FCA Issues a Public Censure to Redcentric PLC for Committing Market Abuse

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Latham & Watkins LLPThe FCA publicly censured the IT service provider for publishing false information about its net debt and holdings of cash and cash equivalents.

On 26 June 2020, the FCA issued a final notice to Redcentric PLC (Redcentric), publicly censuring Redcentric for committing market abuse, between 9 November 2015 and 7 November 2016, by publishing false information about its net debt and holdings of cash and cash equivalents in November 2015 (the November 2015 Statement) and June 2016 (the June 2016 Statement) (together, the Statements).

The FCA found that Redcentric knew, or could reasonably have been expected to know, that the information about its net debt and cash and cash equivalents published in the Statements was false and misleading and that it gave, or was likely to give, a false or misleading impression as to the value of its shares. This resulted in the market price for Redcentric shares being artificially inflated — which continued until Redcentric made an announcement and statement on 7 November 2016 (the November 2016 Announcement) — and in investors paying more for purchased shares than they would have had they known the true position. The estimated loss to affected shareholders was £43 million.

In a first for an AIM quoted company, Redcentric has implemented a compensation scheme to those purchasers who suffered losses as a result of the market abuse. The estimated value of the scheme to potential claimants is £11.4 million (worth approximately 17p for each share purchased).

Somewhat unusually, the FCA did not fine Redcentric. The FCA explained in the final notice that it did not impose a financial penalty because Redcentric’s customers include numerous NHS Trusts, and they considered it would give rise to significant risk of disruption to Redcentric’s business which may in turn cause significant disruption to those services, which are vital given the current COVID-19 pandemic. The FCA’s view was that Redcentric was taking such steps as it reasonably could in setting up the compensation scheme, and it was preferable for Redcentric’s resources to provide such compensation, rather than risk disrupting the business and the services it presently provides.

Background

Redcentric is an IT service provider that provides network, cloud, and collaboration services to private and public sector organisations including the NHS.

On 9 November 2015, Redcentric issued unaudited interim results (for the half year ending 30 September 2015), which stated that net bank debt was £16.5 million and cash and cash equivalents were £9,984,000. Then on 16 June 2016, Redcentric issued its audited final year end statement (for the year to 31 March 2016), which stated that net debt was £25.3 million and cash and cash equivalents were £8,492,000.

In the November 2016 Announcement, Redcentric announced that following an internal review by its audit committee of the interim results for the six months ending September 2016, it had identified misstated accounting balances in the balance sheet (the Issue) and that a restatement of the audited accounts for previous years would likely be needed. The final notice does not make clear what prompted the internal review by the audit committee.

Following the November 2016 Announcement, the price of Redcentric’s shares fell by approximately 52% during the course of the day, although the share price did recover slightly by 18 November 2016 (when there was a net fall of 42%).

Having recognised the Issue, Redcentric commissioned an independent forensic review, which identified in December 2016 that there had in fact been a misstatement. The FCA undertook its own analysis of Redcentric’s net debt and cash and cash equivalents, and the figures did not correspond to those identified by Redcentric.

In summary, the FCA found that:

  • For the November 2015 Statement, Redcentric had overstated its cash and cash equivalents by approximately £13,045,000 and understated its net bank debt by the same amount.
  • For the June 2016 Statement, Redcentric had overstated its cash and cash equivalents by approximately £12,155,000 and understated its net debt position by the same amount.

The FCA acknowledged in the final notice that Redcentric cooperated with the FCA during its investigation and took extensive steps to remedy its failings, such as: (i) commissioning an independent review by an auditor immediately upon identifying the Issue; (ii) proactively offering information to the FCA; (iii) making improvements to its systems and controls; and (iv) accepting that it should compensate investors who suffered loss as a result of the incorrect statements.

Interestingly, in the final notice, the FCA referenced the fact that Redcentric’s systems and controls had not been effective to prevent the deliberate misconduct but did not explain what led it to draw such a conclusion. According to its press release, the FCA is taking separate criminal proceedings against three former Redcentric employees, who are each facing various charges such as making a false or misleading statement and false accounting.

Conclusion

This case serves as a reminder that publicly listed companies must ensure that the market is properly informed with timely and correct information. Listed issuers might usefully reflect on their own systems and controls in this area — with a view to ensuring that something similar could not occur in their particular circumstances.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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