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Jun 20, 2010

FSA sends signal on disclosure with record fine

Photo-Me created false market in its shares for 44 days, says regulator

The Financial Services Authority (FSA), the UK’s financial watchdog, has fined Photo-Me International £500,000 ($740,000) for failing to disclose price sensitive information quickly enough.

The fine – the largest of its kind, according to the FSA – is intended to send a signal to other listed companies that they must live up to their disclosure obligations or face the possibility of similar action.

‘It’s not a new issue but the FSA are following up what they have been saying for a while, which is making it clear to people that the obligations are there to be taken seriously,’ comments Jonathan Herbst, partner at law firm Norton Rose.

Photo-Me fell foul of the rules because it delayed releasing inside information, which created a false market in its shares, says the FSA in a statement.

The company, which manufactures and sells photo-processing equipment called minilabs, made statements at the end of 2006 that gave the impression it would win significant sales contracts and make strong minilab sales generally, says the statement.

By early 2007, however, Photo-Me was no longer in exclusive negotiations with one important retailer, while minilab sales had fallen 40 percent behind budget, the regulator states.

Neither of these two details was released quickly enough to the market, says the FSA, resulting in a false market for 44 days. When the poor performance was released to the market, in the shape of a profit warning on March 2, 2007, Photo-Me’s shares fell 24 percent.

The Photo-Me case is a clear example of breaking the rules, says Herbst, but he notes it is not always as clear cut. ‘There are, at the edges, some quite complicated questions about how long you can delay,’ he explains. ‘This is a fairly clear case, but there are at the margins much more difficult cases.’

This is the fourth time in the last two years the FSA has taken action against public companies over the release of price sensitive information. This includes the case of Wolfson Microelectronics, which was fined £140,000 in January 2009 after following the advice of its IR agency and not disclosing to the market the loss of a contract.

Photo-Me notes the FSA’s fine in a statement, in which it says the company is ‘disappointed’ by the size of the fine but ‘welcomes the fact that the FSA has not found that any directors or previous directors were at fault in this matter’.

Photo-Me adds: ‘The company maintains that the FSA has underestimated the real-time difficulties faced by the company in updating the market on the possible outcome of the relevant complex contractual negotiations. However, the board has decided it is not in the best interests of shareholders to incur further legal costs (none of which would be recoverable even if the company was successful) and expend considerable executive time in pursuing its appeal.’