On Friday 11 February, Timothy Coleman, former Chief Financial Officer of Redcentric PLC, was convicted by a jury of two counts of making a false or misleading statement to the market, and three counts of false accounting. The Financial Conduct Authority ("FCA") brought the prosecution against Mr Coleman and Fraser Fisher, the company's ex-chief executive, who was acquitted of all charges. Estelle Croft, former Finance Director at Redcentric, had already pleaded guilty to making false statements, false accounting, and making false statements to Redcentric's auditors PricewaterhouseCoopers.
Redcentric itself however was not a defendant in the proceedings, even though the FCA had found that it had issued false and misleading interim and audited financial results which misstated its cash position. Redcentric's extraordinary cooperation with the FCA's investigation and the remedial action that it took were the primary reasons the regulator opted to impose a public censure on the company, instead of a more punitive course.
Background
Redcentric PLC is an IT provider that is listed on the London Stock Exchange's AIM sub-market. In November 2015, Redcentric published its unaudited interim results which recorded its net bank debt of £16.5m with cash and cash equivalents of £9,984,000. In June 2016 Redcentric published its audited financial end of year results, which stated that its total net borrowings were £25.3m, and that its cash and cash equivalents were £8,492,000. The company subsequently announced in November 2016 that it had uncovered misstated accounting balances in its balance sheet and that its audited accounts may have to be revised as a result of this. The misstatements that Redcentric made to the market meant that investors kept hold of Redcentric stocks that they might have otherwise sold and purchased stocks at a higher price than they would have if Redcentric's true cash position had been stated. The FCA estimated that the misstatements contributed to £43m in losses to Redcentric shareholders. The regulator found that Redcentric had committed market abuse as a result of the information that it submitted regarding its interim and final results.
No penalty imposed
However, it did not prosecute Redcentric or impose a financial penalty on it. Redcentric's response to the discovery of the market abuse issues that arose within its business, and its significant level of cooperation with the FCA, proved to be a crucial factor in helping it to secure this outcome.
Following the November 2016 announcement about the misstated accounting balances, Redcentric commissioned independent auditors to carry out a forensic review of both its current and historical balance sheets and delayed publication of its interim results. In December 2016, Redcentric announced the initial results of the independent review and a remedial plan of action. The review found that there had been misstatements of Redcentric's debt and cash position. The Redcentric board immediately implemented its remedial plan of action which included the appointment of a new CFO to carry out a full review of its entire finance function. Redcentric also made changes to its billing and credit control management systems and processes.
Redcentric cooperated with the FCA investigation that followed. Redcentric voluntarily offered information to the FCA and implemented changes to its systems and controls that had failed to detect the wrongdoing that took place. Redcentric accepted that it had a duty to compensate those who had suffered losses as a result of the misstatements and set up a compensation scheme to do this.
The FCA considered Redcentric's decision to implement a compensation scheme to be exemplary. This was the first time that an AIM listed company decided of its own volition to offer to compensate those that had suffered losses as a result of the market abuse that it had committed. The FCA also had regard to the fact that a number of Redcentric's customers were NHS Trusts and that it was providing an important service during the Covid-19 pandemic
Lessons to be learned
The FCA's decision not to take more punitive action against Redcentric was based on what the regulator described as the "unique circumstances" of the case. Although not every company will be able to cite the provision of important services during a global pandemic, the level of cooperation offered by Redcentric provides an important benchmark.
The transparency with which Redcentric dealt with market abuse once it was uncovered was clearly a significant factor. It made an announcement to the market, commissioned an independent audit to ascertain what had gone wrong and quickly updated the market with the findings of the audit review.
Redcentric cooperated fully with the FCA, even volunteering information to the regulator during its investigation. Redcentric's board were also quick to implement changes to the systems and controls that failed to detect the wrongdoing that was taking place.
Redcentric was also proactive in offering to compensate those who had suffered losses as result of the market abuse that had occurred. It is perhaps surprising that Redcentric is the first AIM listed company to take such a step, and this may have been the factor that led the FCA to consider that the circumstances of the case were unique.
In an environment where the FCA is increasingly looking to criminal prosecution to resolve matters, the need for financial institutions to identify issues early and remediate them is ever higher.
Comment by Alison Geary, Partner in the White Collar Crime & Investigations group at Mishcon de Reya:
"To gain maximum cooperation credit it is necessary to identify wrongdoing at an early stage. This requires not only robust procedures to flag potential issues, but a clear strategy for ensuring evidence of wrongdoing is escalated and dealt with efficiently."