Spain's Telefonica responded this week to reports published in Spanish daily El Mundo that president Juan Villalonga benefited from insider information in the purchase of Telefonica stock options in 1998.

The report alleged that Villalonga had already initiated merger talks with both British Telecom and WorldCom-MCI prior to his buying 264,224 Telefonica share options with a $1.2m (PTS200m) loan on January 2, 1998. It quoted Villalonga at a December 1997 board meeting stating that he planned to close a major deal by the second week of January. Villalonga reportedly profited as much as $120,000 (PTS21m) by cashing in on the share options within the month.

"The proceedings of the meeting referred to [in El Mundo] have been intentionally slanted and mutilated," Telefonica said in a press release sent out Monday. "On the date on which the Telefonica share options were acquired - January 2, 1998 - conversations'about a revision to the existing alliance [with MCI] had not even been initiated."

"Telefonica will facilitate all necessary information to the CNMV [Spain's National Market Values Commission] as the only body authorised to pronounce on the facts," the press release concluded.

The allegations appear to have compromised Villalonga's position at Telefonica. It is likely he will have to respond to the accusations at a Telefonica board meeting tomorrow (June 28). In addition, one of Spain's largest general workers' unions - the CCOO - has reportedly called on Telefonica's lead shareholders, La Caixa and BBVA, to demand his resignation if the allegations prove true.

The controversy led the CNMV last week to re-open a 1998 investigation into the purchase of the share options. There is also talk that the US Securities and Exchange Commission (SEC) may be conducting an investigation of its own. Meanwhile, the president of the CNMV has come under scrutiny for his handling of the 1998 investigation.

Telefonica shares have suffered over the last week in response to the reports. There has been speculation that Telefonica's acquisition of Dutch entertainment giant Endemol and Terra's buy-out of Lycos could both be jeopardised if shares continue to fall.

But some analysts suggest that it is the government of Spanish president Jose Maria Aznar which is pulling the strings behind both the controversy and support for Villalonga at Telefonica. Aznar, a longtime friend and former ally, appointed Villalonga to his position in 1996 before the company was fully privatised. Last week Aznar weighed in his support for the CNMV investigation. Yesterday he tried to calm investors and further distance himself from Villalonga by differentiating between the performance of Telefonica and the company's leaders.