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US investors sue C&W over secret £1.5bn liability

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Cable & Wireless received a late Christmas present yesterday in the form of a class action suit from angry US investors.

The shareholders (or to be precise, holders of C&W American Depository Receipts) say the company's failure to disclose a potential tax liability of £1.5bn was false and misleading. They are claiming damages after the C&W share price went into freefall, down more than 40 per cent following the UK-owned telco's disclosure of its £1.5bn disclosure on December 6. The suit is filed in the state of Virginia, Reuters reports.

C&W fessed up to the secret prospective tax liability when its credit rating was cut to junk status by Moody's. This triggered a provision inserted into the £3.5bn sale of C&W's half-share in One2One (now the UK arm of T-Mobil) to Deutsche Telekom in 1999. No capital gains tax was paid on the sale, and C&W reckons that no capital gains tax on the sale is due to the UK government, either from C&W, or from Deutsche Telekom. But then it also reckoned that the possibility of its investment-grade credit rating was so remote that there was no need to disclose the clause that it would set money aside to pay tax on the deal, if any were due, if cut to junk status.

Even if C&W reckons right, it faces the prospect of keeping £1.5bn in escrow for several years. This retards the ability of the company to restructure its loss-making global data services businesses from internal resources. After all, Moody's expressed this fear when it cut C&W's credit rating - before the £1.5bn provision was out in public. ®

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