FT reports now upto 80% of Worldspreads’ client funds missing!

 Conor Foley – incumbent CEO of Worldspreads at the time of the fraud.

Simon Mundy of the FT has broken the following story in todays FT –

“Worldspreads had moved 80 per cent of its clients’ funds out of segregated accounts at the time of defunct spread betting operator’s failure, and may have routinely misused client money for as long as five years, according to its chairman.

Lindsay McNeile, chairman of Worldspreads since 2007, said in a witness statement last month that he became aware on March 16 that “the client money reconciliations had been ‘deliberately falsified’”. This followed the resignation earlier that week of Conor Foley, chief executive, and Niall O’Kelly, financial director, neither of whom has been accused of any wrongdoing.

“We were told that this had been going on for at least 12 months,” Mr McNeile said in his statement, submitted to the High Court to support Worldspreads’ application for administration on March 18. “The indication … was that there may have been inappropriate treatment of client monies for as long as five years.”

Mr McNeile’s admission means that the practices may have been ongoing at the time of Worldspreads’ flotation on Aim in 2007, underwritten by the company’s corporate broker, Collins Stewart. The revelation of the extent and longevity of the alleged fraud will add to the pressure on Ernst & Young, Worldspreads’ auditor, over its apparent failure to detect the irregularities.

Worldspreads was forced to announce its insolvency last month after it became clear that the amount of money owed to clients far exceeded the cash available to the company. This was caused by the group’s long-running failure to keep client monies in protected bank accounts as required by law, instead using much of the cash for its own purposes.

Clients believed that they were making their margin payments directly into a segregated account that would not be accessed by the company. But Mr McNeile’s testimony reveals that the company was misusing the vast majority of its customers’ funds at the time of its insolvency. When the insolvency was announced, it was revealed that Worldspreads had total cash balances of £16.6m, and owed clients a total of £29.7m.

“It appears that … client monies have indeed been commingled with the company’s funds, leaving a shortfall in the client accounts,” Mr McNeile said. The amount in segregated client accounts was only £5.8m, he said – meaning that £24.1m of the funds held on clients’ behalf was being used by Worldspreads for its own purposes.

Regulations state that spread betting companies must segregate funds held on behalf of clients unless a client specifically opts out of this arrangement. Few if any of Worldspreads’ clients made use of this exemption, according to people close to the situation.

Clients are expecting to receive about 50p of every pound owed to them by Worldspreads, and the Financial Services Compensation Scheme will cover the first £50,000 of any amount still outstanding.

This means that a number of clients owed more than £100,000 could be left facing substantial losses. The Worldspreads Action Group, representing 23 of these clients, is considering legal action against E&Y and Worldspreads’ directors, said Richard Jennings, the group’s chairman.

Several clients allege that much of the missing money was lost through an illegal scheme to support the company’s share price. The people say that managers of the company encouraged wealthy clients to take leveraged long positions in Worldspreads stock, promising to indemnify them against any losses.

The company then bought the corresponding shares in the market, allegedly using other client funds to make up the difference between the wealthy clients’ bets and the cost of the shares. Worldspreads did not force the clients to make good on their losses when the share price fell – but KPMG, the special administrator, may pursue these clients for the outstanding amounts.

“It’s beginning to look as though this company was never what it was purporting to be,” said Tony Wollenberg, a founder of City Index and leading spread betting and derivatives lawyer, who is one of the clients owed money by Worldspreads.”