The FSA has found that Pace breached the Listing Rules because it failed to ensure its Interim Results Announcement on 8 January 2002 included all relevant information, when it did not reveal that its trade credit insurance, in respect of one of its largest customers, had been withdrawn. It also failed to update the market without delay of a change in its expectation as to its future revenue performance which had occurred on 4 February 2002. When Pace did alert the market as to its financial position on 5 March 2002, its share price fell 67% by close of trading.
Gay Huey Evans, Director of Markets at the FSA, said:
"The effect of Pace's omission from its Interim Announcement on 8 January 2002 was further compounded by the delay in announcing its changed expectation as to its financial performance until 5 March 2002. These were clear breaches of the Listing Rules."The FSA requires listed companies to ensure the financial information they release to the market is accurate and provided without delay to enable investors to make informed investment decisions. This is a fundamental protection for shareholders and is vital for the smooth operation of efficient, orderly and competitive markets.
"This is the third time in the last 12 months that the FSA has taken action against a company for failing to observe the Listing Rules. It demonstrates how seriously we view a failure by companies to meet expected standards and our determination to take action for such failures."
Background
Pace is involved in the manufacture, development and distribution of digital television set top boxes. Pace's primary customer base, during this period, was composed of a small number of large European and US companies. One of its largest customers in late 2001 was NTL Group Limited (NTL), a subsidiary of the US-based NTL Inc which was suffering well publicised financial difficulties.
NTL, during the first half of Pace's financial year 2001/2002, accounted for 42% of Pace's turnover by volume and 48% by revenue. Pace had made known to the market, in previous Annual Reports, that it maintained a policy of trade credit insurance in respect of its larger customers.
Interim Results Announcement of 8 January 2002
In October 2001, NTL placed orders for 450,000 set top boxes, to be delivered in January, February and March 2002, on which Pace's forecasted revenues for the financial year ending 1 June 2002 were dependent. In early December 2001, the size of the order was reduced to 300,000 boxes and the parties continued to discuss payment and delivery terms.
On 19 December 2001, Pace's trade credit insurer, NCM, informed Pace that it was withdrawing insurance cover in respect of all of Pace's future shipments to NTL including the October 2001 order. This withdrawal meant that future payments owed by NTL were no longer guaranteed. The matter was not drawn to the attention of the company's corporate brokers and the withdrawal of insurance cover was not mentioned in the Interim Results statement published on 8 January 2002. Pace's Interim Results Announcement on 8 January 2002 showed that the expected turnover for the year ending 1 June 2002 would be broadly similar to the previous year's turnover of £524 million. Key to the realisation of the forecast figure was the receipt of the revenue from NTL's purchase of the 300,000 boxes.
Trading Statement of 5 March 2002
On 4 February 2002, Pace changed its expectation of its revenue for its financial year ending 1 June 2002, to £455 million, which was 12.5% less than the market consensus of £520 million. This information was not announced to the market. On 4 March 2002 Pace commenced a review of its performance which indicated that there had been a marked deterioration in its forecasted revenue for the financial year ending 1 June 2002 from £455 million on 4 February to £350 million. This further change in expectation represented a decrease of approximately 30% from the forecast of £524 million implied by the Interim Results of 8 January 2002.
Pace issued a Trading Statement on 5 March 2002 setting out its change in expectation. Following the announcement, Pace's share price fell nearly 67% from £3 to £1 at the close of trading.
Background
- The full text of the Final Notice, dated 26 January 2005, is available on the FSA website. This includes the background to the case, the relevant statutory provisions and the regulatory requirements contravened and the factors taken into account by the RDC when setting the level of the fine.
- Financial penalties are not treated as income by the FSA. They are applied for the benefit of authorised persons (or the issuers of securities admitted to the official list) as appropriate, and so given back to the industry in subsequent years.
- Pace Microtechnology is a publicly listed company whose shares are traded on the LSE.
- Paragraph 9.2 of the version of the Listing Rules, which applied at the time, states that:
"A company must notify the Company Announcements Office without delay of all relevant information which is not public knowledge concerning a change:
(a) in the company’s financial condition;
(b) in the performance of its business; or
(c) in the company’s expectation as to its performance;
which, if made public, would be likely to lead to substantial movement in the price of its listed securities."
- Paragraph 9.3A of the version of the Listing Rules, which applied at the time, stated that:
"A company must take all reasonable care to ensure that any statement or forecast or any other information it notifies to the Company Announcements Office or makes available through the UK Listing Authority is not misleading, false or deceptive and does not omit anything likely to affect the import of such statement, forecast or other information."
- Under section 91(1) of the Financial Services and Markets Act 2000 if the FSA considers that an issuer of listed securities has contravened the Listing Rules, it may impose a penalty of such amount as it considers appropriate.
- FSA took on new powers under the Financial Services and Markets Act 2000 on 1 December 2001. The disciplinary sanctions available to the FSA for breaches of the Listing Rules that take place on or after 1 December 2001 include a fine or a public statement.
- The FSA has taken action for Listing Rules breaches in the following cases since 1 December 2001 - Marconi, SFI, Sportsworld, Universal Salvage and Shell.
- The FSA wrote to listed retail companies, on 15 December 2004, reminding them of their duties under the Listing Rules to keep the market informed without delay of any developments in their businesses.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the appropriate degree of protection for consumers; and fighting financial crime.
- The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve our business capability and effectiveness.
