Formula 1 - The truth behind Ecclestone’s £258m legal letter

Last week it came to light that F1’s boss Bernie Ecclestone had received a letter from a German bank demanding that he pay it £258m.

Speaking from the paddock at the Indian Grand Prix, Ecclestone said he is “aggravated” but “not worried” by the letter which was sent to his lawyer in Germany. Ecclestone has a fortune estimated at £2.9bn so he has more than enough resources to pay out £250m. However, he is also renowned for his glib remarks which raises the question of whether this latest development really does give him cause for concern.

The letter did not come out of the blue. It is connected to a trial, which finished in June and was Germany’s biggest post-war corruption case. Ecclestone was not a party to it but gave evidence as a witness during the trial. He sat across the dock from F1’s former chairman Gerhard Gribkowsky who was on trial for receiving a bribe, breach of trust and tax evasion.

Gribkowsky became F1’s chairman through his position as chief risk officer for German bank BayernLB which, until 2006, owned a 47.2% stake in the sport’s former parent company SLEC. Gribkowsky was in charge of selling BayernLB’s F1 stake and in 2006 private equity firm CVC paid £527m for it. Gribkowsky didn’t tell his bosses at the bank that during the two years following the sale he personally received a total of £27.5m from Ecclestone and his family’s Bambino trust.

The money was paid into accounts in Austria where it was taxed at a lower rate than in it would have been in Germany where it should have been declared since Gribkowsky is resident there. Soon after prosecutors in Munich discovered this in late 2010 they arrested Gribkowsky and threw him in Stadelheim prison where Hitler was once an inmate.

The difference in the tax rate explains why Gribkowsky was charged with tax evasion and he was also accused of  breach of trust because he didn’t disclose the payment to the bank. However, it is the bribery charge which could have the most significant implications for F1. This was driven by the prosecutors’ belief that Gribkowsky received the money in return for him agreeing to sell to CVC which was allegedly Ecclestone’s preferred choice because the firm wanted to retain him as F1’s boss. Indeed, this is precisely what it did since CVC remains F1’s controlling shareholder and Ecclestone is still running the show.

Ecclestone has disputed the prosecutors’ version of events and last year revealed “I had a contract with BayernLB so they couldn’t have fired me. [CVC] bought the contract so they had to take me as well.” He has not denied paying the money and last year also revealed that Bambino paid its share because Gribkowsky was doing property consultancy for the trust. Ecclestone says he paid his share of the £27.5m because Gribkowsky threatened that if the money was not paid he would tell the UK’s tax authority that he was in control of Bambino.

There is no evidence that Ecclestone controlled Bambino, and he stresses that there was no substance behind this allegation, however he adds that he would have had to spend years in court defending it if Gribkowsky had made this allegation. At the time, the the UK tax authority had not given the green light to the trust and in the event that a court decision had gone against Ecclestone it would have been extremely costly.

Bambino has made around £2.4bn from selling stakes in F1 and securing loans on the sport but no tax has been paid on the money since the trust is based offshore in Liechtenstein. Ecclestone is a UK taxpayer so if he was found to be in control of the trust it could be declared a sham meaning that he would have to pay tax on the money. “It was a risk I couldn’t afford to take,” Ecclestone said during his court testimony and when asked how much it could have cost him Ecclestone replied “in excess of £2bn.”

In June Gribkowsky testified in court that, after reflecting on the situation, he agreed he had been bribed. This led to his conviction for bribery but Gribkowsky’s motives have been questioned because he was previously told that if he gave a confession his punishment would be more lenient and in the end he was sentenced to eight and a half years rather than up to 15.

So, in summary, the prosecutors believed that Gribkowsky was bribed so that he would wave through the sale of F1 to CVC whereas Ecclestone says that there was no bribe as in fact he paid Gribkowsky to stop him making false allegations about his tax affairs. In the end, Gribkowsky admitted in court to receiving a bribe so he was found guilty even though Ecclestone maintains that his version of events is true and as he was not a party to the trial, he has not had a chance to prove it. This stalemate is where things stood until news about the letter broke on Thursday.

