Investors await FSA inquiry into Redstone cash statement

Redstone Telecom, the struggling telecoms carrier, is being investigated by the Financial Services Authority over whether the company kept investors properly informed of price sensitive information. The City regulator is now liaising with the Department of Trade and Industry on the matter.

The investigation centres on a Stock Exchange statement in May regarding Redstone's cash position. The company was later forced to issue a correction statement and the group's finance director, Alan Harrold, resigned as a result. Redstone's new finance director, Andrew Walsh, confirmed yesterday that the FSA had contacted Redstone about the matter some months ago. He said the investigation had been declared in its prospectus published on 26 June when Redstone was seeking an emergency £25m refinancing package. "They [the FSA] made contact a number of months ago. We provided information to assist them but have had no contact recently."

The statement in question was made on 8 May when the company told an analysts' briefing in Portsmouth that it had £18.7m of free cash at the end of March. But it did not reveal that this included £3.4m due to be paid out for acquisitions. A corrected statement was issued two days later. The announcement was one of three updates made between January and May regarding the strength of Redstone's balance sheet.

Yesterday, the Redstone Action Group said its members would be considering their options. Dennis Carmedy, a Redstone shareholder who heads the group, said: "Many people invested in the company based on the strength of those statements. If those statements are deemed to be misleading, then we'll take advice on whether those small shareholders have an actionable case."

Redstone narrowly avoided bankruptcy last month when its investors backed a rescue refinancing package. However, some shareholders were unable to cast their votes as heavy short-selling of the shares by some brokers caused a dearth in the stock. As a result many small shareholders did not receive their share certificates in time to vote at the extra-ordinary meeting on 18 July. The situation caused a row between the London Stock Exchange and the Financial Services Authority over who was responsible.

The company's tactics at the emergency meeting in July were criticised after it said an insolvency practitioner from Ernst & Young would be on hand to take control of the company if shareholders voted against the rescue package. The resolution required the support of three quarters of those voting. In the end 89 per cent, or 44.2 million, of the shares were in favour. The company had burned through £125m in 15 months. Redstone shares closed at 1.15p on Friday. They stood at 253p early last year.