Two Cheers for the FCA in the Case of Redcentric
Two cheers for the FCA: they have achieved a positive outcome for shareholders affected by the case, and have been pragmatic, albeit after a very long time. It is also good to see the other objective of our campaign potentially achieved – of prosecuting individuals for their alleged misdemeanors. Such actions are essential to deter others from criminal activity.
Background
Redcentric has been an extraordinary case. They key issues at the time when serious irregularities came to light are covered in my post of 2016, here: https://www.sharesoc.org/blog/red-faces-at-redcentric/. As a result of the many concerns raised in that post, ShareSoc launched a campaign with the aim of seeking redress for shareholders and bringing guilty parties to justice.
Campaign members and I have continued to work hard to explore avenues for possible redress, as well as raising our concerns forcefully with regulators. With invaluable support from solicitors iLaw we have been considering litigation that could result in compensation for shareholders who had been misled by misstated accounts published by Redcentric.
Regulatory Enforcement
On the regulatory enforcement front, the FRC were first out of the blocks (if that is the right metaphor!, as they took 3 years from start to finish in what is a relatively simple case, where the company was co-operating). The FRC concluded their investigations in June 2019, with financial sanctions on Redcentric’s auditor and the responsible audit partners. The FRC released a damning report, covered here: https://www.sharesoc.org/blog/regulations-and-law/redcentric-rcn-campaign-important-developments/
Friday 26th June 2020 saw another major development, described in this announcement from Redcentric. For the whole period since the announcement in 2016, and my subsequent complaint to the FCA in early 2017, the FCA had refused to indicate the status of any ongoing investigation (as is their usual practice). However, Redcentric’s own annual reports disclosed that the company was under investigation and had incurred significant legal costs in connection with it.
Also on Friday, the FCA finally made its own announcement. As the FCA says itself, the two announcements are unprecedented: for the first time shareholders who had been misled will actually be compensated, without the need for legal action themselves! Moreover, unlike most past cases, the sanctioned firm will not suffer a financial penalty. When companies are penalised financially by regulators, that merely causes further harm to shareholders – hardly a desirable outcome.
In addition, the FCA states:
In a separate action, the FCA has instituted criminal proceedings against three former employees of Redcentric Plc, who are scheduled to appear at Westminster Magistrates court on 28 August 2020.
So, two cheers for the FCA: they have achieved a positive outcome, and have been pragmatic, albeit after a very long time. It is very good to see the other objective of our campaign achieved of bringing guilty individuals to justice (if the court so rules, ultimately). Such actions are essential to deter others from criminal activity.
ShareSoc is generally in favour of agreed settlements – they can be in the best interests of shareholders and speed up the process. It is good that the FCA have pursued this option and we hope they will do so in other cases. Delayed justice is often bad justice.
Deficiencies
Nevertheless, there are two aspects of Redcentric’s proposed restitution scheme that are concerning.
Firstly, the scheme offers compensation equivalent to 17p/share for each purchased in the “Relevant Period”. It is not clear on what basis that quantum of compensation was determined – and we will be making further enquiries about that. The magnitude of the share price fall when the accounting irregularities came to light was very much larger than 17p and I personally suffered much larger losses than that as a result of purchasing shares both before and during the Relevant Period and ultimately selling them in later years.
Having said that, however, I observe that the total magnitude of the scheme (£11.4m) is affordable for Redcentric (subject to completing its proposed placing). If a much larger quantum were offered, it could potentially drive the firm into bankruptcy and at the very least cause serious harm to current shareholders. That is not an outcome ShareSoc would want to see.
A problem in such cases is that it can end up with one set of shareholders gaining at the expense of other shareholders which ends up as a “negative sum game” when legal costs are taken into account. We hope very much that in this case Redcentric will use its best endeavours to recover at least some of the costs of the scheme from directors’ indemnification and fidelity insurance policies it should hold.
The second concern is that the scheme only compensates shareholders who purchased shares in the Relevant Period – from November 2015 to November 2016. However if we look at the preliminary findings of the forensic review the company undertook, they state:
[my bold, for emphasis]The remaining £14.9 million misstatement relates to periods prior to and including the year ended 31 March 2016. To date there has been no evidence of theft and the misstatements are attributable to profit overstatement over a number of years with revenues being overstated and costs understated in broadly equal proportions.
In other words, accounts (on which investment decisions were made) weren’t just false during the relevant period, but likely prior to it too. In particular, in the period from 18th November 2013 (when the acquisition of InTechnology was confirmed) until 2nd November 2015 (prior to the start of the Relevant Period) Redcentric’s share price rose from 98p to 197p. That rise may well have been the result of false accounts too, so purchasers in that period may equally have lost out, yet will receive no compensation.
Outcome
ShareSoc will review these matters, in conjunction with our legal advisers, and decide whether we can or should take any further action on behalf of shareholders.
Of most significance, in my eyes, is that serious and significant regulatory action has been taken in this case, demonstrating that firms and individuals can’t mislead investors with impunity, and that auditors have to do the job that they are paid for. Sadly, there have been too many other cases where such action doesn’t seem to have been taken or has been ineffective.We are still waiting to hear about whether there are any ongoing or potential prosecutions of some of the directors of Carillion, Conviviality, Patisserie Valerie, Thomas Cook, Sirius Minerals, Woodford, Hargreaves Lansdown, Nighthawk Energy etc. And because the FCA and FRC will not comment on ongoing cases or ones it decides there is no case worth pursuing, we will never know if they are reviewing or have reviewed allegedly misbehaving directors.
Mark Bentley, Director, ShareSoc
DISCLOSURE: the author currently only has a token shareholding in Redcentric but held a modest but meaningful shareholding at the time that the irregularities came to light in 2016.
A very good blog. I only wish that the proposed placing to pay for the compensation would include an Open Offer to allow existing shareholders to participate. The Chairman appears to indicate in his letter that the reason is to avoid the need for a prospectus!
Thanks Walter, you make a good point about the lack of a retail offer and I will raise it with the company. The prospectus regulation allows companies to make retail offers of up to €8m without the need for a prospectus, as PrimaryBid have demonstrated in many recent offers.
Well done Mark, reward for all your hard work and persistence.