UNBELIEVABLE – FSA WERE AWARE OF POTENTIAL FRAUD WITHIN WORLDSPREADS 3 MONTHS BEFORE COLLAPSE

The board of Marketspreads, formed by a 2009 buyout of Worldspreads’ Irish business, wrote to the Worldspreads board in December 2011 and January 2012 to alert them to the discovery of apparent fraud and false accounting at the division before its sale.

Worldspreads was told that there had been a big overstatement of assets and revenues at the former Irish subsidiary and that funds had been misused. Last month, Marketspreads filed restated accounts showing that reported pre-tax profit of €4m for the year to March 2009 was overstated by €2.5m.

At the time of the buyout, Worldspreads had inflated retained earnings by €6.7m, and overstated amounts due from clients by €3m, according to the restated accounts prepared – like the initial accounts – by Ernst & Young. The revised report added that “certain former directors and senior executives of the company had been engaged in significant and previously undisclosed trading activities with the firm”.

The board of Worldspreads did not tell shareholders about the letters informing them of these irregularities in December 2011 and January 2012. It notified the Financial Services Authority, which told the company to set up an investigation into the allegations under the oversight of an independent director.

In February, Worldspreads announced the resignation of Niall O’Kelly, finance director, and said it expected to report a full-year loss, but blamed this on “unusual client activity”.

On March 14, Conor Foley resigned as chief executive with immediate effect. Lindsay McNeile, chairman since 2007, became executive chairman and promised that Worldspreads would “grow shareholder value”.

Two days later, the shares were suspended following the discovery of financial irregularities. Mr McNeile said he had not had any suspicion of the accounting problems.

Worldspreads went into administration on March 19, revealing that it had only £16.6m of cash to repay £29.7m owed to clients. Misuse of client funds had gone on for as long as five years, according to a witness statement by Mr McNeile filed in the insolvency proceedings.

Richard Jennings, a client of the company and chairman of the Worldspreads Action Group, said the FSA should have taken faster action when it was informed of the allegations by Marketspreads.

“Not only did the losses mount [between December and March], but retail clients were trading with them in good faith. The FSA has been categorically remiss in their duties.”

Trading at Marketspreads was suspended by the Central Bank of Ireland after it filed its restated accounts last month, but the suspension has now been lifted. “All legacy issues have been dealt with and we look forward to a bright future,” said Enrique Curran, chief executive.

The FSA and Worldspreads’ administrators declined to comment. Mr Foley and Mr O’Kelly could not be reached for comment.

Story reproduced courtesy of Simon Mundy, FT.