£600,000 Penalty Hits Director Over Misleading Information About Cattles Plc
The Financial Services Authority (FSA) has fined and banned two former directors of Cattles plc and its subsidiary Welcome Financial Services Limited for publishing misleading information to investors about the credit quality of Welcome’s loan book and acting without integrity in discharging their responsibilities. The FSA has also publicly censured Cattles and Welcome for publishing misleading information.
Welcome is a wholly owned subsidiary of Cattles, and is authorised and regulated by the FSA (FSA registration no. 305742). Welcome’s principal business was retail consumer lending, providing low value secured, unsecured and hire purchase loans to subprime borrowers at high levels of interest. The significance of this part of the business within the Cattles Group is indicated by figures taken from Cattles’ 2007 Annual Report, which showed that it represented approximately 89.5% of Cattles’ revenue.
James Corr, Cattles’ finance director, has been fined £400,000 and Peter Miller, Welcome’s finance director has been fined £200,000, and both have been banned from performing any functions in relation to any FSA regulated activities. The FSA has also decided to ban John Blake, Welcome’s managing director, and fine him £100,000. Blake has referred his case to the Upper Tribunal. All three fines were reduced on account of the directors’ current personal financial circumstances.
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.
The actions have been taken because a number of the FSA’s market abuse, listing and disclosure rules, as well as Principles for Businesses, were found to have been breached in this case.
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.
5. 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.
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 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.
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.
The FSA has publicly censured Cattles and Welcome, and would have imposed substantial financial penalties had it not been for their financial circumstances. The firms cooperated fully with the FSA’s investigation.
Tracey McDermott, the FSA’s acting director of enforcement and financial crime, said: “The consequences for shareholders of the misleading statements issued by Cattles and Welcome have been devastating. These directors failed to act with integrity in discharging their responsibilities. They failed in their obligations to shareholders, the wider market and the regulator.
“In order for markets to function properly, information given to investors must be accurate. Directors of listed companies must act with integrity and exercise appropriate diligence when making disclosures to the market. They should note the personal consequences for those who fail to meet our requirements.”