Worldspreads had moved 80 per cent of its clients’ funds out of segregated accounts at the time of defunct spread betting operator’s failure, and may have routinely misused client money for as long as five years, according to its chairman.
Lindsay
McNeile, chairman of Worldspreads since 2007, said in a witness
statement last month that he became aware on March 16 that “the client
money reconciliations had been ‘deliberately falsified’”. This followed
the resignation earlier that week of Conor Foley, chief executive, and
Niall O’Kelly, financial director, neither of whom has been accused of
any wrongdoing.
“We were told that
this had been going on for at least 12 months,” Mr McNeile said in his
statement, submitted to the High Court to support Worldspreads’
application for administration on March 18. “The indication … was that
there may have been inappropriate treatment of client monies for as long
as five years.”
Mr McNeile’s
admission means that the practices may have been ongoing at the time of
Worldspreads’ flotation on Aim in 2007, underwritten by the company’s
corporate broker, Collins Stewart. The revelation of the extent and
longevity of the alleged fraud will add to the pressure on Ernst &
Young, Worldspreads’ auditor, over its apparent failure to detect the
irregularities.
Worldspreads was
forced to announce its insolvency last month after it became clear that
the amount of money owed to clients far exceeded the cash available to
the company. This was caused by the group’s long-running failure to keep
client monies in protected bank accounts as required by law, instead
using much of the cash for its own purposes.
Clients
believed that they were making their margin payments directly into a
segregated account that would not be accessed by the company. But Mr
McNeile’s testimony reveals that the company was misusing the vast
majority of its customers’ funds at the time of its insolvency. When the
insolvency was announced, it was revealed that Worldspreads had total
cash balances of £16.6m, and owed clients a total of £29.7m.
“It
appears that … client monies have indeed been commingled with the
company’s funds, leaving a shortfall in the client accounts,” Mr McNeile
said. The amount in segregated client accounts was only £5.8m, he said –
meaning that £24.1m of the funds held on clients’ behalf was being used
by Worldspreads for its own purposes.
Regulations
state that spread betting companies must segregate funds held on behalf
of clients unless a client specifically opts out of this arrangement.
Few if any of Worldspreads’ clients made use of this exemption,
according to people close to the situation.
Clients
are expecting to receive about 50p of every pound owed to them by
Worldspreads, and the Financial Services Compensation Scheme will cover
the first £50,000 of any amount still outstanding.
This
means that a number of clients owed more than £100,000 could be left
facing substantial losses. The Worldspreads Action Group, representing
23 of these clients, is considering legal action against E&Y and
Worldspreads’ directors, said Richard Jennings, the group’s chairman.
Several
clients allege that much of the missing money was lost through an
illegal scheme to support the company’s share price. The people say that
managers of the company encouraged wealthy clients to take leveraged
long positions in Worldspreads stock, promising to indemnify them
against any losses.
The company then
bought the corresponding shares in the market, allegedly using other
client funds to make up the difference between the wealthy clients’ bets
and the cost of the shares. Worldspreads did not force the clients to
make good on their losses when the share price fell – but KPMG, the
special administrator, may pursue these clients for the outstanding
amounts.
“It’s beginning to look as
though this company was never what it was purporting to be,” said Tony
Wollenberg, a founder of City Index and leading spread betting and
derivatives lawyer, who is one of the clients owed money by
Worldspreads.
