Timothy Coleman, former chief financial officer of AIM-listed cloud service provider Redcentric, has been found guilty on four charges concerning the making of false and misleading statements to the market.
At an earlier stage in proceedings, a second defendant, Estelle Croft, the former finance director at Redcentric, pleaded guilty to charges of making false statements and false accounting, and making false statements to Redcentric’s auditors PwC.
A third defendant, Fraser Fisher, former chief executive officer of the firm, was acquitted in the jury trial on all charges brought. All three faced charges brought by the Financial Conduct Authority (FCA).
For her part, Croft was sentenced prior to the trial to a total of three years’ imprisonment, and was ordered to pay £120,346 following confiscation proceedings. The sentencing of Coleman will be heard on 3 March.
Redcentric as a company issued false and misleading unaudited interim results in November 2015, and false and misleading audited final year results in June 2016. Both materially overstated Redcentric’s cash position – by £13.1m and £12.2m respectively – and consequently misstated its net debt position by the same amount each time.
When the true position was revealed, shareholders suffered immediate losses in the value of their shares.
Croft falsified key accounting records to inflate the cash position and accepted that she was involved in the making of the false statements. Coleman further inflated those figures for financial reports that were then presented to the board.
Croft and Coleman knew that the market was misled when the statements were published. The jury was told that Coleman was aware that this information was critical to decisions by investors, who were watching Redcentric’s cash position carefully.
Coleman also used the false figures to assure key investors about Redcentric’s financial position, persuading them not to sell down their investment in the company.
Croft and Coleman took a number of steps to prevent the dishonesty being discovered. Croft gave auditors falsified bank statements and bank reconciliations. Later, when the issue began to be discovered, Coleman suggested to a member of the Redcentric board that the misstated position could be “washed” through a potential new acquisition.
As a result of the false statements, the share price of Redcentric shares was artificially inflated, which meant that investors paid more to purchase shares than they were actually worth.
The FCA estimates the losses to affected Redcentric shareholders, to which the misstatements contributed, to be approximately £43m. The FCA publicly censured Redcentric for market abuse on 26 June 2020 in proceedings, in which Redcentric agreed to pay compensation to affected investors.
Mark Steward, executive director of enforcement and market oversight at the FCA, said: “These false statements are directly attributable to the appalling misconduct of Coleman and Croft, which caused substantial damage to confidence in the market for Redcentric shares.
“While Redcentric has done the right thing in compensating affected shareholders, this case shows the FCA will bring criminal cases against company directors and other officers, and hold them personally to account when their conduct damages UK markets.”
Following the trial verdicts, Redcentric stated: “Redcentric Plc notes the outcome of the criminal prosecutions by the Financial Conduct Authority of three former employees in relation to historical accounting misstatements contained in announcements issued by the company. The company is pleased to note that those responsible have been held accountable and that the FCA's investigation and prosecutions have now reached their conclusion.
“The company gave its full support and cooperation to the FCA throughout its investigation and prosecution of the individuals. Redcentric also reached a settlement with the FCA in 2020, and compensated affected shareholders through a restitution scheme amounting to approximately £9m.”
It added: “Redcentric has made wholesale changes to its board of directors and management team since 2016, and they have worked to transform the company, including overhauling its accounting structures, controls and governance processes, and optimising its products, platforms and networks. With a modern, resilient and growing business, the company looks forward to continuing the positive progress it has made into 2022 and beyond.”
