The Financial Conduct Authority (FCA) has issued a public censure to Redcentric for committing market abuse between 9 November 2015 and 7 November 2016.

The IT service provider 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.

Redcentric has now agreed to offer compensation to affected investors who purchased shares during the period.

Mark Steward, executive director of enforcement and market Oversight at the FCA, said: "Redcentric issued misleading final year results, harming its own investors and confidence in the market - 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," he continued, adding: "Investors deserve to be told the truth and uncomfortable news cannot be hidden for very long."

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. In this announcement, it stated that the board had commenced a forensic review of its current and historic balance sheets and would delay publication of its interim results.

As a result of the misleading information, the market price for Redcentric shares was artificially inflated. This continued until it issued its corrective statement on 7 November 2016.

The FCA estimates the losses to affected shareholders to be approximately £43 million.

Redcentric estimates the value of the compensation scheme to potential claimants is £11.4 million and that each claimant will have a basic entitlement to receive an overall value of approximately 17 pence for each net share purchased.

This is the first time that an Alternative Investment Market (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 FCA has taken into account Redcentric’s approach to compensate affected shareholders, and has decided to impose a public censure rather than a financial penalty.

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 findings against the firm are separate to the action being taking against the individuals, and the FCA noted that no assumption should be made that a criminal offence has been committed.

Commenting on the announcement, Nick Bayley, UK head of Duff & Phelps’ Compliance and Regulatory Consulting practice, said that the only similar company arranged investor compensation scheme previously in the UK related to the Tesco false accounting debacle in 2014.

However, he added that the public sanction against Redcentric is really just a side-show.

"The main event is the potential criminal trial of three former employees of Redcentric, as those individuals will be facing not just criminal market manipulation charges under FSMA, but also charges of false accounting and fraud under the Theft Act, Fraud Act and Companies Act.

"Typically these latter offences are matters for the police or the Serious Fraud Office, as they were in the Tesco case, although the FCA also does have the power to prosecute them itself.”

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