The Room Service Group Plc is a small Alternative Investment Market listed company. It maybe one of the smallest AIM listed companies, but in the words of the Nominated Advisor it’s caused one of the biggest scandals / headaches the London Stock Exchange and Financial Services Authority has had to deal with for the past 5 years.

The market capitalisation was only £124,000. The company has had trading difficulties over the past year. The group was once profitable, but last year made a loss and the trading company was placed in receivership. The operating business was sold off to the Coran Group, leaving the ‘shell’ company with huge debts (£219,000), but assets consisting of the AIM listing, worth about £300,000 and a tax loss that was recoverable, provided that the new operating business was of a simalar sector to the previous.

The company was released from suspension on 25 September 2003. Within a few days, the price dropped considerably from 0.2p to about 0.06p. Then it started picking up again and over two weeks increased more than 4 times it previous value, it went to 0.28p. Then the price suddenly dropped again. In the matter of two days (14 October), it went from 0.2p down to 0.06p again.

This behaviour was noticed by many private investors, including some that were interested in taking over the company for it’s shell value. On 15 October, there was a marked increase in trading which suddenly surged. One of the market makers, started selling short into the demand. This did not stop and in fact picked up pace. The surge was so great that the entire amount of issued shares was sold in one day!

Yet most of the private investors knew that only about 40% of the issued shares were available to be sold. As the selling increased, the price started dropping, when in fact it should have been increasing rapidly. This alerted many to the possibility of a case of insider trading. Certainly everyone on the bulletin boards were aware that the market maker activity indicated a possible major market abuse.

The three market makers for Room Service Group Plc are Evolution Beeson Gregory, Shore Capital Stockbrokers Limited and Winterflood Securities Limited.

The Nomad (Nominated Advisor) John East & Partners, were aware that something was wrong  and on 16 October they notified the LSE as required by the regulations. The LSE then flashed a ‘Market Status’ alert to all dealing screens, warning them that the Exchange was ‘aware of difficulties’ in trading of the share.

The company directors had proposed a rights issue to obtain finance to clear the existing creditors, which included a company called Chiddingfold Investments Limited, registered in Gibraltar. They had purchased the debts owed to a company called the Hanover Group. This purchase had gone through against the wishes of the existing directors. As major creditors Chiddingfold Investments asked for seats on the board.

At the AGM on 20 October, two new directors were elected onto the board of the Room Service Group. These were Nicolas Greenstone and Raymond Harris. They also passed Sections 80 and 95 of the Companies Act 1985, so that they could make a private issue of shares to clear the creditors. The proposed issue was £100,000 of 1p shares (10 million shares) which would have diluted the present shareholders 10 to 1.

It is believed that the market maker’s took a short position in anticipation that they would have been able to obtain some of this issue. But as this had not yet been announced, their position was completely incorrect.

It has been alleged by certain users of ADVFN, that the market makers entered into a deal to purchase some of the dilution shares prior to their issue. Although this means that the market makers would not have been ‘short’, they were in breach of contract by failing to deliver on the agreed settlement dates. There has been no proof of these allegations or any statement from the market makers to validate their claim. As the purchase of this many shares would have constituted a takeover under Rule 9 of the Takeover and Mergers Rules, this is a very serious claim.

When the directors were unable to get agreement from the creditors to accept the settlement offer on their debts, they were forced to announce this on 22 October and suspend the share immediately. The market makers were now unable to close their short position and a considerable number of private investors, who had paid for their shares and had agreed settlement dates, did not receive their shares. Including some that wanted to rescue the company.

We have evidence of several major market abuses under FiSMA 2000 (notified to the FSA) and over 45 cases of misrepresentation by the market makers.

Even more amazing, is that (for probably the first time) most of the private investors were in communication on the ADVFN financial information network and were using the Bulletin Boards to discuss what the MMs were up to.

We also believe that the MMs sent ‘de-rampers’ onto the bulletin boards to encourage people to take a loss. Some of the investors did sell shares and sustained losses. The Shareholder’s Action Group was started by a few of the investors. Now over 80 in number (and growing daily) we hold over 120.75% of the issued shares, including all the major investors.

We have retained legal counsel (Edwin Coe) and they have advised us to seek substantial compensation from the market makers. We have received a letter from the solicitor of the market maker chiefly responsible, Evolution Beeson Gregory. It said that thet were seeking their client’s instructions.

