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FINAL NOTICE

1.
ACTION

1.1. For the reasons given in this Final Notice, the Authority hereby publishes a public

censure in respect of Redcentric PLC (“Redcentric”) pursuant to section 123(3) of the

Act.

1.2. Redcentric agreed to resolve this matter.


2. SUMMARY OF REASONS

2.1. The Authority has found that Redcentric committed market abuse by publishing false

information about its net debt and holdings of cash and cash equivalents in November

2015 and June 2016.

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2.2. On 9 November 2015 Redcentric published its unaudited interim results for the half

year ending 30 September 2015 (the 9 November 2015 Statement). These stated that

net bank debt was “£16.5m” and that cash and cash equivalents were £9,984,000.

2.3. On 16 June 2016 Redcentric published its audited financial year end results for the

year to 31 March 2016 (the 16 June 2016 Statement). These stated that it had “Total

net borrowings of £25.3m” and that cash and cash equivalents were £8,492,000.

2.4. On 7 November 2016 Redcentric announced that its audit committee had undertaken

an internal review of Redcentric’s interim results for the 6 months ending September

2016, which had discovered misstated accounting balances in the Group’s balance

sheet and that as a result its audited accounts for previous years were likely to need

to be restated. Redcentric stated in this announcement that its Board had commenced

a forensic review of its current and historic balance sheets and would delay publication

of its interim results.

2.5. On 13 December 2016 Redcentric announced the initial findings from its independent

forensic review and remedial action plan. It stated that the forensic review and

management’s initial findings included:

(1)
The cumulative overstatement of net assets and profits after tax up to 30

September 2016 was approximately £20.8 million. Approximately £5.9 million

of this misstatement arose in the six months ended 30 September 2016; and

(2)
The net debt position as at 31 March 2016 was £37.8 million and as at 30

September 2016 net debt was £34.4 million.

2.6. The Authority has undertaken its own analysis of Redcentric’s net debt and cash and

cash equivalents. It has concluded that the true position was as follows:

(1)
As at 30 September 2015, Redcentric’s net debt was approximately £29,545,000

and its cash and cash equivalents were negative £3,061,000;

(2)
As at 31 March 2016, Redcentric’s net debt was £37,455,000 and its cash and

cash equivalents were negative £3,633,000.

2.7. The Authority has found that Redcentric knew, or could reasonably have been

expected to know, that the information about its net debt and cash and cash

equivalents published in its 9 November 2015 Statement and its 16 June 2016

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Statement was false and misleading, and that it gave, or was likely to give, a false or

misleading impression as to the value of its shares.

2.8. The 9 November 2015 Statement and 16 June 2016 Statement each caused

Redcentric’s shares to trade at a higher value than they should have done. They

continued to do so until Redcentric’s announcement of 7 November 2016.

2.9. Purchasers of Redcentric’s shares during this period paid a higher price than they

would have paid if the 9 November 2015 Statement and 16 June 2016 Statement had

been accurate. Accordingly, those who purchased more of Redcentric’s shares than

they sold in this period suffered loss.

2.10. Redcentric has co-operated with the Authority during its investigation and has taken

extensive steps to remedy its failings. Those steps include commissioning an

independent review immediately upon discovering the issues, proactively offering

some information to the Authority, and making improvements to its systems and

controls which had clearly not been effective to prevent the deliberate misconduct in

this case. In addition, the Authority welcomes Redcentric’s acceptance that it should

take such steps as it reasonably can to compensate investors who suffered loss as a

result of Redcentric’s incorrect statements.

2.11. Redcentric has implemented a scheme to provide compensation to those purchasers

of Redcentric’s shares who suffered losses as a result of the market abuse described

above. The Authority is satisfied that Redcentric has taken reasonable steps to provide

the compensation that it reasonably can provide in the circumstances. The Authority

is also satisfied that it is preferable for Redcentric to use its resources providing

compensation in this way, rather than to impose a penalty which would risk causing

disruption to Redcentric’s business, and therefore to its customers. In the unique

circumstances of this case, the balance of public interest is against the issue of a

penalty.

