Shares in scandal-hit Room Service to resume trading

The Financial Times
By Elizabeth Rigby

December 3, 2003

Shares in Room Service, the Aim-listed company at the centre of a short-selling scandal, will resume trading on Friday, as angry shareholders threaten legal action against market-makers accused of over-shorting.

The decision to resume trading came after Room Service announced a re-financing deal, in which it will raise 195,000 in cash from the placing of 19.5m shares at 1p a share. It is also issuing a further 10.5m shares in a debt-for-equity swap. The shares were suspended on October 22 pending such a package.

Yesterday the London Stock Exchange took the unusual step of telling investors that the heavy short positions would affect the trading of the shares.

Separately, it emerged last week that market-makers had shorted more shares in the company than actually existed, creating settlement problems and leaving investors out of pocket. Market-makers sold the shares "naked", without entering into arrangements to borrow the underlying stock, leaving them unable to settle trades.

However, the London Stock Exchange said the share placing would not ease liquidity problems, because the consortium taking up the rights issue is also offering to take over Room Service. It will therefore not be allowed to trade shares until the deal is completed, which could take at least three weeks.

The consortium is being led by Chiddingfold, Room Service's largest creditor, an offshore company registered in Gibraltar that plans to re-name the company Azure Holdings.

"The filling of the short position has been complicated by the corporate action," the LSE said, in a statement warning of "settlement difficulties". When trading resumes market-makers will rush to close positions. Opinion is split on which way the shares - suspended at 6.5p - will move.

Nigel Smith, a co-ordinator for the Room Service Shareholders' Action Group, said: "The shares will come off if they start trading at about 6p. A lot of people will sell at that price." However, someone close to Room Service said demand could push them up.

Meanwhile, Mr Smith said the shareholder action group planned legal action against market-makers Evolution Beeson Gregory, Shore Capital and Winterfloods for "misrepresentation, failure to deliver shares and denying holders' voting rights".

Winterfloods and Evolution declined to comment.


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