The Situation: The UK Financial Conduct Authority ("FCA") publicly censured a UK publicly listed IT services provider for false disclosure but avoided a fine on the basis that the company provided essential services during the COVID-19 pandemic and had actively established a compensation scheme for investors.
The Result: This is only the second investor compensation scheme established in the UK arising from an FCA investigation, with the first being established by Tesco following the investigation into its accounting practices in 2017.
Looking Ahead: The FCA appears to be adopting an increasingly innovative and practical approach to enforcement against UK issuers that breach securities laws. It remains to be seen if the FCA continues to impose these relatively new remedies against UK issuers in future investigations and cases.
In June, the FCA censured Redcentric PLC ("Redcentric"), an IT systems provider listed on the AIM Market of the London Stock Exchange, for market abuse by publishing false information in its interim financial statements for the half-year ending 30 September 2015 (the "Interim Results") and its audited financial statements for the year ending 31 March 2016 (the "Final Results").
Redcentric announced these errors in November 2016, which prompted an FCA investigation, which found that the Interim Results and Final Results overstated Redcentric's cash position, and understated its net bank debt, by approximately £13 million and £12.1 million, respectively. There was a net fall of 42% in Redcentric's share price between 9 November 2015 and 7 November 2016 (the "Relevant Period").
The FCA concluded 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 Interim Results and Final Results, 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. The FCA decided not to impose a fine given:
- Redcentric's cooperation with the investigation;
- Its willingness to set up an £11.4 million investor restitution scheme (the "Compensation Scheme"); and
- The fact that Redcentric is providing important IT services (including to the UK National Health Service) during the COVID-19 pandemic.
Redcentric Compensation Scheme
Redcentric is the first AIM-listed company to implement an investor compensation scheme following an FCA investigation and only the second such scheme since Tesco's investor compensation scheme. In March 2017, Tesco agreed to the first compensation order imposed by the FCA, under which it had established a compensation scheme for investors in its shares and bonds in connection with investigations into Tesco's accounting practices.
Under the Compensation Scheme:
- Net purchasers of shares during the Relevant Period are entitled to submit a claim for compensation to Deloitte (the scheme administrator), which is calculated at an amount per share;
- Compensation can be claimed in cash, shares, or a combination of both, and those claiming compensation in shares are subject to a first come first served basis given limits to Redcentric's authority to allot; and
- Investors must submit an executed release, in which they release and waive all related claims against Redcentric and its related parties in connection with this matter, and in which Redcentric makes no admission of liability.
The Compensation Scheme is largely similar to the scheme that Tesco established. The main difference is that while Tesco's scheme was established by virtue of the FCA exercising its powers under section 384 of FSMA to require an issuer to pay restitution to investors, the fact that the FCA made no reference to its powers under FSMA suggests that Redcentric offered voluntarily to establish the compensation scheme as part of its settlement.
This Redcentric case, taken together with Tesco's case back in 2017, suggests that investor compensation schemes may become a more commonplace remedy or settlement tool in circumstances where UK issuers are found to have committed market abuse due to disclosure failures.
The Redcentric decision also suggests that the FCA may consider whether a fine is in the public interest and whether imposing a fine accords with its regulatory objectives. Historically, it has been unclear whether such arguments had traction with the FCA. However, FCA fines will not disappear. The FCA made clear that a fine on Redcentric would have been appropriate, and in Tesco's case, an FCA-imposed fine was likely avoided due to the Serious Fraud Office already levying a significant fine, as well as the FCA finding that Tesco's board did not have actual or constructive knowledge of accounting irregularities.
While compensation schemes are an imperfect remedy where an issuer becomes insolvent or criminal conduct exists, they offer investors in UK-listed securities a means to recover a portion of losses suffered from breaches of securities law, and the schemes established by Redcentric and Tesco may also provide a precedent for UK issuers who become subject to similar investigations in the future.
In the United States, the establishment of "fair funds" by the Securities and Exchange Commission, in which disgorged profits and penalties are paid to wronged investors, has taken place since the enactment of Sarbanes-Oxley in 2002. As accounting and audit practices and adequate disclosures by UK issuers come under increased scrutiny, this potential convergence of remedies across jurisdictions suggests an innovative and evolving approach by the FCA as the use of its enforcement powers in respect of UK issuers becomes more frequent.
Two Key Takeaways
- Investor compensation schemes are becoming more common following FCA investigations into UK issuers.
- With increased scrutiny on the quality of UK issuer public disclosures, especially given the number of recent accounting scandals, the FCA may be inclined to adopt new remedies and settlement tools in respect of UK issuers, including by borrowing from other jurisdictions.
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