FSA probes Room Service short-selling
The Financial Times
By Elizabeth Rigby
December 6, 2003
The Financial Services Authority said yesterday it had launched an investigation into the short-selling scandal engulfing Room Service, the Aim-quoted shell company.
The regulator's decision came a day after the London Stock Exchange said it would not allow trading to resume because it feared settlement problems caused by over-shorting would lead to "disorder in the stock".
Shares in Room Service - suspended on October 22 pending a refinancing deal - were due to start trading yesterday.
It emerged last week that market-makers had sold more shares in Room Service than existed.
Nigel Smith, who is a member of the Room Service Shareholders Action Group, said about 60 per cent more shares had been sold between September and October than had been issued.
Market-makers' action have created severe settlement difficulties. It has also left many small investors out of pocket and without share certificates.
Short-selling involves offering shares the vendor does not actually own, in the hope of making a profit by buying them at a lower price before delivering them to the buyer. Typically, the shares are borrowed from a long-term shareholder and returned after the transaction. But in the case of Room Service, now renamed Azure Holdings, market-makers such as Evolution Beeson Gregory, sold the stock "naked" - without entering arrangements to borrow the underlying stock.
Mr Smith said: "We are pleased that the FSA has finally realised the seriousness of this issue and we hope that they look at the LSE's involvement, as well as the market-makers'. The LSE was made aware of the unusual activity long before most of the damage had been done by the short-selling and it could have moved faster to prevent this situation from developing as it did."
In the meantime, it is thought that the market-makers are trying to close out their positions in the grey market.
This week, Evolution bought more than 430,000 shares from two of Room Service shareholders - Ronnie Pearl, a former director, and Gerald Gold, a current director - for 6p a share. The shares were suspended at 6½p.
The LSE yesterday said it did not yet know
when the shares would resume trading. The FSA said its enforcement division was looking
into the matter. Evolution declined to comment.
[ RGM Short Selling Home page ]