First fine of a director for breach of the listing rules

Continuing obligations

On 29 March 2004 the Financial Services Authority (FSA) announced that it had censured Sportsworld Media Group plc and fined its former Chief Executive Officer £45,000 in relation to a breach of Rule 9.2 of the Listing Rules, which is one of the main pillars of the continuing obligations regime. It is designed to promote the disclosure of relevant information on a timely basis so that all users of the market have simultaneous access to the same information, and is a key factor in maintaining an orderly market and confidence in the system.

Listing Rule 9.2 requires a listed company to notify the market without delay of all relevant information which is not public knowledge and concerns a change in its financial condition, the performance of its business or its own expectation as to its performance and which, if made public, would be likely to lead to substantial movement in the price of its listed securities. The rule has both a subjective element (the company's expectation of its performance) and an objective element (the likely market impact of any change in that subjective expectation), and a listed company is normally best placed to assess whether an announcement is required. Careful consideration of the obligation – together with the company's advisers, if necessary – is described by the FSA as an overriding obligation.

The facts as found by FSA

Sportsworld was involved in the sports, media and entertainment business. Its board comprised its Chief Executive Officer, Geoffrey Brown, its finance director and three non-executives.

The market expected Sportsworld to make between £14.9 and £18 million in the year to 30 June 2002 and the board repeatedly confirmed its confidence that the Group would meet that expectation. In September 2001 the board approved a budget which anticipated growth of 40% compared to the previous financial year, with 34% of those profits being made in the first half. Statements were issued in October and November to the effect that the year had started in accordance with the board's expectations.

In fact, the company's performance in the first few months of the financial year changed materially for the worse relative to budget and the corresponding period in the previous year. On 24 December 2001, the November 2001 management accounts were available, although they were not distributed to the non-executive directors. The accounts showed that, for each of the four months from August to November 2001, Sportsworld had experienced a significant loss compared to the budgeted profit. But the CEO considered that there was no need to revise the company's expectation because he counted on profits that were not included in the budget, such as acquisitions, accounting adjustments and a consumer promotions programme. It became evident in early January, however, that Sportsworld had not achieved enough major contracts to bring its performance back on track and that it could not make up the budget deficit.

The December 2001 management accounts, presented to the board on 24 January 2002, showed that, if Sportsworld was to meet its profit expectation for the full financial year, it would have to generate £17.8 million profit in the second half of the year: that amounted to 68% more than the budgeted figure. On 25 January the board met to discuss the results and agreed to announce to the market a reduced full-year PBT expectation of £9-10 million, and this was done on 28 January.

The FSA noted that, in the month between 24 December 2001 and 25 January 2002, approximately 2.71 million Sportsworld shares had been traded, at prices between 255p and 161p. On 28 January 1.61 million shares were traded after the company's announcement and the price fell 60% from 161p to 65p. The company issued a further announcement on 13 February indicating that the financial year would be substantially below the £9-10 million announced. The share price fell from 26.4p to 3.5p on 13 February, with 35.02 million shares being traded on that day. Sportsworld's listing was suspended on 2 April and administrative receivers were appointed eight days later.

Contravention by Sportsworld

The FSA said that the November 2001 management accounts indicated the need for a significant increase in profitability in the second half of the financial year, and that, no matter how confident the CEO and Sportsworld may have been that it would be achieved, it was likely that the market would have reacted materially and adversely had it known that, in order to maintain expectations, the company was having to rely on an increasingly optimistic view of its performance in the second half of the year. It found the company at fault for not having accelerated the all relevant information to board level and made an announcement without delay.

By delaying an announcement until 28 January 2002 Sportsworld was in breach of Listing Rule 9.2. The FSA said that, were it not for the company's lack of financial resources, it would have imposed a substantial financial penalty.

CEO knowingly concerned in the contravention

The FSA found that the CEO was principally responsible for Sportsworld's optimistic announcements in September, October and November 2001. He was also aware of the change for the worse in the company's performance, and that this was not public knowledge. As CEO, he was required to be familiar with the requirements of the Listing Rules, and it was ultimately his duty to ensure that the full board was provided with the information so that they could consider the need for an the announcement without delay. In failing to do so, he was knowingly concerned in, and ultimately responsible for, Sportsworld's breach of Listing Rule 9.2.

The FSA imposed a fine of £45,000, taking into account that he may not have the resources of a body corporate, had fully cooperated with the FSA's investigations and had a previously unblemished record as a director. The FSA accepted that he had not deliberately set out to mislead the market.

Conclusion

This is the first time that FSA has used its powers to fine a director for being knowingly concerned in a breach of the Listing Rules. The FSA's announcement illustrates how the FSA approaches such cases and is therefore important to all listed companies and their advisers.

The FSA spells out a number of key factors:

• Listed companies must have written procedures in place to ensure that Listing Rules are complied with, and should take appropriate advice on their obligations. It seems that Sportsworld had no formal or written controls and did not take advice early enough.
• There was a lack of information provided to the non-executive directors, and a failure to discuss the position with them. When the board met in late January to consider the first announcement it had not met since September, and the non-executives had not seen any management accounts or other financial information throughout that period.
• The continuing duration of the breach of Listing Rule 9.2 meant that it became more serious over time as more information became available confirming the changes in expectations.
• The market's view of Sportsworld's performance was materially out of kilter with the real position, and was conditioned by positive statements made at a time when executive management had already had warning signs. Investors were seriously prejudiced.
• Even in the absence of a change to the "headline" full-year profit expectation, if there is a change in the phasing of that profit through the financial year the company must consider whether that change would, if made public, be likely to lead to a substantial movement in the share price.
• A company's optimism that it will achieve its headline profit figure for the year, despite changes in the timing of the delivery of that profit through the year, is not a sufficient basis for the company to conclude that no announcement is required – the market should have been given the opportunity to asses that optimism and the credibility of the company's increasingly ambitious expectations for the remainder of the year.

For further information please contact Peter Smith on 020 7367 2816 or by email at [email protected] or Leonie Counihan on 020 7367 2924 or [email protected]