Conduct unbecoming

Conduct unbecoming

Scandal after scandal has rocked the City in recent years, tarnishing its carefully cultivated image as the world's leading financial centre.

First, British banks abused their clients by selling them unnecessary insurance. Then their employees were caught manipulating financial benchmarks like Libor and the gold fix. Next, over $6bn in trading losses were served up by a rogue trader nicknamed 'the London Whale'.

This month, fresh allegations of wrongdoing and improper conduct have emerged, albeit on a smaller scale, further denting investor confidence.

Follow the money

Africa-focused oil group Afren (AFR), a FTSE 250 member, has suspended its chief executive officer and chief operating officer after an independent review discovered evidence of "unauthorised payments potentially for the benefit of the CEO and COO". The company offered few clues about the nature of the payments, but stated they "were not made by the company", that no other board members are thought to be involved, and that "the investigation is ongoing".

Shares in Afren plummeted 30 per cent on the news. Charlie Cryer, an oil equity analyst at broker RFC Ambrian, wrote in a research note to clients that the share price action represents the "destruction of a whopping $850m of shareholder value. The extent of the fall shows the market's disquiet and concerns about what the investigation may reveal".

Breathless ranting

Hewlett-Packard (HPQ: NYSE) has directly accused former Autonomy founder Mike Lynch of fraud for the first time, according to court filings recently submitted in San Francisco. The US computer giant indicated it was also preparing a lawsuit in the UK against Mr Lynch and Autonomy's former chief financial officer, Shushovan Hussain. Shareholders who had planned to sue HP's management over the botched takeover of Autonomy have now reportedly dropped their claims and will instead join HP in seeking damages from former Autonomy management.

The former FTSE 100 company was a stock market darling and a flag bearer for the British technology industry until shortly after its $11.1bn takeover by HP in 2011. HP took an $8.8bn writedown the year after, saying more than $5bn of it was tied to alleged accounting misrepresentations.

A spokesperson representing Mr Lynch and Mr Hussain rejected HP's latest claims, saying: "This breathless ranting from HP is the sort of personal smear we've come to expect. As the emotional outbursts go up, the access to facts seems to go down."

Danger lurks in the dark

In an unusual move, Barclays (BARC) has chosen to defend itself in court against claims made by New York's attorney general Eric Schneiderman that the bank misled clients about the level of high-frequency trading in its "dark pool".

Dark pools are secretive trading venues designed to allow institutional investors to trade large blocks of shares anonymously, with prices posted publicly only after deals are done. They have come under attack recently from regulators, lawmakers and the media - most notably in author Michael Lewis' bestseller 'Flash Boys' - in part because high-frequency traders have been reportedly paying banks to actively trade there, too.

Mr Schneiderman alleges Barclays told "investors they were diving into safe waters", but, in fact, "Barclays' dark pool was full of predators - there at Barclays' invitation", in an effort to boost trading. In a motion to dismiss the case filed in late July, Barclays' lawyers said the suit was "based on clear and substantial factual errors". They disputed the attorney general's assertion that Barclays gave investors the wrong impression about the amount of high-frequency trading in the Barclays LX dark pool via "glossy marketing brochures". Barclays' lawyers highlighted a page in a marketing flyer that stated 35 per cent of LX traders fell into the category that included high-frequency traders.

IC View

There is very little that retail shareholders can do to protect themselves against stock fraud or improper conduct. It will always exist in some form or another, even if lately it seems as if these kinds of activities are on the rise rather than on the wane. So why are we highlighting these cases? They should serve as a reminder to investors to always be alert to the inherent dangers that are part and parcel of investing.

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