2.12. Given these matters, the Authority has decided that it is appropriate to impose a public

censure rather than a substantial fine. Accordingly, the Authority publishes the

censure set out in this notice pursuant to section 123(3) of the Act.

3. DEFINITIONS

3.1. The definitions below are used in this Notice:

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“the 9 November 2015 Statement” means the announcement dated 9 November

2015 by Redcentric of its unaudited interim results for the six months ending 30

September 2015;

“the 16 June 2016 Statement” means the announcement dated 16 June 2016 by

Redcentric of its audited results for the year ended 31 March 2016;

“the Act” means the Financial Services and Markets Act 2000;

“AIM” means the Alternative Investment Market of the London Stock Exchange;

“the Authority” means the Financial Conduct Authority;

“DEPP” means the Decision Procedure and Penalties Manual, part of the

Authority’s Handbook of Rules and Guidance;

“EG” means the Authority’s Enforcement Guide;

“Redcentric” means Redcentric PLC;

“Redcentric’s shares” means Redcentric’s publicly tradeable shares listed on AIM;

“the Regulations” means the Financial Services and Markets Act 2000 (Market

Abuse) Regulations 2005

“the Relevant Period” means the period from 9 November 2015 to 7 November

“RNS” – the Regulatory News Service operated by the London Stock Exchange

4. FACTS AND MATTERS

4.1. Redcentric is an AIM listed IT managed services firm based in Harrogate, Yorkshire.

4.2. On 9 November 2015 Redcentric made the 9 November 2015 Statement, in which it

published its unaudited interim results for the six months ending 30 September 2015.

The “Highlights” section included the statement: “Net bank debt £16.5m”. That figure

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was repeated under the heading “Financial position and dividend”, which stated

“Following the acquisition of Calyx and the securing of new bank facilities in April 2015,

net bank debt has increased to £16.5m”, and the figure appeared again under the

heading “Cash flow and funding”.

4.3. The 9 November 2015 Statement also reported that cash and cash equivalents at the

end of the period (i.e. at 30 September 2015) were £9,984,000.

4.4. The Authority has found that Redcentric knew or ought to have known that its net

bank debt position was in fact approximately £29,545,000, and its cash and cash

equivalents were negative £3,061,000. It had therefore over-stated its cash and cash

equivalents by approximately £13,045,000, and under-stated its net bank debt by the

same amount.

4.5. By understating Redcentric’s net bank debt position in this way and over-stating its

cash and cash equivalents, the information in the 9 November 2015 Statement gave

a false and misleading impression as to the value of Redcentric’s shares.

4.6. On 16 June 2016 Redcentric made the 16 June 2016 Statement in which it published

its audited results for the year ended 31 March 2016. The “Highlights” section included

the statement: “Total net borrowings of £25.3m”. This figure was repeated in the body

of the announcement under the heading “Cash-flow”, where it stated: “As at 31 March

2016, the Group had net debt of £25.3m…”.

4.7. The 16 June 2016 Statement also stated that “Cash and cash equivalents at end of

year” were £8,492,000.

4.8. The Authority has found that Redcentric knew or ought to have known that its net

debt position was approximately £37,455,000 and its cash and cash equivalents stood

at a negative value of £3,663,000. It had therefore over-stated its cash and cash

equivalents by approximately £12,155,000, and under-stated its net debt position by

the same amount.

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4.9. By understating Redcentric’s net debt and over-stating its cash and cash equivalents

in this way, the information in the 16 June 2016 Statement gave a false and

misleading impression as to the value of Redcentric’s shares.

4.10. On 7 November 2016 Redcentric announced that an internal review by its audit

committee in relation to the (as yet unpublished) interim results for the 6 months

ended 30 September 2016 had discovered misstated accounting balances in the

Group’s balance sheet. It stated that its Board had commenced a forensic review of

the Group’s current and historic balance sheets, which would delay publication of its

interim results. It noted that the work to date had identified that audited accounts for

previous years were likely to need to be restated, resulting in some write down in

historic profits. It went on to explain that the Board believed from the information

available to date that the impact of correcting these cumulative historic accounting

misstatements would result in a need to reduce net assets by at least £10 million, and

that the net debt guidance previously given was now believed to be unreliable. The

Board said that it now believed that net debt at the half year was approximately £30

million, and that the underlying net debt position at 31 March 2016 was materially

higher than as reported.

