FCA Takes the Unusual Step of a Public Censure in a Market Abuse Case

Posted on 26 June 2020

The FCA has publicly censured Redcentric PLC ("Redcentric"), an AIM listed IT managed service provider.  A public censure is an unusual sanction for the FCA to impose at the best of times and even more so given the FCA's determination that Redcentric committed serious market abuse.  As set out below, the public censure reflects the remediation package volunteered by Redcentric, but also perhaps some rare "bigger picture" thinking from the FCA regarding the wider utility of a financial penalty. 

Underlying facts.

The facts relevant to the market abuse finding can be succinctly stated and are probably less interesting for readers than the sanction.  In November 2015, Redcentric published unaudited interim results for the 6 months ending in September 2015, setting out its cash, cash equivalents and bank debt ("the November Statement").  In June 2016, Redcentric published audited results for the year to March 2016 including the same indicators updated ("the June Statement").  Both Statements caused the Redcentric share price to trade up.  In November 2016, Redcentric announced that its audit committee had discovered misstatements in the accounts for the 6 months to September 2016, that the Board was commencing a forensic review and that audited accounts for the previous years would likely have to be restated.  Redcentric's share price fell very significantly on the back of this announcement.  The FCA determined that Redcentric knew or could reasonably be expected to have known at the time that the cash and debt positions set out in the November and June Statements were false and misleading and that they gave or were likely to give a false or misleading impression as to the value of its shares. It determined that Redcentric had therefore committed market abuse in terms of FSMA (the relevant conduct taking place before the implementation of the Market Abuse Regulation). 

It is not possible to determine from the Notice how the misstatements came to occur, other than to note the reference to "deliberate misconduct" that Redcentric's systems and controls failed to prevent.  However, we note that the FCA announced on 24 September that it has brought criminal charges against the former CEO, former CFO and a former FD.

Sanction

The Final Notice specifically mentions both Redcentric's co-operation with the FCA investigation but also (and no doubt more significantly) its extensive steps to remedy its failings.  These included the early commissioning of an independent audit, proactively offering up information to the FCA (described as of "critical assistance" to the FCA), making changes to its systems and controls and (very unusually in a market abuse case) voluntarily setting up a scheme to compensate investors who had lost money as a consequence of the misleading statements ("the Scheme").

The Scheme is particularly noteworthy, not only because of its novelty, but also because it so clearly impressed the FCA and was consequently a key factor in its decision to impose a public censure rather than a financial penalty.  The Scheme compensated net purchasers of Redcentric in the period between the November Statement and the update announcement in November 2016.   Redcentric estimated the value of the Scheme as being £11.4m and that each Claimant would receive approximately 17p for each net share purchased.  The FCA described the steps taken by Redcentric to devise and implement the Scheme as "exemplary". These are rare words indeed for a Final Notice.

Whilst it is difficult to gauge its real significance, the FCA also noted that Redcentric's customers included numerous NHS Trusts and that it (Redcentric) provides vital services in respect of COVID. The FCA therefore noted that a penalty would give rise to a "significant risk" to disruption to Redcentric's business which might impact these services and that it would be better for Redcentric to provide compensation under the Scheme rather than also paying a penalty.  This appears to be a rare example of the FCA seeking to adopt "bigger picture" thinking in respect of the purpose and utility of penalties.

Comment

Market manipulation cases are an area of real focus for the FCA at present.  Indeed, as covered elsewhere in this publication, FCA Reflections: Market Abuse - Investigations Uptick?, Mark Steward said in June that he was braced for an uptick in market abuse investigations against the backdrop of COVID.  In all the circumstances, the FCA's approach to Redcentric (albeit in respect of historic misconduct) may appear surprisingly lenient to some.  However, this is probably not a sign of things to come and more likely reflects the FCA's strong inclination towards Redcentric given its co-operation and the terms of the Scheme, combined perhaps with the uniqueness of the COVID epidemic and the desire to avoid adverse headlines, especially if Redcentric faltered or failed under the burden of a financial penalty.     Firms seeking to learn lessons from this matter should focus more on the level of co-operation, but in particular the bold step of devising and implementing the Scheme. Whilst that was a costly step and no doubt carried some risk if the FCA had nonetheless imposed a penalty, it seems to have allowed it to get ahead of the inevitable FCA approach to sanction. 

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