The FSA and LSE are investigating the case. David Shrimpton (Head of Trading Services, LSE) and Phillip Cane (Manager of Regulatory Complaints & Enquiries, LSE) both admitted to us in telephone calls, that it was a serious case of market abuse. The FSA have announced that they are conducting an Enforcement Investigation. They are unable to comment on their investigation, which is governed by the Financial Services and Markets Act 2000.

We’ve even had trouble trying to get information released on the MMs responsible by some of the brokers. They’ve quoted confidentiality agreements as the reason why they are refusing to provide the name of the MM responsible for the misrepresentation. The FSA (and LSE) both refused to instruct the brokers to release the information, which means that a number of private investors are now obliged to sue their brokers instead of the market maker. Even though under law, the brokers act as agents of both principals. Obviously this will attract even more publicity.

We have contacted Members of Parliament at the House of Commons and also the Department of Trade and Industry. The DTI was playing ‘pass the parcel’. First we were told to write to Jacqui Smith’s office (Minister of State for Trade and Industry), then the case was passed to Gerry Sutcliffe’s office (Minister for Consumer Affairs). They even called us and said that we should speak to the HM Treasury, as they regulate the FSA and LSE (contrary to statements made by Patricia Hewitt). We’ve copied the letters to the Prime Minister and the Chancellor. We have received 5 letters from No 10 (which are included on this website). We have since reminded the Prime Minister, the Leader of the Opposition and our Members of Parliament once more. Had there been official intervention, the company could have been rescued by the shareholders and not the creditors, These creditors have effectively now taken control of the company.

We were told in November that the LSE, the market maker and the company are agreeing a compromise that benefits everyone except the people that matter the most – the shareholders.

Even financial experts and long term investors who’ve been in the market for years, have declared that they’ve never seen such a bad scandal since Barings Bank. Most of the media people we’ve spoken to can not understand how the Stock Exchange regulators could be so derelict in their duty.

On Tuesday 2 December 2003, It was announced by the company that the name had changed to Azure Holdings Plc. Also that a share issue was to take place, up to the maximum value agreed at the AGM on 20 October 2003. This was £300,000. The issue was split into the following amounts:

As a result of the Placing and the Debt Conversion, Chiddingfold and its associates hold 80.98 per cent. of the Company's issued share capital as enlarged by the Placing and the Debt Conversion and, accordingly, Chiddingfold and its associates have incurred an obligation under Rule 9 of the City Code on Takeovers and Mergers ('City Code') to make a general offer for Room Service at 1p per share.

A further 1,476,000 shares is due to Chiddingfold in lieu of the debt but will not be issued until such time as the issue would not place any further obligations under Rule 9 of the City Code.

For arranging the Placing and the Debt Conversion and underwriting the costs of the Open Offer, Azure Holdings agreed to pay Libra Investments Limited, an associate of Chiddingfold, a fee of £10,000 and a commission of 3.2 per cent. of the amount equal to the aggregate of the gross proceeds of the Placing and the value of the Debt Conversion, to be satisfied by the issue of 2,000,000 new ordinary shares at 1p per share, which will be settled at such time as their issue would not impose any obligation on Libra under Rule 9 of the City Code. The following statement was made in the announcement:

“Gerald Gold, as the independent director, considers, having consulted with the Company's nominated adviser, John East & Partners Limited, that the terms of the Placing, the Open Offer, the Debt Conversion and the Libra Fee, taken together, are fair and reasonable as far as the shareholders of the Company are concerned. “

He then promptly sold his entire shareholding to Evolution Beeson Gregory on 3 December 2003. Followed by Ronnie Pearl (ex-director of Room Service Group Plc) the same day.

On 4 December 2003, it was announced that the non-concert party members of the placing would be able to deal in their shares immediately when it had been previously assumed that they would be under obligation to withold from dealing in the share until the end of the Takeover period of 21 days.

