The tangled tale at Torex Retail that caught the City by complete surprise

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The Independent Online

The software developer Torex Retail has found itself in the spotlight over the past week as a result of a scandal which looks set to eclipse the woes of its former parent iSoft in 2006.

The speed of the meltdown has caught even the most cynical technology analysts by surprise. Within two weeks of an upbeat trading statement being issued on 18 January, the Oxfordshire-based company has suspended its shares, launched an investigation into its accounts, and lost its controversial chairman and recently appointed chief executive in a boardroom battle that has observers scratching their heads.

The board has called in Deloitte & Touche to search for gremlins in Torex Retail's accounts over previous years, while its bankers Royal Bank of Scotland called in KPMG to investigate. Torex can not lift the share suspension until it has published revised forecasts, after warning that it would miss market expectations in 2006 by a "significant" amount.

That statement could be weeks away as the auditors look to determine the extent of the company's financial problems.

Once trading resumes, the shares will almost certainly tank. That will increase fears the company will breach banking covenants, given its £203m debt mountain, and lead to calls for a break-up.

Meanwhile, the London Stock Exchange, the Financial Services Authority and the Serious Fraud Office have launched separate enquiries into Torex. Not only does that underline the gravity of the situation, it raises the possibility of criminal activity and possible prosecution of company executives.

The FSA will look into whether the company and its executives have been involved in any market abuse, such as misleading the market or irregular share trading. The company's upbeat statements in the months before the shock profit warning are likely to be scrutinised. The LSE will investigate Torex Retail and its stockbrokers, Evolution Securities and Jefferies International, over whether any rules have been broken regarding disclosure.

Neil Mitchell, the chief executive of Torex Retail until Wednesday, said in November that he had completed a "diligent investigation of all aspects of the business", and that the company had a "solid business platform".

The SFO has acted quickly to investigate accusations against unnamed company executives. The tip-off is rumoured to have come from a member of Torex's board, and an SFO spokesman said the individual who aired the concerns "must have some inside knowledge". Earlier this week, the SFO, in conjunction with the City of London Police, swooped on three houses within the vicinity of the company's Oxfordshire base, to gather evidence.

The SFO has declined to comment on what it is investigating, and has not named the implicated individuals. Mr Mitchell has said that his residence has not been investigated, and added that finance director Marcus Leek had not been raided.

Mr Mitchell has allegedly been at loggerheads with the Torex Retail board since a positive trading statement was issued in January. At that stage, the company boasted £80m of new contracts in the final quarter of 2006 with large customers like Argos, Homebase and Swarovski.

Only eight days later, the company suspended its shares, and told the market that it would miss market expectations significantly as a result of contract slippage. The chairman Chris Moore flew back from Japan to attend a crisis board meeting before the suspension. In the aftermath of the SFO raids, Mr Mitchell and Mr Moore stood down from their positions, but remained on the board. While Mr Moore has "agreed to step aside", according to Torex, Mr Mitchell has "been asked to step down". Mr Leek has survived the shake-up for now.

Iain Lynam, a restructuring expert, has been appointed as Mr Mitchell's replacement, and will run the company on a day-to-day basis. Geoffrey Forster, a Torex Retail veteran, will replace Mr Moore as chairman. Analysts are concerned that Mr Forster would remain "Moore's man" within Torex Retail, given the pair's long working history.

Mr Moore is credited with building Torex Retail into a global software developer that installs electronic point-of-sales systems for retail customers including McDonald's, Argos and French Connection. The roots of the company stretch back to 1989, when Mr Moore led a management buyout of Smart Terminals. After investing in the fast-growing healthcare software market, Mr Moore merged the company with iSoft in 2003. He became chairman of the combined company, but left after only two months, due to "strategic" differences with other board members.

iSoft decided to split off the retail business it inherited via the Torex merger. It was floated on AIM in March 2004. Mr Moore re-joined the retail business in November 2004 as deputy chairman, and took on the chief executive's role in 2005.

Mr Moore also dabbled in the world of football, taking over Oldham Athletic in 2001. The club was struggling with its finances, yet Mr Moore promised to take Oldham back to the top tier of English football. Instead, the club fell into further financial difficulties, and fans turned on its owner, who stood down after an effigy of him was burned outside Torex's offices.

While iSoft went on to win the lion's share of contracts in the massive upgrade of the NHS's IT infrastructure, Mr Moore led an aggressive acquisition strategy to build up Torex's presence in the fast-growing retail software market. Between 2003 and 2006, Torex Retail splashed out over £400m on 13 acquisitions that took the company into new areas such as retail petrol systems, and online gaming.

Analysts became uncomfortable with the frenetic acquisition activity and growing debt levels. Lorne Daniel, an analyst at Arden Partners, who was cautious about the stock in 2006, said: "It appears very little integration work has been undertaken to date, owing to the numerous acquisitions over the last few years. The group is described as a 'federation' of businesses."

Of particular concern to analysts was the acquisition of XN Checkout in June 2005, for £73m. Mr Moore owned 10 per cent of XN, another acquisitive electronic payment system developer, and acted as chairman for the company. He denied any conflict of interest. Also of note was the departure of the former UBS banker Michael Meade, who quit as finance director last January after only three months in the role.

Bowing to concerns over his joint role as chairman and chief executive of the company, Mr Moore appointed Neil Mitchell as chief executive in September 2006. Mr Mitchell, a former adviser to the collapsed US energy giant Enron, joined the company after the collapse of takeover talks with Barclays Capital, and is understood to have been given a mandate to sell the company. Mr Leek, 31, was appointed to replace Mr Meade in July 2006 after joining from mobile phone retailer Phones4U.

While a string of profit warnings and an accounting inquiry wiped out the majority of iSoft's value in 2006, Torex Retail's horror show this year looks set to eclipse its former parent's. Investors, particularly in the US, are furious with the sudden about-face, which has soured sentiment toward AIM and specifically technology stocks. Although the SFO investigation could last up to three years - and could come to nothing - it appears that much damage has already been done.

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