UK's Financial Services Authority: JJB Sports PLC Fined £455,000 For Failing To Disclose Information To The Market

The Financial Services Authority (FSA) has fined JJB Sports Plc (JJB) £455,000 for failing to disclose information to the market about the true cost of two acquisitions. This led to a false market in JJB shares for over nine months. JJB made a number of market announcements in that time which did not correct the position.

On 18 December 2007, JJB announced that it had purchased the retail chain Original Shoe Company (OSC) for £5 million in cash. JJB failed to disclose that, in addition to the cash price, it had to pay for the in-store stock.  The cost of the in-store stock was £10.038 million.

On 22 May 2008 JJB announced that it had purchased another retail chain, Qubefootwear Ltd (Qube) for £1 in cash but failed to disclose that, as part of the acquisition, it had agreed to settle Qube’s overdraft prior to completion.  The cost to JJB of settling the overdraft was £6.47 million.

In both cases the cost of the acquisition was inside information and should therefore have been disclosed to the market as soon as possible. At the relevant time the cash positions of listed companies were the subject of increasing investor focus and JJB’s failure to disclose gave a false impression of the costs of OSC and Qube and of the impact of those acquisitions on the true nature and costs of JJB’s strategy.

On 26 September 2008, JJB published its 2008 Interim Results which, for the first time, disclosed the true costs of the OSC and Qube acquisitions. By this time, it had been necessary for JJB to arrange a short-term bridging facility to shore up its financial position, and the 2008 Interim Results also noted uncertainties about JJB’s ability to continue as a going concern. On the day the results were published, JJB’s share price fell by 49.5% from 104p to 52p.

In determining the penalty for JJB’s actions the FSA has taken into account a number of factors including JJB’s co-operation with the investigation and that the entire executive board and nearly all of JJB’s non-executive directors have changed since the events in question.

Alexander Justham, FSA director of markets, said:

"JJB’s failure to disclose information about the two acquisitions denied investors the ability to fully understand its financial position and make informed investment decisions. The repeated failure to disclose this information showed a lack of regard for the market, the disclosure rules and investors.

"Timely and accurate disclosure of inside information is a fundamental component of a properly functioning securities market and is a key focus of the FSA in enforcing the disclosure regime around listed companies. The action we have taken shows it is unacceptable to tell only part of the story whilst leaving material facts unannounced in the background."

JJB agreed to settle at an early stage in the investigation and therefore qualified for a 30% reduction in penalty. Were it not for this discount the FSA would have imposed a financial penalty of £650,000.

Background

1. The Final Notice for JJB Sports plc can be found on the FSA website.
2. The fine of £455,000 (£650,000 before application of early settlement discount) is the second largest fine imposed by the FSA on a company for breach of the Disclosure & Transparency and Listing Rules. In June 2010 Photo-Me International plc was fined £500,000 for breaches of the Disclosure & Transparency and Listing Rules.
3. In the last three years the FSA has taken action against Photo-Me International Plc, Wolfson Microelectronics plc and Woolworths Group Plc for similar breaches.
4. The Disclosure & Transparency Rules and Listing Principles provide a fundamental protection for investors by requiring full disclosure to the market of all relevant information on a timely basis. This aims to ensure that all users of the market get the same information at the same time.
5. Disclosure & Transparency Rule 2.2.1 R states that an issuer must notify a RIS (Regulatory Information Service) as soon as possible of any inside information which directly concerns the issuer, unless certain exceptions apply. Listing Principle 4 states that a listed company must communicate information to holders and potential holders of its listed equity securities in such a way as to avoid the creation or continuation of a false market in such listed equity securities.
6. The FSA, when it acts as the competent authority under Part VI of FSMA, is referred to as the UK Listing Authority or UKLA. In this role, the FSA is a securities regulator, focused on the companies which issue the securities traded in financial markets. By making and enforcing the Disclosure & Transparency Rules, the Listing Rules and the Prospectus Rules, the FSA aims to protect investors and foster appropriate standards of transparency, conduct, shareholder rights and due diligence
7. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.