LSE acts to solve Room Service short-selling scandal

The Financial Times
By David Blackwell

December 20, 2003

The London Stock Exchange yesterday instructed marketmakers involved in the short-selling scandal around Room Service to offer investors who did not receive shares their money back.

However, Nigel Smith of the Room Service Shareholders' Action Group described the offer as "totally unacceptable". He also criticised the Stock Exchange for failing to consult the shareholders about the offer.

The marketmakers, which included Evolution Beeson Gregory, sold more shares in Room Service than existed. Their action created settlement difficulties and left many small investors both out of pocket and without share certificates.

The Stock Exchange has directed the marketmakers to make a cash payment to investors covering the price they paid for the shares and any transaction costs. Alternatively, they must pay 11.2p a share, reflecting an open offer entitlement that emerged later. The offers apply to all who bought shares between September 25 and October 22, when the shares were suspended.

The offer, which shareholders can opt to accept until January 14, effectively means that any investor who has lost out will get a minimum of 11.2p. But anyone who bought shares at the top of the market, when the shares hit 28p, will be able to get their money back.

The third option is to do nothing and await delivery of the shares. However, the shares in Room Service, now known as Azure Holdings, remain suspended.

The Stock Exchange said yesterday that it was acting in accordance with its obligations to protect investors and maintain an orderly market. It had consulted both market participants and the Financial Services Authority, which is continuing investigations into the scandal.

The FSA said it had agreed to the Stock Exchange using its powers of direction, but had had nothing to do with the terms of the offer.

Shares in Azure were due to resume trading a fortnight ago, but at the last moment the Stock Exchange changed its mind because of the weight of short positions.

Yesterday, it said trading would remain suspended "pending the conclusion of the settlement offer and until an orderly market can be restored".

 

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