The company announced the following:

“In the light of the well publicised difficulties in settling transactions in Azure shares, Azure, Chiddingfold and its solicitors have agreed to release the non concert party investors (as set out in Appendix 3B of Chiddingfold's announcement under Rule 2.5 of the City Code and who hold in aggregate 4.5 million shares) from their undertakings not to deal in Azure shares. This will permit them to sell shares if they wish, which could alleviate the settlement difficulties in the market. “

The Action Group pointed out to the press and politicians that this is not acceptable for the following reasons:

1. Had the shares sold by the market makers been delivered in October, then the company would have been able to take opportunity of various ‘rescue’ plans that were more beneficial to the shareholders as a whole. A few major shareholders (whose holding was greater than 10% but under 30% and therefore not in contravention of City Code rule 9) had mentioned that they were interested in electing new directors to the board, so that the Chiddingfold debt for equity issue could be halted. However, they were unable to as they were denied their voting rights. This was because their shares had not been delievered by the market makers.

2. The price abuse that had occurred during the short selling in October had artificially depressed and distorted the market price. Whilst the buying had not abated in any way and had actually increased, the market makers had kept the price steady and even after more than 252% of the entire shares had been sold, they then dropped the price, which is an abusive squeeze and contrary to the FSA Code of Market Conduct (COMC). One of the purposes of the squeeze was to encourage shareholders to sell at a loss. The market makers could then buy the shares to cover the short sales that they had made.

Various people have pointed out that the price distortion was to take account of the dilutive debt for equity issue. However, this issue had not been approved by the board or at the AGM. It would also have required an application to the AIM for the issue to be made as well as approval by the AIM and admission to trading. None of this had been approved, therefore any distortion of the price would be contrary to the COMC.

3. The parties selling the non-concert party shares would be taking advantage of the current market price and depressing it even further. Exacerbating the price difference between the value the shares should have reached under natural market dynamics of supply and demand and the price they were artificially lowered to by the market makers.

On Thursday 4 December 2003, the LSE announced that the shares would remain suspended. The Exchange said that they would not allow trading to resume, because it feared settlement problems caused by over-shorting and would lead to “disorder in the stock”

The FSA announced on Friday 5 December 2003 that it had launched an investigation into the short-selling scandal concerning the Room Service Group Plc. They also announced that the FSA enforcement division was looking into the matter.

In December 2003

Evolution Beeson Gregory declined to comment.

Shore Capital stated to the Financial Times on 3 December 2003 that:

“We have no knowledge of any intended legal action against us. In any event, we were puzzled why this would be contemplated as we had no material position in Room Service - short or otherwise.”

Winterflood made no comment.

This is a summary of the Market Abuses

Most people are aware of the Room Service Scandal for the market abuse performed by Evolution, then known as Evolution Beeson Gregory. They were the first market maker to be fined £500,000 by the Financial Services Authority (FSA) for market distortion. Their chief market maker, Christopher Potts was also fined £75,000.

What they did was to sell far more shares in Room Service Group plc that actually legally existed. Over 252% of the legal issued shares. They sold the shares short. Selling short means that they sold a share that they did not have, with the expectation that they would be able to buy it back cheaper later on and make a profit.

They tried to take advantage of the fact that the company would be issuing shares some time in the future and sold the shares before they existed and with no plan to complete delivery by the agreed (and contracted) settlement dates, which were mostly three days after the trade.

In doing so, they made the market disorderly and disadvantaged the investors they sold to. They also distorted the share price and this caused the existing shareholders to lose too.

What was not known by the public up until Monday 3 April 2006, was that the Room Service Scandal was not just a market abuse by the market makers – but also by the London Stock Exchange as well.

This shocking news was revealed today when a claim was filed with the Courts. After the market for Room Service shares had become completely disorderly, the Exchange as a Regulated Investment Exchange (RIE), had an obligation to restore the orderly market as soon as possible, under their Recognition Requirements (or RRRs) – the rules that govern the way RIEs have to work and laid down by the Financial Services and Markets Act 2000 (FSMA).

The Exchange had been notified of the disorderly market on 16 October 2003 by Room Services Nomad (Nominated Adviser), John East & Partners, but they did nothing until 20 October 2003, when they put out a warning to the brokers and market makers that there may be settlement difficulties. The Exchange did not suspend the share immediately, as they should have under the RRRs. The share was suspended for corporate reasons, unconnected with the disorderly market.

