Anyone who closely follows the UK financial scene, especially scandals, knows that local reporting on them quickly devolves into rumor mongering and tabloid-like headlines. And the WorldSpreads situation is understandably no different, with headlines such as "ETX rides to the rescue" being thrown around.
There will be no rescue for WorldSpreads clients or shareholders, just a refund of some of clients' money plus whatever the U.K.'s Financial Services Compensation Scheme will cover.
We understand that the following has occurred, is occurring, or is likely to occur:
1) Client Money Missing. WorldSpreads had £29.7 million in client assets on the books, but only £16.6 million in cash as of last weekend. That means that £13.1 million in client money was missing (more actually, as WorldSpreads itself also had cash, but let's ignore that for the time being), meaning that fully 44% (!) of client money was missing. This clearly wasn't misplacement of a little money, it was quite a lot in relative terms for WorldSpreads. Both the FSA and administrator KPMG, along with police investigators, are working quickly to trace exactly where the missing money went, and where (and how, and by whom...).
2) Asset Sales. Again, as per above there will be no overall "rescue" of WorldSpreads, nor a sale of the company. The remaining assets of value which WorldSpreads has (after giving out all cash to clients) are its 5,000-person client list, its trading and back-office systems (software), and then everything else a bankrupt company has – computers, furniture, etc. KPMG has confirmed that the client list will remain confidential and will not be sold. That leaves WorldSpreads' trading systems, for another spreadbetting firm which believes it might be an upgrade to its own, or for a company outside the industry which wants to break in. WorldSpreads' administrators will try to extract maximum value for those assets in order to distribute funds to WorldSpreads' creditors, and that kind of sale can take some time. We'd be surprised if something happens very fast in terms of asset sales.
3) Police Investigation. The WorldSpreads saga is unlikely to end with a quiet whimper and return-of-assets. Again, this was not a few million dollars misplaced from a billions-of-dollars corporation -- this was 44% of client assets! The police are already going about their investigation quietly and rapidly, both to help recover (if possible) and client money and to lay charges of wrongdoing if those are warranted.
4) Former Senior Management. Ex-CFO Niall O'Kelly, who left WorldSpreads about a month before the story broke in mid-February, has remained silent. But ex-CEO (and WorldSpreads' largest individual shareholder) Conor Foley put out a statement that his resignation from WorldSpreads last Wednesday, just 48 hours before the missing client money came to light, was "completely unrelated", and that "the first he learned of these issues (the financial irregularities) was on Friday morning last, at the same time as the rest of the board." We'll just leave it at that.
(Src:Leaprate)
There will be no rescue for WorldSpreads clients or shareholders, just a refund of some of clients' money plus whatever the U.K.'s Financial Services Compensation Scheme will cover.
We understand that the following has occurred, is occurring, or is likely to occur:
1) Client Money Missing. WorldSpreads had £29.7 million in client assets on the books, but only £16.6 million in cash as of last weekend. That means that £13.1 million in client money was missing (more actually, as WorldSpreads itself also had cash, but let's ignore that for the time being), meaning that fully 44% (!) of client money was missing. This clearly wasn't misplacement of a little money, it was quite a lot in relative terms for WorldSpreads. Both the FSA and administrator KPMG, along with police investigators, are working quickly to trace exactly where the missing money went, and where (and how, and by whom...).
2) Asset Sales. Again, as per above there will be no overall "rescue" of WorldSpreads, nor a sale of the company. The remaining assets of value which WorldSpreads has (after giving out all cash to clients) are its 5,000-person client list, its trading and back-office systems (software), and then everything else a bankrupt company has – computers, furniture, etc. KPMG has confirmed that the client list will remain confidential and will not be sold. That leaves WorldSpreads' trading systems, for another spreadbetting firm which believes it might be an upgrade to its own, or for a company outside the industry which wants to break in. WorldSpreads' administrators will try to extract maximum value for those assets in order to distribute funds to WorldSpreads' creditors, and that kind of sale can take some time. We'd be surprised if something happens very fast in terms of asset sales.
3) Police Investigation. The WorldSpreads saga is unlikely to end with a quiet whimper and return-of-assets. Again, this was not a few million dollars misplaced from a billions-of-dollars corporation -- this was 44% of client assets! The police are already going about their investigation quietly and rapidly, both to help recover (if possible) and client money and to lay charges of wrongdoing if those are warranted.
4) Former Senior Management. Ex-CFO Niall O'Kelly, who left WorldSpreads about a month before the story broke in mid-February, has remained silent. But ex-CEO (and WorldSpreads' largest individual shareholder) Conor Foley put out a statement that his resignation from WorldSpreads last Wednesday, just 48 hours before the missing client money came to light, was "completely unrelated", and that "the first he learned of these issues (the financial irregularities) was on Friday morning last, at the same time as the rest of the board." We'll just leave it at that.
(Src:Leaprate)
In my most humble of opinion, the statement made by Mr Foley last week was very badly advised. To release it via a PR company made matters even worse. As if making a statement like that really means anything anyway. A total denial of any involvement looks shambolic given that he was the company CEO some 48 hours earlier. In a previous interview Mr Foley had gone on the record as saying how nice the S/B Co was to run due to it's very simple nature, how there was clarity with no hidden nasties.
