Small Talk: Room Service shareholders feel 'misled' by the LSE

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The Independent Online

Look out for developments on the Room Service Group saga this week.

Small Talk has been told that shareholders left out of pocket by the short-selling scandal are angry with the way the London Stock Exchange handled the affair.

According to Nigel Smith, the co-ordinator of the Room Service Shareholders Action Group, investors feel misled by the LSE over the way it resolved the scandal and believe the Exchange failed to adequately protect their interests.

The scandal hit the headlines back in 2004 when Evolution Group, the stockbroker, was fined £500,000 for market abuse by the Financial Services Authority (FSA).

It emerged that in the Autumn of 2003 the broker had sold two-and-a-half times the issued capital of the Aim-listed Room Service, which later changed its name to Azure Holdings.

This created huge problems with settlement and the stock was suspended, at the company's request, on 22 October leaving many investors unable to receive the shares they had purchased.

In a bid to resolve the problem, the LSE organised a so-called "settlement offer" for aggrieved investors. Under the terms of the deal, investors were offered a refund of 11.2p a share, worth £140,000, to be paid by the market makers that sold them undeliverable stock.

To this day Mr Smith, of the Shareholders Action Group, views the remedy offered by the LSE as totally inadequate.

In fact, he and others in the Action Group believe they were misled by the Exchange with regard to the method it used to derive the 11.2p a share compensation level.

He believes that given the size of the short position in the stock the shares would have been worth a lot more if the market makers had been forced to unwind their bets.

Mr Smith's anger is understandable. In March 2004 he received a letter from the LSE, which assured him that the 11.2p valuation was a reasonable one and based on the company's fundamental worth.

The letter also said: "The valuation was made by an independent expert commissioned by the Exchange, in consultation with the FSA. Neither the Exchange nor the market makers had any influence on the valuation."

However, an investigation into the matter by Keith Woodley, the Complaints Commissioner for the LSE, discovered that this was not true.

In a report published in June 2004, Mr Woodley found that the independent valuers had been expressly told by the Exchange to disregard the key effect the short position in the market would have had on the company's valuation.

His report says: "The valuers have informed me that they were expressly instructed to discount any effect that the substantial short position might have had on the valuation of the shares in Azure Holdings (formerly Room Service Group)."

The Complaints Commissioner's report then goes on to back up Mr Smith's claim that the shares were worth far more than 11.2p.

The report says: "The independent valuers expressed to me the opinion that the short position in the market was so large that the act of buying shares to close the short position would have had a substantial upward effect on the company's share price, to an extent which would have been impossible to quantify."

Mr Woodley also points out that the restriction on the scope of the valuation set by the Exchange was not revealed in any of the announcements it made to the market.

Despite these damning findings, in the conclusion to his report into the Room Service affair, Mr Woodley failed to really criticise the actions of the LSE.

An investigation by the FSA also found nothing wrong with the Exchange's conduct. However, activists in the Room Service Shareholders Action Group remain angry with the way they have been treated and will soon be taking major legal action.

Wong 'buys' into Galleon

There were some strange goings on at Galleon Holdings last week.

On Wednesday, the intellectual property rights group announced that David Wong, the boss of medical devices group Medisys, had taken a 29 per cent stake in the company and had been appointed chairman.

This news left some brokers puzzled. How had Mr Wong picked up such a sizeable shareholding?

He certainly could not have bought it in the market given the tiny volumes that have been traded in Galleon stock in recent weeks. And there has been no announcement from the company that any of its existing big shareholders had reduced their stake by selling directly to Mr Wong.

Watch this space for an answer to the puzzle.

ID products win success for RC Group

The positive news from the AIM-listed RC Group is set to continue this week when it unveils a contract to advise a major Far Eastern electronics company on developing radio frequency identification (RFID) products.

RFID technology lets manufacturers capture information about the location and status of products and track them as they move from the assembly line to the retail store. It is expected to replace bar codes.

It follows the release last week of record annual results from RC Group, which reported a 114 per cent rise in profits and a 358 per cent jump in revenues. This performance was driven by strong demand for bio-metric security solutions including fingerprint recognition and iris scans. It has recently moved into the emerging RFID industry, which will allow it to offer complete security packages where both people and goods can be monitored and tracked.