Are shares being manipulated? Is there a tax problem? Or what?

Late last month, the publicly traded stock of GildemeisterA.G. (Bielefeld, Germany), one of the world's top three machine-tool builders, joined the mid-cap stock index MDAX, and the company management was riding high.

The Deutsche Borse in Frankfurt made the announcement following a review of the company's stock and decided that, on the basis of its increase in market capitalization and higher volumes, it was time to move GILG.DE from the small-cap SDAX index to the bigger sandbox. Company chairman Dr. Rudiger Kapitza sounded elated: "Admission to the MDAX is a reflection of our company's good performance."

The builder noted that by being grouped with the bigger players, Gildemeister shares now would be expected to attract more attention from private and institutional investors.

Just how much more attention would be focused on Gildemeister stock was shown in spades--two weeks later, when German prosecutors said they were investigating the chief executive of Gildemeister and others on suspicion of breach of trust, bribery, and tax evasion.

Senior prosecutor Klaus Pollmann in Dusseldorf said that ten offices in Germany and Austria as well as the home of chairman Kapitza had been searched and that two Austrians as well as other unidentified persons are under investigation as well.

The company immediately issued a statement saying that it was cooperating with the public prosecutor's office and that the board assumes it will be possible to clarify the allegations and that these will prove to be unfounded. Gildemeister also said that the inquiries were made on an initial suspicion of tax evasion for commission payments abroad and are directed at individual persons and unknown persons.

   Here the plot thickens. Over at the German
   stock exchange Gildemeister shares" sold off
   rapidly and in high volume on Tuesday, Jan.
   15th, the day before the prosecutor 's raids had
   been made public.

The following day with breaking news of the investigation the sell-off accelerated: a total of 4.4-million shares were sold, equivalent to more than 10% of the company's 43.3-million shares and a volume nine times higher than the 12-month average. The price fell by 25% and local banks lowered their rating.

But the very next day the share price rebounded by 12% and thus became the leader in the MDAX on the Frankfurt exchange.

That in turn spurred Gildemeister's executive board to call in the German financial supervisory authority known as BaFin, seeking an investigation of the recent share-price movements. The company states it has a strong interest in determining who has been influencing the stock market since Jan. 15th.

Work council head and member of the supervisory board Wulf Bantelmann told the German press he suspected a conspiracy against Gildemeister. An attack by a hedge fund or a rival is not out of the question, according to BaFin.

At press time there was no schedule for a hearing regarding CEO Kapitza. On Feb. 12th the company (www.gildemeister.com) will publish figures for the fiscal period ended Dec. 31, expected to be the most successful year in the builder's 137-year history. Sales revenues, which were 1.33-billion [euro] ($1.67-billion) at the end of 2006, should top 1.5-billion [euro] for the year just ended, with orders surpassing 1.8-billion [euro].