ReplyDeleteBesides, to issue an outright denial is an acknowledgement that both he and his fellow directors we not running the business in a legitimate manner. It's their legal responsibility to ensure that their S/B Company is solvent since it is against the law to carry on trading otherwise.
Mr Foley also runs the risk of looking like a fool if anything comes to light which might indicate that he did have some prior knowledge of the fraudulant activity taking place at his company. I mean, the mere whiff will make his carefully worded statement seem completely untrue. This in turn will cause people to suspect that there is 'no smoke without fire'. He was badly advised indeed on this matter.
Of course, what he should of done, is issue a statement which made himself available to the administrators and police in order that he could help sort out some of the mess. I do hope that he didn't pay anyone for the advice which he received!
One thing not mentioned so far is the role played by compliance staff? In the UK the head of compliance is a role which requires FSA approval and indeed FSA clearance as it is deemed a 'controlled role' within and FSA regulated company. Do we know who the compliance officer is at Worldspreads?
The Compliance Officer was Dominic Bacon and you rightly say it his his job to ensure that Worldspreads were complying with FSA rules.There are few more important roles for a Compliance Officer in a Spreadbetting company than to make sure that client funds are indeed ringfenced.
DeleteAs for Foly, you are also right that he was poorly advised to release that statement given his role in the company and the fact that if there was no contection with the shortfall it is not at all obvious the reason why he did resign from the company he founded and ran with immediate effect a few days before.Still, as I am keen to see Foly sued for his role, or lack of it, I am quite pleased he did release it.
Almost certainly Foley did not realise how at risk he was legally. He should have spoken to a lawyer not a PR guy. His reputation is the least of his worries.
DeleteHe is probably now putting assets into his wifes name faster than you can say "Class action lawsuit".
Apparently the police have already grilled Bacon.
DeleteI hear he`s toast.
DeleteThey've tried turning up the heat but he's not spitting
DeleteThe FSA said he has had his chips.
DeleteHe had the CEO telling him what to do on one side and the CFO on the other.
DeletePolice say it was a classic Bacon sandwich
Mr Foley appears prone to making 'interesting' statements. Not least was the one in an interview with a spread betting site - basically a PR interview for Worldspreads. In it he claims client funds are 100% segregated and were held at RBS. He made the point that anyone with money in Worldspreads had tantamount to a state guarantee given the ownership structure of RBS.
DeleteWe have to wait and see but E & Y have questions to answer to clients who lost their money. Perhaps all was fine when they audited and the cash was frittered away post audit but a lot of paper talk (FT, Telegraph etc.) is suggesting this lack of segregation may well have been happening in at least one of the audit periods.
After the MF Global collapse I asked for a written assurance that my funds were safe in the event of a Worldspreads bankruptcy. I got this in writing only 4 months ago.
DeleteWasnt worth the paper it was written on however.
I suspect that a very many people within Worldspreads knew that client money was being accessed for company use.In particular, money posted as margin for hedges by Worldspreads to their Brokers is not supposed to come from client segregated accounts. On Feb 28th 2012, Worldspreads put out a statement saying they had £6m of company cash on the balance sheet. Although that figure was a pack of lies, even if it wasnt, almost certainly, margin posted with brokers at that time exceeded that amount.
ReplyDeleteSo even if Foley et al did believe that the company had £6M net cash (a big if), they must have known that margin calls exeeding that amount could only have been financed by dipping into client segregated accounts. There must have been a lot of people within Worldspreads who knew the size of the margin calls for hedges.
I suspect that WS hedged very little. They've clearly landed themselves in this mess because customers started getting more right than wrong. As a result the firm took the loss. Of course this strategy was meant to yield fast profits which in turn would lead faster growth.... as with all things financial, high reward = high risk.
DeleteThe £6m cash they showed on the balance sheet looks to be 'pie in the sky'. Unless of course they're trying to make us believe that they lost £6m (from the balance sheet) + £13m (from client funds) in the space of three weeks??? Hardly likely is it?
Of course, when you study the balance sheet, the shear SIZE of the £13m loss (plus the £6m of company funds) raises many many questions (in my mind anyway) like, are any of the company accounts actually real or are they all works of fiction? Let's face it, at best the company made a profit of around £3m in its BEST financial year! It looks to me that several years of reported profits were simply manipulated figures which were really based on money taken from client funds? Of course, the money didnt actually have to be physically taken but just reported. So long as more clients placed money on deposit the fraud could go on and on. Let's be honest here, there's a chance that this company could have been losing £2m - £3m per year for the last five or six years? They may have simply choosen to cover this up because they needed people to believe that they were an up and coming company within the sector. It is a form of Ponzi.
If this is what happened.And I agree it is the most likely explaination.Then Foley and the gang are no different to Bernie Madoff.
DeleteI know it will take at least two years for anyone to see the fscs pay out. You can phone kmpg or fscs and ask what was the average timescale for previous payouts which they don't like to tell you but if you pressure them they will tell you a good few years
ReplyDeleteThat's just not true. When IceSave went under, I got my money back within 2 months. I think it will be clear that in order to make sure all clients are paid in full, all the remaining funds in WS will go to the big clients and the FSCS will pay out on all balances of £50k or lower.
ReplyDeleteMF Global first payouts now i.e 5 months, but for clients over £50k it will take a few years.
ReplyDelete