On 26 June 2020, the Financial Conduct Authority ("FCA") published a public censure in respect of Redcentric PLC ("Redcentric"), an IT services provider listed on the Alternative Investment Market ("AIM"), for committing market abuse. The decision to impose a public censure as the sole sanction despite finding that Redcentric had committed market abuse is notable. This outcome can largely be ascribed to two factors. Firstly, Redcentric swiftly implemented a compensation scheme. Secondly, the FCA considered that a penalty may cause service disruption to Redcentric's customers, many of whom are NHS Trusts, which would not have been in the public interest during the unprecedented circumstances created by the COVID 19 pandemic.
On 26 June 2020, the FCA issued a Final Notice publicly censuring Redcentric for committing market abuse by publishing false information about its net debt and holdings of cash and cash equivalents in its November 2015 unaudited interim results and June 2016 audited final year results (the "Financial Statements").
The Financial Statements led Redcentric's share price to increase artificially until the company issued a corrective statement. Investors consequently paid a higher price to purchase shares during this period than they otherwise would have done had they known the true position.
The FCA's Executive Director of Enforcement and Market Oversight, Mark Steward, said that when the company made the true position clear, affected investors suffered immediate losses, directly attributable to Redcentric's misleading statements.
The total loss to those shareholders is estimated to be approximately £43 million.
The FCA considered that the misconduct was serious and, but for the wider public interest in avoiding disruption to the services provided by Redcentric to NHS Trusts, ordinarily a substantial financial penalty would have been justified. However, in the circumstances, the FCA decided only to publish a public censure pursuant to section 123(3) of the Financial Services and Markets Act 2000 (the "Act").
The FCA also announced criminal charges against the implicated individuals and in June 2019, the Financial Reporting Council announced that it had fined Redcentric's auditors, PwC, £4.55 million and two audit partners £200,000 each for their "failure to exercise professional scepticism".
Background
Redcentric is an AIM-listed IT managed services company, providing cloud, network and collaboration services to private and public sector organisations. Its customers include several NHS Trusts.
On 7 November 2016, Redcentric announced that its audit committee had undertaken an internal review of Redcentric's interim results, which had uncovered misstated accounting balances in the group's balance sheet. As a result, it would likely need to restate its audited accounts for previous years. As a result of this announcement, the price of Redcentric's shares fell by approximately 52% to 63.3p during the course of the day, albeit it did partly recover on 18 November 2016.
By reason of the misleading Financial Statements, Redcentric's shares traded at a higher value then they should have done. They continued to do so until Redcentric's announcement on 7 November 2016. Purchasers of Redcentric's shares during this period paid a higher price than they would otherwise have paid had the Financial Statements been accurate, and those purchasers who had not sold those shares during this period suffered a loss as a result of the fall in price.
On 13 December 2016, Redcentric announced the initial findings from its independent review, which confirmed that there had been a misstatement and proposed a remedial action plan.
Following its own investigation, the FCA found that:
- For the November 2015 Financial Statement, Redcentric had over-stated its cash and cash equivalents by approximately £13,045,000, and under-stated its net bank debt by the same amount; and
- For the June 2016 Financial Statement, Redcentric had over-stated its cash and cash equivalents by approximately £12,155,000 and under-stated its net debt position by the same amount.
The FCA concluded that Redcentric "knew, or could reasonably have expected to know, that the information about its [Financial Statements] was false and misleading, and that it gave, or was likely to give, false or misleading impression as to the value of the shares".
Redress and remedial steps
The FCA acknowledged that Redcentric not only co-operated with the FCA but also took "extensive steps to remedy its failings", including:
- following discovery of the issues, it swiftly commissioned an independent review;
- it proactively disclosed information to the FCA. The "evidence and assistance" provided voluntarily to the FCA led to a timely conclusion of the investigation which was of "critical assistance" to the FCA;
- it corrected deficiencies in its systems and controls which had been ineffective to prevent the misconduct, and
- Redcentric took such steps as it reasonably could to compensate investors who suffered loss as a result of the incorrect Financial Statements.
By taking these remedial steps, the FCA was satisfied that it was preferable to let Redcentric use its resources to provide compensation, instead of imposing a penalty. The compensatory scheme has a total estimated value of £11.4 million and will be administered by Deloitte. Each claimant will have a basic entitlement to receive an overall value of approximately 17p per net share purchased.
The FCA determined that a penalty would risk causing disruption to Redcentric's businesses, which in turn would risk causing disruption to its customers. This last factor appears to have tipped the balance since Redcentric's customers include numerous NHS Trusts providing vital services during the COVID-19 pandemic. The FCA therefore took into account Redcentric's business and the knock-on effect that imposing a financial penalty would have. The FCA considered that there could be a significant disruption to Redcentric's business, causing disruption in turn to the services it provides.
The FCA concluded that in the "unique" circumstances of this case, "the balance of public interest is against the issue of a penalty", commenting that both the proactive manner with which Redcentric devised and implemented the compensation scheme "has been exemplary".
An holistic approach
It therefore seems that the decision to only impose a public censure without a financial penalty was due to a combination of Redcentric's proactive remedial actions, the type of customers it services, and the importance of business continuity to those customers during the pandemic.
This case is therefore notable, as it indicates that the FCA will take a pragmatic, holistic approach to enforcement in the current climate when the company in question operates in a specific sector. Additionally, we may see other companies move to introduce compensatory schemes when faced with an FCA investigation, in the hope of mitigating or avoiding a financial penalty.
It remains to be seen whether other public interest arguments might have a mitigating effect and whether the disruption caused by the pandemic may be an ongoing factor in the FCA's deliberation in deciding the appropriate sanction.
Authors: David Capps, partner and Anna Varga, senior associate.
This article first appeared in the August 2020 issue of PLC Magazine.
