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 6p.

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.

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