As the market makers had masses of delivery obligations and no shares available to deliver, market integrity was threatened. The fundamental point of a share market is that the value of shares varies from moment to moment. If shares are delivered late, then the buyer can be seriously disadvantaged and lose a lot of money. This was the case with Room Service, as the investors wanted to take control of the company and had bought more than 100% of the issued share capital. They could have taken control – IF the shares had been delivered, but they were not.

The Exchange was invited by the investors to call round table negotiations between the market makers, the shareholders, the company and the Exchange, but they refused. Instead, they choose to use the powers of the FSA to arrange with the market makers to make a Settlement Offer. The point of this Offer was to offer a cash alternative instead of physical delivery of the share, as there were too few shares to go around. However what the Exchange did next, has resulted in the headline news, that the Exchange is now being sued for market abuse.

To set the price of the Settlement Offer, the Exchange approached a Nomad and verbally asked them to value the Room Service shares. But instead of letting the valuer determine the true market share price under the conditions of the open short positions, the Exchange gave them specific instructions. They set narrow parameters for the valuation and told the valuer to ignore the true high value of the shares under the market dynamics. They also told the valuer to value the shares AFTER a share dilution had been made. The dilution shares were created a month after the market abuse and were of lower value. The valuer knew that the value of the pre-dilution shares was incredibly high and he later revealed this fact to the LSE Complaints Commissioner, when he investigated a complaint against the LSE that the Exchange’s Settlement Offer was flawed both in valuation and terms.

The Exchange never revealed to the shareholders, that they had put restrictions on the settlement offer. This was dishonest act, because they deceived the shareholders of the true nature of the valuation. They said that the Offer was fair and later on in their letters, that it was free from influence. But this was an outright lie – which was a market abuse.

Under the FSMA it is an offence to make a false or misleading statement about a material particular. This was one of the reasons why Shell were fined $150m by the SEC and £?17m by the FSA. They misled the market about their true assets.

What the Exchange did is conceal that they rigged the valuation in favour of their market maker member – the market abuser. This was an act of bad faith by the Exchange, firstly because they were dishonest in their deception – they were asked to reveal the valuation report on numerous occasions but refused – because the valuation contained the instructions they gave to the valuer. Secondly, because the Exchange is an RIE and under the RRRs, they have to maintain a higher moral and ethical standard as the Regulator of their members and their markets. They failed to uphold one of the key rules – to protect investors’ interests.

Not only that, but they failed to protect investors’ interests in the matter of a financial crime. To use a simple analogy, it was as if an old lady was mugged, and then the policeman came alone – and he mugged the lady too!

The Exchange explained to their Complaints Commissioner that they did make the Offer without prejudice to any legal right to claim additional damages. But when too few people accepted the Settlement Offer for the Exchange to restore the orderly market, the Exchange then did something worse – they allowed the sale of the low value dilution shares to fill the orders for high value pre-dilution shares and in so doing, not only destroyed their value, but also prevented the victims of the abuse from claiming additional compensation through the courts from some market makers. The Exchange went back on their word. They promised that the victims could claim additional compensation and then made it impossible for them to claim it in the Courts.

Some victims don’t even know the name of the market maker that abused them. They were refused the information by the Exchange and the FSA and are completely unable to claim justice or compensation at all.

What the Exchange did – in a moment of madness is dishonour themselves and damage the good reputation of the City – a reputation built up over hundreds of years under the motto:

“Dictum Meum Pactum” – My Word is my Bond.

For hundreds, people have been able to rely on the word of the City of London Markets – because of their tradition and honour in upholding their word, no matter what. But what the Exchange did was drag the good name of the City through the mud, by acting more like a trade association protecting market abusers than a Regulated Investment Exchange.

The Exchange are not the only ones with woes. The FSA have been implicated in four separate scandals, involving their handling of Room Service Group plc, Mayflower Corporation plc, African Diamonds plc and of course the Langbar International Fraud – the biggest fraud on the LSE’s AIM market.

A company that was a fraud from inception and at £370m, seven times the size of the Tonbridge robbery in Kent.

A company that the Exchange allowed to list on their Alternative Investment Market.

A company that put out a false RNS that caused hundreds of investors to lose millions of pounds.

A company that the Exchange is obstructing the investigation into, by withholding vital information that both the investors and the FSA have requested.

The Exchange should be ashamed of themselves.

To read the Exchange Evidence files with all the documents from the investigation into the market abuse by Evolution, you can click on the link below:

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