SFO Difficulties and Barclays Case

This morning the Financial Times ran a full-page article over the problems with prosecuting fraud under the headline “The legal fight over a company’s controlling mind”. This covered the difficulty that the Serious Fraud Office (SFO) has in prosecuting fraud with particular reference to the Barclays case. That arose from the escape by Barclays from involvement with Government funding after the financial crisis in 2008. They simply borrowed a pile of money from Qatari investors instead. But it was alleged that they had paid additional consultancy fees as a sweetener for the deal which were not disclosed to investors at the time.

As a Barclays shareholder at the time, I thought that it was a very wise move to avoid Government involvement as the Government seemed to be intent on taking control of the banking sector by forcing recapitalisation on the major UK banks, i.e. forcing them to issue equity or take loans on onerous terms which they certainly did with RBS and Lloyds, much to shareholders disadvantage.  It has always seemed to me that the legal case against Barclays was politically motivated from the very beginning with the objective of teaching Barclays a lesson.

Last week, the last of three Barclays defendants were acquitted. The former CEO John Varley had been previously discharged by the judge on the grounds that there was insufficient evidence and no corporate charges were brought. The deal had been approved by the board of Barclays after legal advice had been taken so the latest acquittal is hardly surprising.

But the FT article explains well why it is difficult for the SFO to obtain convictions in fraud and bribery cases even when the evidence is better because it is very difficult to identity a “directing” or “controlling” mind in large companies. The current law might have worked with small companies in times gone by but the complexities of modern corporations make it difficult to apply. As a result the SFO has tended to rely on Deferred Prosecution Agreements (DPAs) where the company pays a fine to avoid prosecution but without conceding anything. However, the individuals involved have often then been declared not guilty in subsequent trials (e.g. in the Tesco case).

It’s worth reading the FT article to see how the legal framework is such a mess in the UK. It’s also not helped by the FCA and FRC also being involved with overlapping and confusing responsibilities for corporate financial affairs.

It’s certainly makes a good case for reform. It’s worth pointing out also that the Barclays case stemmed from 2008 (i.e. 13 years ago) and it is surely unjust to have the defendants under the stress of a major prosecution, incurring very large legal costs and probably making them unemployable for that length of time when the legal case seemed to be very weak.

However much some sections of the public would like bankers who were around in 2008 put in prison, this is not justice.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Quindell (Watchstone), SFO inaction and Tungsten Corporation

The Daily Telegraph this morning (25/2/2019) disclosed that law firm Harcus Sinclair is preparing a legal case for investors who lost money in Quindell (now renamed Watchstone). Quindell was once the largest AIM company – valued at £2.6 billion. But its accounts were extremely dubious and many investors think they were downright fraudulent. The company is still being investigated by the Serious Fraud Office (SFO) but only two days ago it was announced that the SFO was dropping investigations into Rolls-Royce and GlaxoSmithKline. The SFO said there was “either insufficient evidence” or it was “not in the public interest” to continue. That’s despite the fact that Rolls-Royce paid nearly £500 million under a Deferred Prosecution Agreement over the allegations of bribery and corruption. Will the Quindell case be dropped also one wonders?

Watchstone (WTG), now worth £44 million, is also the subject of a law suit by Australian firm Slater & Gordon over the acquisition of businesses from the company in 2015. They claim breaches of the warranties and deceit but Watchstone denies they have a valid claim.

Why is it so difficult to pursue directors and other senior executives over false accounts? Tesco was a similar situation where the company conceded wrongdoing and paid a fine but the prosecutions of individuals collapsed. It seems clear that the whole legal framework for fraud under which the SFO operates needs reviewing and changing to make such cases easier to prosecute. Either that or companies should not be conceding wrongdoing and paying fines (a charge on shareholders effectively) when it cannot apparently be proven. It’s the individuals who need convicting, not the company, if future frauds are to be deterred.

Also this morning Tungsten (TUNG), another AIM company and in which I have a miniscule holding, issued a trading update. This is a company that has been consistently loss making, and it was always doubtful whether it had a viable business model in the new sector of electronic invoicing and supply chain enablement.

CEO Richard Hurwitz, who was appointed to the board in 2015, after a revolution, left “with immediate effect” on the 14th February. He did seem to have made changes in the last three years that gave some hope that the company was not going to continue to be a bottomless cash pit. But losses persisted. However, this mornings announcement was somewhat more positive in that it mentioned “significant reductions in the cost base over the past three years” and there are other changes afoot including a review of the Group’s “remuneration structures”. That includes a reduction in cash bonuses in favour of shares and introduction of “clearly defined performance conditions”. Perhaps that prompted the CEO to quit (he got paid £1.3 million last year despite the company still losing money).

Other good news was that net cash inflow of £0.5 million in the quarter represented the first ever positive cash flow from operations! But the underlying EBITDA of £0.4 million includes a “seasonal working capital” inflow of £1 million so the “normalised” cash outflow was still £0.5 million. Does that make sense or is this fanciful presentation?

The share price only perked up slightly this morning on this announcement which probably reflects continuing concerns about when it will actually show some profits and (and I am not just talking about EBITDA), and the added uncertainty of a new CEO but it seems good candidates have already been lined up.

Still a “wait and see” situation so far as I am concerned.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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