4.11. The price of Redcentric’s shares fell by approximately 52% to 63.3p during the course

of the day on 7 November 2016, although it recovered to 87p on 18 November 2016,

which was a net fall of 42%.

4.12. Purchasers of Redcentric’s shares during the period from 9 November 2015 to 7

November 2016 paid a higher price than they should have paid, as the price was

higher than it should have been due to the false or misleading impressions created by

the 9 November 2015 Statement and 16 June 2016 Statement. Those purchasers who

had not sold those shares during this period, suffered a loss as a result of the fall in

price.

Redress and Remediation

4.13. Since the announcement of the misstatements, Redcentric has taken a number of

steps to remedy the failings which led to the misstatements. Redcentric appointed

auditors to conduct a forensic review, which identified desirable improvements which

have since been implemented by the Board.

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4.14. Redcentric has initiated a scheme to provide some compensation to all net purchasers

of Redcentric shares during the period from 9 November 2015 to 4 November 2016

(the latter being the last trading day before the announcement of 7 November 2016).

Redcentric has told the Authority that it estimates the value of the scheme to potential

claimants is £11.4 million and that each Claimant will have a basic entitlement to

receive an overall value of approximately 17 pence for each net share purchased.

4.15. The approach of the Redcentric Board in proactively devising and implementing a

scheme to offer some compensation to shareholders affected by the false market has

been exemplary. Furthermore, the evidence and assistance provided by Redcentric

has led to a timely conclusion of the FCA’s enquiries and has been of critical assistance.

Further relevant matters

4.16. The Authority is of the view that in setting up the scheme Redcentric is taking such

steps as it reasonably can to compensate investors who suffered loss as a result of

Redcentric’s market abuse.

4.17. The Authority also notes that Redcentric’s customers include numerous NHS Trusts

and that it provides vital services in respect of the Covid-19 pandemic. The Authority

considers that the imposition of a penalty would give rise to a significant risk of

disruption to Redcentric’s business, which may cause significant disruption to those

services.

5. FAILINGS

5.1. The regulatory provisions relevant to this Final Notice are referred to in Annex A.

The Relevant Securities were qualifying investments traded on a prescribed

market

5.2. Redcentric’s shares were admitted to trading on the Alternative Investment Market on

the London Stock Exchange on 24 April 2013. Redcentric’s shares are therefore

“qualifying investments” admitted to trading on a “prescribed market” for the

purposes of Article 10 of the Regulations. Accordingly, Redcentric’s behaviour fell

within section 118(1)(a)(i) of the Act. In addition, the provision of information by

Redcentric and the publication of the 9 November 2015 Statement and 16 June 2016

Statement, both occurred in the UK, fulfilling the jurisdictional criteria set out at

section 118A(1)(a) and section 118A(1)(b)(i) of the Act.

The information gave a false or misleading impression as to a qualifying

investment

5.3. The information provided by Redcentric to the market in the 9 November 2015

Statement and 16 June 2016 Statement incorrectly overstated Redcentric’s cash

position and understated Redcentric’s net debt position. As a result, the information

gave a false or misleading impression as to Redcentric’s shares.

The information was disseminated by persons who knew or could reasonably

be expected to have known that it was false or misleading

5.4. The Authority has found that Redcentric knew, or could reasonably have been

expected to know, that the information it disseminated to the market via the 9

November 2015 Statement and 16 June 2016 Statement was false and misleading.

Conclusion on Market Abuse

5.5. The Authority considers that the behaviour of Redcentric constituted market abuse

contrary to section 118(7) of the Act.

5.6. Pursuant to section 123(1) of the Act, the Authority may therefore impose a penalty

of such amount on Redcentric as it considers appropriate.

5.7. At the relevant time, Section 123(2) of the Act stated that the Authority may not

impose a penalty for market abuse in certain circumstances. The Authority is satisfied

that these circumstances do not apply to the conduct described in this notice.

