2007 Annual Report and 2008 Rights Issue prospectus of Cattles plc contained highly misleading arrears, impairment and profit figures
James Corr, former finance director of Cattles plc, and Peter Miller, former finance director of Cattles’s principal subsidiary Welcome, have been fined £400,000 and £200,000 respectively and each banned from performing any functions in relation to any regulated activities. The FSA found them personally responsible for publication by Cattles of misleading financial information and to have committed market abuse. The FSA press release is here.
Mr Corr’s financial penalty was for engaging in market abuse as defined in section 118(7) of the Financial Services and Markets Act 2000 and for being “knowingly concerned” in breaches of Listing Rule 1.3.3.R (misleading, false or deceptive information) and Listing Principles 3 (integrity) and 4 (creation of a false market). Mr Miller’s was for the section 118(7) offence and for breach of Principle 3 (Management and control) of the FSA’s Principles of Business.
Let’s let the FSA tell the story
The 2007 Annual Report showed a profit but should have showed a loss:
“Cattles was a sub-prime lender and was listed on the London Stock Exchange. In 2008 it was a member of the FTSE 250, but has since been delisted. Most of its business was conducted through its subsidiary Welcome. Cattles’ 2007 annual report contained highly misleading arrears, impairment and profit figures. It stated that only £0.9 billion of Welcome’s approximately £3 billion loan book was in arrears, when if accounting standards had been properly applied the correct figure would have been around £1.5 billion. Cattles also announced a pre-tax profit of £165.2 million for 2007, but if accounting standards had been correctly applied Cattles would have suffered a pre-tax loss of £96.5 million.”
The misleading figures were repeated in the 2008 Rights Issue prospectus…and after that the Cattles share price completely collapsed:
“The misleading figures from the Annual Report were also included in a rights issue prospectus that Cattles released to potential investors in April 2008. It therefore gave misleading impressions of the firm’s financial health. It is likely that investors would have regarded this as highly material when subscribing under the rights issue. The rights issue was subsequently fully subscribed and raised £200 million. When the true state of Cattles’ loan book emerged in 2009, trading in Cattles’ shares was suspended. On 2 March 2011 Cattles announced a scheme of arrangement under which its shareholders would receive only 1p for each share, compared with a rights issue price of £1.28.”
Mr Corr and Mr Miller were personally responsible:
“As a result Cattles breached the Listing Principles by failing to act with integrity towards its shareholders and potential shareholders, and failing to communicate information in such a way as to avoid the creation or continuation of a false market. Welcome breached Principle 3 of the FSA Principles for Businesses by failing to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems. Both firms engaged in market abuse by disseminating the inaccurate information. Corr and Miller were personally responsible for the breaches by the companies of which they were directors and also committed market abuse.”
Treatment of impairments
At the heart of the abuse and misleading information was the treatment of impairments to the Welcome loan book:
“The figures in the annual report and prospectus were misleading because they failed to disclose that Welcome routinely used ‘deferments’ when its customers failed to make repayments. The missed payments would be deferred to the end of the loan period, usually without contacting the customer, and the loan would be deemed to be contractually up to date in the accounts. If Cattles had applied accounting standards correctly, the accounts would have shown these deferred payments as being in arrears.
For 2007 a new accounting standard specifically required Cattles to disclose the arrears position on a strictly contractual basis with deferments stripped out. However, Cattles sought to interpret the standard in a way that avoided doing this so as not to reveal significant negative information about the loan book. Corr, Miller and Blake were aware that Welcome made extensive use of deferments, but they failed to ensure that there was a full and open discussion with all concerned on the treatment of deferments under the new standard. They therefore failed to act with integrity in discharging their responsibilities. Neither the auditors nor the audit committee were aware of the significance of the use of deferments within Welcome.
Miller also knew that there were concerns over the amount of cash being collected on unimpaired debt and did not ensure auditors were properly informed. The FSA considers that Blake had the same knowledge. In addition, in advance of the rights issue Corr provided highly misleading and disingenuous answers to market analysts in relation to Cattles’ impairment figures.”
Mr Blake was Welcome’s managing director. Mr Blake has referred his case to the Upper Tribunal.
What Mr Corr should have done
The FSA’s Final Notice sets out its view as to how Mr Corr should have behaved:
“In these circumstances, the right thing for a person in your position to do would be:
(1) to rely on and assert his position and authority as an experienced Group Finance Director;
(2) to ensure a culture of transparency and openness in relation to the financial statements which properly balanced the aims of the business with the needs of the market;
(3) to ensure a group structure in relation to finance which delivered the proper balance in which the key roles are filled with people delivering according to their responsibilities; and
(4) to take a particularly close and rigorous interest in the treatment of deferments and their impact on impairment, both from a policy point of view and thedelivery of the policy;
so that he can, with integrity, satisfy himself that the figures for which he has responsibility are true and fair.”
What about the auditors?
Although the FSA finds that “neither the auditors nor the audit committee were aware of the significance of the use of deferments within Welcome”, in July 2009 the Accountancy and Actuarial Discipline Board launched an investigation into the conduct of PwC, as auditors of Cattles. From the AADB website, that investigation appears to be ongoing.
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