In a nutshell, the letter from BayernLB demands that Ecclestone pay the bank a total of £250m. Since he was convicted, Gribkowsky has been giving further testimony in private to the prosecutors and has claimed that he could have sold BayernLB’s F1 shares for as much as £685m.

This is the driving force behind BayernLB's letter to Ecclestone which claims that his payment to Gribkowsky induced him to sell to CVC for £527m rather than to a higher bidder for £685m. This difference forms the majority of BayernLB’s damages claim and it is asking Ecclestone to pay up.

The letter raises the question of exactly Gribkowsky was convicted. Was it because he received a bribe for waving through the sale of F1 to CVC or a bribe for undervaluing F1 or both? To demonstrate that someone received a bribe one needs to know what they did in return and although the prosecutors claimed that Gribkowsky got £27.5m for waving through the sale of F1 to CVC, they did not accuse him of undervaluing F1. Quite the opposite in fact as multiple witnesses testified during the trial that the price paid by CVC was extremely good and independent consultancy firm Deloitte agreed that it was nor undervalued.

Crucially, it was revealed during the trial that CVC was the highest of the total of seven bidders and BayernLB acknowledged this which in itself seems to contradict the notion that the shares were undervalued. However, by taking money from Ecclestone, Gribkowsky was corrupted and was essentially in the pocket of the F1 boss to do as he said.

BayernLB had no idea that Gribkowsky had received the £27.5m which adds to the theory that he was in league with Ecclestone. So when Gribkowsky told prosecutors that he could have got as much as £685m for BayernLB’s F1 shares it could be interpreted to mean that he didn’t bother looking for buyers who would pay more than CVC because he was getting £27.5m  for agreeing to sell to it.

This is what underpins BayernLB’s claim that it is due £258m in damages from Ecclestone however it does not seem to make sense. In order for BayernLB to prove that it is due £258m in damages it needs to be able to prove that it lost the money. It is hard to see how it could do this because no bidder actually offered £685m for its F1 shares. We know this because CVC was the highest bidder and it paid £527m. If no one was prepared to pay £685m then how could BayernLB possibly have lost out by F1 not being sold for that amount?

Using the same argument we could say that although Gribkowsky didn’t find anyone who was prepared to pay BayernLB £5bn for its F1 shares he could have found someone who was prepared to do so. Accordingly, why say that BayernLB lost out to the tune of £258m - why not £5bn or even £10bn? The crucial flaw seems to be that Gribkowsky’s claim that he could have sold the F1 shares for £685m is purely hypothetical. He did not sell the shares for £685m and no bidders were prepared to pay this so how could he prove that he could have sold them for that price? This is surely what has to be proven for BayernLB’s demand from Ecclestone to hold water.

Just as it doesn’t make sense to say that Mr X should be arrested because he could have mugged Mr Y it is hard to see why Mr Ecclestone should pay £258m in damages because Mr Gribkowsky could have sold BayernLB’s F1 shares for £685m. What seems to be missing is proof that this was more than hypothetical and given that no bidder was prepared to offer £685m it doesn't seem likely that BayernLB could fill in this gap. In addition, Ecclestone’s lawyers have already questioned Gribkowsky’s credibility by pointing out that the motivation for his testimony to the prosecutors is to try and get his sentence reduced.

It is also open to question why BayernLB should demand the money from Ecclestone. As BayernLB’s representative in the sale process, Gribkowsky was responsible for securing the highest bidder so if he is now admitting that he did not do this (for whatever reason) one would expect him to be blamed for it. If a court were to rule that Ecclestone did indeed pay a bribe to ensure F1 was sold to CVC then that would be illegal in itself but it still wouldn’t change the fact that Gribkowsky was responsible for selling to the highest bidder.

The bottom line is that Gribkowsky did sell to the highest bidder as no other offer was as high as the one made by CVC. Gribkowsky has claimed that he could have sold F1 for £685m but since no other bidder was prepared to pay BayernLB this amount it is hard to see how it can be anything other than hypothetical. Ecclestone says F1 “was something they couldn’t sell. They had six people look at them and wouldn’t buy.” It could well explain why he isn’t worried right now.

Christian Sylt is author of Formula Money