The views expressed in this article are those of its author and not necessarily those of ShareSoc.
The stock markets are in turmoil now everyone is back from their holidays and facing up to the realisation that with high inflation and looming recessions the stock market may not be the best place to be for investors. I have moved more into cash and more defensive shares but cash is not the place to be for very long when inflation is eroding its value by more than 10% per annum. Stocks are getting cheaper as the short-term speculators and inexperienced investors exit so there will soon be bargains to be had while there are still few good alternatives when banks are paying less interest than inflation and fixed interest bonds are collapsing in capital values as interest rates rise.
I have written before about how useless the Financial Ombudsman is, after I complained about the time it took to complete a transfer of a SIPP from one platform to another. It took over 5 months and I complained to the Financial Ombudsman about the delays in May 2021. After lengthy correspondence and an initial offer from the sending platform which I rejected as derisory, they have accepted that there was an unnecessary delay of 9 days at one stage in the transfer process. The Ombudsman has now proposed compensation of £350 for the inconvenience caused and £139.75 for the loss of investment return. This I have reluctantly accepted although my complaint about the receiving platform is still outstanding.
It has therefore taken 15 months to resolve the complaint which I do not consider reasonable. But the key problem is the Financial Conduct Authority (FCA) not laying down strict rules about the time to complete transfers of investment holdings as they do for bank accounts. Both the FCA and Financial Ombudsman are toothless in essence and do not provide reasonable protection to investors.
ShareSoc has just issued its latest Informer Newsletter to members and it makes for a good read. One good article is on 4D Pharma (DDDD) which recently went into administration. This company claimed to be “a world leader in biotherapeutics” but it was a typical jam tomorrow story company. I never held the shares so I cannot judge whether the claimed prospects were realistic or imaginary but it does appear to have been very badly managed such that it ran out of cash. Unfortunately shareholders have no recourse against incompetent or inept directors.
But the key point to highlight is the typical wildly excessive costs of the administration which has run up costs of over £580,000 in just a few weeks. Shareholders should never expect any return from an administration and this case is no different. There may be some assets (mainly IP) in the business but after the administration costs and settling debts, there may be nothing left.
The insolvency regime needs major reform. At present the big beneficiary of administrations are insolvency practitioners who to a large extent can do what they want and charge what they want. The insolvency regime seems to have been designed for the benefit of the insolvency profession. I suggest the regulations in this area should be totally reformed and administrations should be a court supervised process as per the insolvency regime in the US, Chapter 11.
Another article in the ShareSoc Newsletter is on Blancco Technology Group (BLTG) in which I did hold a few shares for a while. There was a complaint to the FCA about the accounts of this company which were grossly misleading and the auditors (KPMG) have been fined £3,500 with costs of £2,743. A derisory and disgraceful outcome and another example of how weak the financial regulators are in the UK.
Ultimately the cases of 4D Pharma and Blancco reinforce the point that you should never invest in a company unless you have absolute confidence in the prudence and ability of the directors.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
I agree with Roger Lawson recent commentary on the failings of the Insolvency Practitioners and our Insolvency Services, this does need to be fixed.
So many companies fail quickly, it is not easy to spot them. Several companies that have collapsed of late, include energy companies, bio-techs and some large organisations serving Government. Carillion PLC and Interserve Plc come to mind.
Carillion PLC is the icing on the cake, now in the hands of the Official Receiver after crashing to the ground in Jan 2018.
Carillion accounts for 2016 were signed off by KPMG and published on the 1 March 2017. In July 2017 an investigation undertaken by KPMG, its auditors into its major contracts. This revealed £845m of receivables that were overstated. In September 2017, a further £200m was found overstated on service contracts. A blackhole of £1.045bn and it fell apart in Jan 2018, no cash in the bank was cited.
Insolvency Practitioners are an extension of the accountancy profession that makes money no matter what happens. We really do need independence is this arena. Insolvency, including the dreadful CVA and Administration need to be fully independent and not run by the accounting profession, who seem to cause part of the problem in the first place with dodgy audit and over-reliance on ever more dodgy directors.
For example…a significant change that could open this can of worms is ………The creditors should appoint the IP, not the Directors, and the IP must report directly to both parties on all matters. The creditors should have representative committee appointment from day one who meet at least monthly in any CVA/Liquidation/Administration matters to cover and protect their rights.
We must question the morality in all of this. The aspiration that a CVA makes out that directors are saviours is a complete myth. By putting them in a comfortable place, out of reach of law seems plain wrong.
Carillion auditors are now subject to £1.2bn claim from the Official Receiver for their failings in this. It appears this very complex business was almost unmanageable. The FCA have censured some of the directors, but no action has been taken against any of them to bring justice.
I have fallen foul of Wellesley Finance plc who entered in to a dodgy and contrived CVA in September 2020. The cost of CVA is now noted in the Wellesley Group accounts to 31 12 2020 at £2.52m (page 29). This is staggering amount of cost and we have asked for details of this as investors we have right to know. It is reported that Kroll Advisory have been paid £330,000 in fees for their admirable CVA work. They have also been paid for checking and verifying a 60-page Business Overview Document (BOD). Also, a large percentage of a £250,000 fees for carrying out marketing of the Loan Book Sale, which resulted in the Loan Book being sold to a £1 company set up by Wellesley just days before the CVA was issued for substantially less than its market value. We estimate Kroll have been paid at least £550,000, probably closer to £600,000.
Kroll have worked on the Wellesley CVA and now claim they have spent 818 hours at an average rate of pay of £477 per hour. Nice work, if you can get it. Their recorded timed costs for their services amount to £390,658, but they are quite happy to accept £330,000 paid so far, plus a large proportion of fees relating to two pieces of work in and around the CVA mentioned above.
On the 4D Pharma plc that Roger talks about, I note Woodford invested via LF Woodford Equity Income Fund. The investment was 17,514,561 shares, with Link Fund Solutions placing a value on this of £41m as 31 12 2017. As at 31 12 2018, it was dropped to £13.4m and on 30 06 2019 down to £11.9m. We now believe a large part of this was sold to Acacia Research Corporation in June 2020, a hedge fund in Delaware for £3.2m making a loss of around £8.8m for Woodford investors.
I note that Hargreaves Lansdown are reported to hold 25,139,905 shares in 4D Pharma plc 13.94% of the share capital. Not sure if this is good news for investors here too.
Another investment worth mentioning is Rutherford Health plc which has also just gone bust in June 2022. Another so called “jam tomorrow” investment, a term used by Roger. This is another Woodford Equity Income Fund investment. You could not defend this investment; it is total nonsense for an equity income fund. Link Fund Solutions continued to invest since the suspension of the Woodford fund. It is believed to be £64m via LFWEIF and SUPP. It is noted £750,000 was given in April 2022, just a couple of months before it went bust in June 2022. 28.8% of the equity is owned by LFWEIF, and 26.3% by Schroder Public Private Trust PLC, (SUPP), formerly Woodford Patient Capital Trust. This company has raised close to £250m of capital, of which £70m appears to have come from LFWEIF and £64m from Schroder Public Private Trust (formerly WCPT). Today, the expected return to investors is £0.00, large losses for all investors. It will be interesting to see how much Evelyn Partners, the Administrators pocket from this unmitigated disaster of Woodford and Link Fund Solutions.