Just when you thought it was safe to go back in the water…

Hard on the heels of the judgement on Siebel, (see posting on September 8th), which lifted the threat of prosecution by the SEC for a selective briefing, the FSA has used its powers to prosecute the directors of a UK company for issuing misleading statements.

In May 2002, 2 directors of AIT, Carl Rigby and Gareth Bailey, issued a regulatory news announcement stating that both turnover and profit were in line with expectations. This statement relied on the inclusion of revenues from 3 contracts. The announcement was proved to be false and misleading because the contracts, according to the FSA, did not exist.

A subsequent announcement a month later acknowledged that the statement was no longer accurate, because one of the contracts has not been confirmed. A further announcement highlighted audit problems, which would mean a shortfall in profits. These announcements caused the share price to fall from just under £5 to 35p.

The prosecution was significant as the FSA’s first criminal action taken under s397 of the Financial Services and Markets Act 2000.

The case highlights the need for Directors to take manipulation of results even more seriously. In this instance, it seems the sales team booked fictitious customer orders to trigger their commission, but because the incentives were clawed back when the debts weren’t paid the team had to keep increasing the amount of fraudulent sales at each quarter end. By the time auditors were called in, fictitious sales accounted for 70 per cent of revenue.

Ultimately the people who paid the price – possibly up to 7 years jail - were the management team.