Phone call cost ScotPower £563m

IT was a moment of stock market panic. As dealers wound down at the end of a lacklustre trading session, rumours of an accounting problem at energy group ScottishPower began to surface. Less than 30 minutes later, £563m had been wiped off the value of one of Britain's biggest companies.

Few traders could remember shares in a FTSE 100 company falling so far and so fast for no obvious reason. Last Wednesday's shock sell-off underlined the dramatic effect that speculation - whether or not it is based in truth - can have on stock markets in a near-permanent state of panic after the Enron scandal.

The rumour, which suggested there had been a row between ScottishPower and its auditor PricewaterhouseCoopers, was picked up by Financial Mail earlier that day. A phone call was made to a utilities analyst at a major investment bank. He had not heard the rumour, but spoke of difficulties that ScottishPower had at its US energy business PacifiCorp.

The company had to write off £200 million last year after Pacificorp overestimated energy prices. Since then it has reported no further significant trouble with PacifiCorp.

After the phone call, Financial Mail began preparing questions for ScottishPower. But at four minutes before 4pm the stock market blow fell. ScottishPower shares dipped below 372p, their closing level the previous day, then at one minute past four they slumped by three% to 360p. Six minutes later they had plunged again - this time to just 345p.

The bulk of the trading was done through the London Stock Exchange's electronic order system, where deals are handled by the Central Counterparty, an automatic 'clearing house' set up last year to allow traders to deal anonymously.

Spencer Crooks, director at Winterflood Securities, said: 'Suddenly the order book was stuffed, and the people doing it did not have to disclose who they were. Before the Central Counterparty was introduced, you knew who you were dealing with. Now it acts as a screen, and in some cases gives buyers and sellers the advantage of confidentiality.'

A source close to ScottishPower said: 'It has all the hallmarks of an orchestrated raid to drive down the share price.' Another told Financial Mail: 'The rumour may have been going around, but I think your phone call was the spark.' As the shares tumbled, ScottishPower finance director David Nish was thousands of miles away in America, meeting PacifiCorp executives.

Observers say this fuelled the panic because some traders wrongly jumped to the conclusion that the meetings were related to the rumours.

It is understood that Nish was informed of the share price slide within minutes. The company immediately began preparing a statement, but the bloodletting was not over. ScottishPower shares staggered even lower and by 4.23pm stood at 333p, a fall of more than ten%. In the final minutesof trading, the shares struggled-back up to close at 342p. Nearly 18 million ScottishPower shares had changed hands - more than double the usual daily volume. And most had been traded in the last half-hour of the day.

At 5.18pm, as the dust settled, ScottishPower issued its response, saying it knew of no reason for the sell-off and that it 'continued to trade in line with expectations'.

As traders tried to make sense of what had happened, analysts combed the company accounts. It is thought the Stock Exchange has launched an inquiry, which it may pass to the Financial Services Authority.

Many analysts blame the selling stampede on market overreaction.

Angelos Anastasiou of stockbroker Williams de Broe said: 'There has been much nervousness over energy shares, especially after Enron. If there is any hint of accounting irregularities, shares can move very fast.'

He and others pointed to hedge funds as the likely drivers of the flood of share trading.

A hedge fund tries to make profits from falling share prices by 'shorting' - promising to sell shares it does not own at an agreed price at a later date. It expects the shares to fall in the meantime, and it can then buy the stock it needs to complete the deal more cheaply than the original agreed price. The difference is the hedge fund's profit.

Analysts who examined the accounts quickly reported they could find no problems. ScottishPower's shares bounced back over the next two days and ended last week at 356p. But the market is still jumpy.

Anastasiou said: 'There is no problem with the accounts, but the question now seems to be whether there was a heated debate between the company and its auditor, PricewaterhouseCoopers.'

ScottishPower sources dismissed suggestions of any disagreement with PWC over the numbers. So, for the time being at least, the rumours remain just rumours.