FCA censures Redcentric over misleading financial information

IT services provider Redcentric has been given a public censure by the Financial Conduct Authority (FCA) for committing market abuse and ordered to pay £11.4m compensation to investors, while three former executives face legal proceedings

The move comes at the end of a three-year investigation and marks the first time that an AIM listed company has offered to implement its own scheme to pay some compensation to those affected by the harm it caused as a result of market abuse.

The regulator said it had decided against imposing a financial penalty, taking into account Redcentric’s approach to compensate affected shareholders, and the potentially adverse consequences for Redcentric’s business. Many of its customers, which include the NHS, provide vital services combatting the coronavirus pandemic and the FCA said there is a particular public interest in avoiding the risk of disruption at this time.

The FCA said Redcentric issued unaudited interim results and audited final year results which materially misstated its net debt position and overstated its true asset position in circumstances where it knew, or ought to have known that the information was false and misleading.

As a result, investors were misled and paid more when purchasing shares than they would have done had they known the true position.  The FCA estimates the losses to affected shareholders to be approximately £43m.

Redcentric has now agreed to offer compensation to affected investors who purchased Redcentric shares between 9 November 2015 and 7 November 2016. The compensation scheme, which is being administered by Deloitte, opens to claims on 13 July.

The FCA investigation found on 7 November 2016, Redcentric announced that its audit committee had undertaken an internal review of its interim results for the six months ending September 2016, which had discovered misstated accounting balances in the group’s balance sheet.

Redcentric stated in this announcement that its board had commenced a forensic review of its current and historic balance sheets and would delay publication of its interim results.

The FCA said Redcentric knew or could reasonably have been expected to know that the information in respect of cash and net debt, published on 9 November 2015 and 16 June 2016 was false or misleading.

Mark Steward, FCA executive director of enforcement and market oversight, said: ‘When the company revealed the true position in November 2016, many investors who had purchased Redcentric shares in the preceding 12 months suffered immediate losses. These losses are directly attributable to the misleading statements issued by the company 12 months earlier.

‘Investors deserve to be told the truth and uncomfortable news cannot be hidden for very long.’

Peter Brotherton, Redcentric CEO, said: ‘I am pleased that we have now achieved an agreed settlement, having worked closely with the FCA over a number of years and having acted promptly to issue a corrective statement to the market when the misstatements were discovered.

‘Over the last three years a new board of directors and management team have been appointed and have worked to transform the company, optimising its products, platforms, networks, processes and structure. As a result, we now have a modern, resilient and scalable business that is fit for growth.’

Legal action

In a separate action, the FCA has instituted criminal proceedings against three former employees of Redcentric, who are scheduled to appear at Westminster Magistrates court on 28 August. Each individual will face charges of two counts of making a false or misleading statement, contrary to Section 89(1) of the Financial Services Act 2012.

One of the individuals will further face charges of four counts of false accounting, contrary to Section 17(1)(a) of the Theft Act 1968; one count of making a false or misleading statement to an auditor contrary to Section 501 of the Companies Act 2006; and one count of fraud by false representation, contrary to Sections 1 and 2 of the Fraud Act 2006.

Another of those individuals will also face charges of seven counts of making a false or misleading statement to an auditor contrary to Section 501 of the Companies Act 2006; and four counts of false accounting, contrary to Section 17(1)(a) of the Theft Act 1968.

The alleged offending took place between 1 May 2015 and 31 October 2016.

The findings against the firm are separate to the action being taking against the individuals. No assumption should be made that a criminal offence has been committed.

FRC

The Financial Reporting Council also initiated an investigation into Redcentric’s financial reporting. A year ago, the regulator fined PwC £6.5m and issued a severe reprimand for failures of professional scepticism over the firm’s auditing of the IT services provider. Two of the firm’s partners in its Leeds office were also sanctioned.

The fine, which was discounted to £4.55m for admissions and early disposal, related to the statutory audits of Redcentric’s financial statements for the financial years ending 31 March 2015 and 31 March 2016.

FCA final notice for Redentric

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