5.8. Section 123(3) of the Act states that if the Authority is entitled to impose a penalty

on a person it may, instead of imposing a penalty on him, publish a statement to the

effect that he has engaged in market abuse.

6. SANCTION

Breach of Section 118(7) of the Act - Public Statement

6.1. The Authority publishes this Notice as a statement of Redcentric’s misconduct

pursuant to section 123(3) of the Act.

6.2. The Authority has had regard to the provisions of DEPP 6 regarding penalty. The

Authority has also had regard to the provisions of Chapter 7 of the Enforcement Guide.

6.3. The Authority’s policy for imposing a financial penalty or publishing a statement of

misconduct is set out in Chapter 6 of DEPP. DEPP 6.4.1G states that the Authority will

consider all the relevant circumstances of the case when deciding whether to impose

a penalty or issue a public censure. In the particular circumstances of this case, which

are unusual, the Authority does not consider it would be appropriate to impose a

penalty. The Authority believes that its objectives may appropriately be achieved by

means of a public censure.

6.4. In reaching this conclusion, the Authority has had regard to the following matters:

(1)
Redcentric benefitted financially from its market abuse, obtaining revenue from

share options that it would not otherwise have received;

(2)
Redcentric’s misconduct was serious such that ordinarily a substantial penalty

would be justified;

(3)
the scheme instigated by Redcentric to provide compensation demonstrates

Redcentric’s commitment to do what it can to undo the harm that its misconduct

caused to net purchasers of its shares;

(4)
Redcentric has provided valuable co-operation to the Authority in its

investigation, and has taken extensive steps since the misconduct to ensure

that similar misconduct will not occur in future;

(5)
the potential impact of imposing a penalty on Redcentric, and the wider public

interest in avoiding disruption to the services provided by Redcentric to NHS

Trusts and in respect of the Covid-19 pandemic; and

(6)
that it is preferable for Redcentric to provide such compensation as it can to net

purchasers in accordance with the scheme it is setting up, rather than to risk

disrupting Redcentric’s business and the services it is providing to its customers

at this time.

7. PROCEDURAL MATTERS

Decision maker

7.1. The decision which gave rise to the obligation to give this Notice was made by the

Settlement Decision Makers.

7.2. This Notice is given under, and in accordance with, section 390 of the Act.

7.3. Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of

information about the matter to which this notice relates. Under those provisions,

the Authority must publish such information about the matter to which this notice

relates as the Authority considers appropriate. The information may be published

in such manner as the Authority considers appropriate. However, the Authority

may not publish information if such publication would, in the opinion of the

Authority, be unfair to the person with respect to whom the action was taken or

prejudicial to the interests of consumers or detrimental to the stability of the UK

financial system.

7.4. The Authority intends to publish such information about the matter to which this

Final Notice relates as it considers appropriate.

Authority Contacts

7.5. For more information concerning this matter generally, contact Luke Stevens (direct

line: 020 7066 6092) or Richard Littlechild (direct line: 020 7066 7146) of the

Enforcement and Market Oversight Division of the Authority

Mario Theodosiou
Project Sponsor
Financial Conduct Authority, Enforcement and Market Oversight Division


ANNEX A: Relevant Statutory and Regulatory Provisions

STATUTORY PROVISIONS

1.
The Authority's statutory objectives are set out in section 1B(3) of the Financial

Services and Markets Act 2000 as amended by the Financial Services Act 2012 and

include the integrity objective.

The following provisions are described as they were in force at the time of the relevant

conduct described in this notice.

2.
The Authority has the power under section 123(1) of the Act to impose a financial

penalty where it is satisfied that a person has engaged in market abuse.

3.
Section 118(1)(a) of the Act defines 'market abuse' as "behaviour (whether by one

person alone or by two or more persons jointly or in concert) which -

(a)
occurs in relation to:

(i) qualifying investments admitted to trading on a prescribed market;

...and

(b)
falls within any one or more of the types of behaviour set out in subsections

(2) to (8)."

