activity. They haven't been accused of wrongdoing.

Prosecutors have alleged in court that Mr. Ecclestone approached Mr. Gribkowsky and bribed him to push through a deal with CVC Partners quickly, offering Mr. Gribkowsky $50 million in exchange for ignoring other potential options for Formula One. Mr. Ecclestone ultimately paid $44 million.

Mr. Ecclestone said in court that Mr. Gribkowsky blackmailed him by threatening to make false accusations to U.K. authorities that the racing chief was evading taxes. German prosecutors acknowledged in their indictment against Mr. Gribkowsky that he sought to pressure Mr. Ecclestone with threats of blackmail. Mr. Ecclestone hasn't been accused of tax evasion.

In a recent phone interview, Mr. Ecclestone repeated that Mr. Gribkowsky's allegations are false and declined to comment further.

As talks to close the sale proceeded, Mr. Ecclestone negotiated a consulting agreement with BayernLB to be paid $40 million in connection with the sale to CVC. The contract was arranged by Mr. Gribkowsky.

Prosecutors are investigating whether the payment was intended to provide Mr. Ecclestone with the money he needed to pay Mr. Gribkowsky.

Mr. Ecclestone said in court that the payment was intended as compensation for his assistance in finding a buyer for the bank's Formula One stake, a fee he said he earned.

BayernLB in 2006 sold its stake to CVC for $839 million. The bank said recently that the price should have been higher but that Mr. Gribkowsky accepted less for the bank because of the payment he received personally from Mr. Ecclestone.

BayernLB recently sent a letter demanding damages from Mr. Eccelstone, who said the claim is unjustified.

From WSJ.Com