Bernard Arnault's luxury goods powerhouse LVMH could face a big fine if it is found to be in breach of financial regulations over its stake in rival family business Hermes.
A spokesman for the French financial regulator Autorite des Marches Financiers said it was unable to comment on the detail of the case so close to the committee hearing on 31 May, but said LVMH would face a fine if in breach of AMF regulations.
The maximum sanction AMF can impose on a company is €100 million, or 10 times any profits made from activities in breach of regulations.
According to an AMF document leaked to French daily Le Monde, LVMH undertook a secret operation to build up a holding in Hermes – maker of the iconic Birkin bag.
AMF's enquiry was first launched when LVMH announced in October 2010 it had managed to build up a 14.2% stake in Hermes. This was in breach of AMF's financial regulations that should have forced it to declare its growing holding in 5% increments. This stake has now increased to 22.6%.
At LVMH's recent annual general meeting on 18 April, Arnault said: "We hadn’t planned on being shareholders of Hermes. We made an investment and it has unfolded in a way we had not anticipated."
But, according to AMF's report, LVMH gained its stake through a web of secret transactions under a variety of code names and with various banks and holding companies across the world, allowing it to keep its interest in Hermes out of its financial documents.
The report said that LVMH started looking at strategies to build a stake in Hermes in 2006, when the head of Hermes and family member, Jean-Louis Dumas, was forced to retire after 28 years at the helm when he was diagnosed with Parkinson's disease.
LVMH developed several scenarios that would allow it to take control of Hermes with the help of several high-profile private banks. According to the AMF's leaked report one project was apparently code-named "Mercury" – the Roman incarnation of the Greek god Hermes.
LVMH ended up using complicated equity derivative structures to gain its holding in Hermes. It purchased the securities via its investment vehicles in Luxembourg and Hong Kong, which the AMF said were mentioned nowhere in LVMH's accounts.
These securities were then divided between three banks, none of which held more than 5% of them, which meant they were not required to declare their holding to the regulator.
After the death of Jean-Louis Dumas in 2010, LVMH wanted the swaps to be settled in Hermes stock rather than cash, which led to the revelation that the Arnault-controlled business had a 14.2% holding of Hermes. This came as a complete surprise to Hermes, which at the time had no idea its rival had bought a stake in the business.
When contacted for comment, LVMH's lawyers DGM-Conseil provided a statement saying: "LVMH plans to vigorously contest the conclusions contained in the report".
It added: "The sanctions committee, the only one that have the power to judge, will decide only after having each of the defences presented by LVMH. Only then will it be able to note the absence of any breach of the law or of the regulations of the AMF on the part of LVMH."
Hermes is controlled by the descendents of its founder Thierry Hermes. In 2011 the Paris-based business set up a family holding structure requiring family shareholders to offer shares to other family members before they can be traded on the stock market to protect the company from hostile takeovers.
LVMH has continued to increase its stake in Hermes through shares bought on the open market, and it now stands at 22.3%.
Currently, Hermes family members control 72% of the company. The LVMH stake has left a free float of less than 7% of Hermes.
Hermes had revenues of €3.5 billion in 2012, but it is dwarfed by LVMH which had revenues of €28.1 billion.
No one from Hermes was available to comment.