4.
Section 118(7) sets out the behaviour that will amount to the dissemination of false

or misleading information:

"... where the behaviour consists of the dissemination of information by any means

which gives, or is likely to give, a false or misleading impression as to a qualifying

investment by a person who knew or could reasonably be expected to have known

that the information was false or misleading."

5.
Section 118A(1) states that behaviour is taken into account if it occurs:

"(a)
in the United Kingdom, or

(b)
in relation to-

(i) qualifying investments which are admitted to trading on a prescribed

market situated in, or operating in, the United Kingdom ...".

6.
Section 123(2) of the Act provides a defence to the Authority imposing a penalty

for market abuse:

"But the Authority may not impose a penalty on a person if ... there are

reasonable grounds for it to be satisfied that -

(a)
he believed, on reasonable grounds, that his behaviour did not fall

within paragraph (a) or (b) of subsection (1), or

(b)
he took all reasonable precautions and exercised all due diligence to

avoid behaving in a way which fell within paragraph (a) or (b) of that

subsection."

7.
Section 123(3) of the Act provides the Authority with a power to issue a public

"if the [Authority] is entitled to impose a penalty on a person under this section

it may, instead of imposing a penalty on him, publish a statement to the effect

that he has engaged in market abuse."

HANDBOOK PROVISIONS

Decision Procedures and Penalties manual ("DEPP")

8.
Section 124 of the Act requires the Authority to issue a statement of policy with

respect to the imposition of penalties for market abuse and the amount of such

penalties. The Authority's policy in this regard is contained in Chapter 6 of DEPP as

applicable from 6 March 2010. In deciding whether to exercise its power to impose

a financial penalty under section 123 of the Act, the Authority must have regard to

this statement.

9.
DEPP 6.2 sets out a number of factors to be taken into account when the Authority

decides to take action for a financial penalty. The factors are not exhaustive, but

include the nature and seriousness of the suspected breach and the conduct of the

person after the breach.

10.
In deciding whether to exercise its power under section 123 of the Act in the case

of any particular behaviour, the Authority must have regard to the statement of

policy published under section 124 of the Act. In determining the penalty to be

imposed on Redcentric, the Authority has had regard to DEPP 6.

11.
DEPP 6.3 sets out factors which the Authority may take into account in determining

whether the conditions in section 123(2) of the Act are met. Relevant factors

(a)
whether, and if so to what extent, the behaviour in question was or was

not analogous to behaviour described in the Code of Market Conduct as

amounting or not amounting to market abuse (DEPP 6.3.2(1)G);

(b)
whether the Authority has published any guidance or other materials on

the behaviour in question and if so, the extent to which the person sought

to follow that guidance or take account of those materials. The Authority

will consider the nature and accessibility of any guidance or other published

materials when deciding whether it is relevant in this context and, if so,

what weight should be given (DEPP 6.3.2(2)G);

(c)
the level of knowledge, skill and experience to be expected of the person

concerned (DEPP 6.3.2(4) G);

(d)
whether, and if so to what extent, the person can demonstrate that the

behaviour was engaged in for a legitimate purpose and in a proper way.

12.
DEPP 6.4 sets out factors which the Authority may take into account in determining

whether to impose a financial penalty or public censure. These factors include:

(a)
whether or not deterrence may be effectively achieved by issuing a public

censure (DEPP 6.4.2(1)G);

(b)
if the breach is more serious in nature or degree, this may be a factor in

favour of a financial penalty, on the basis that the sanction should reflect

the seriousness of the breach; other things being equal, the more serious

the breach, the more likely the Authority is to impose a financial penalty

(DEPP 6.4.2(3)G);

(c)
if the person has admitted the breach and provides full and immediate

cooperation to the Authority, and takes steps to ensure that those who

have suffered loss due to the breach are fully compensated for those loses,

this may be a factor in favour of a public censure, rather than a financial

penalty, depending on the nature and seriousness of the breach (DEPP

6.4.2(5)G);

(d)
the impact on the person concerned. It would only be in an exceptional

case that the FCA would be prepared to agree to issue a public censure

rather than impose a financial penalty if a financial penalty would otherwise

be the appropriate sanction (DEPP 6.4.2(8)G).