Having been through ‘the wringer’, the company believes its auditors will give the 2010 accounts a clean bill of health, clearing the way for a resumption of business

OVER THE last year, management at financial spread betting firm, MarketSpreads, uncovered a series of undisclosed trades and accounting irregularities dating back to the time when it was part of UK-based Worldspreads plc, which is under investigation in the UK. Then last week, shortly after MarketSpreads filed accounts for the nine months ended December 21st, 2009, the Central Bank, which regulates spread betting in the Republic, ordered the company to suspend operations, citing capital adequacy and audit issues.

The bank and the company had been working towards resolving the capital adequacy issues. What made the regulators nervous was auditors Ernst Young’s statement that limited evidence prevented them from saying whether or not the financial statements gave a true and fair view of the company’s affairs at December 21st, 2009.

The accounts cover the period immediately before the current owners bought the business from Worldspreads plc. Ernst Young stopped short of giving them a clean audit because MarketSpreads’s own board had to restate revenues and profits from the 12 months ended March 31st, 2009.

Profits after tax were originally reported as €4 million for the 12 months ended March 31st, 2009. That had to be cut to €1.5 million. Revenues, which were originally reported as €8 million, were €1.7 million less at €6.3 million.

On top of this, the company’s net assets and retained earnings had to be reduced by €6.7 million from an original reported figure of €7.8 million to an actual €1.1 million.

In effect, this meant the company began the nine-month period covered by the 2009 accounts in a far worse situation than was originally reported.

In the accounts themselves, the current directors state that they had to do this because they could find no evidence to support a number of transactions and balances that were included in the financial statements for March 31st, 2009.

Instead, they relied on records contained in the company’s trading systems, which, as it turned out, painted a much different picture of the state of the business.

The accounts also state that “certain former directors and senior executives of the company had been engaged in significant and previously undisclosed trading activities with the firm”.

It is understood that it was these that gave rise to the accounting irregularities uncovered by the current management.

The current directors say that because of the manner in which these activities were carried out, it was not possible to accurately identify all transactions, and as a result, they have not been able to disclose any details about these trading activities in the financial statements.

The MarketSpreads board got the first inkling that there was a problem early last year. It appointed an independent accountant to run the rule over the business. His report pointed to weaknesses in its financial controls.

The company responded by appointing John McNicholl, who is now joint chief executive, as financial director. He imposed tighter controls on the business and began a clean-up operation. It was at that point that the issues raised in the accounts just filed began to emerge. MarketSpreads kept the Central Bank informed of everything it found.

The following June, the company discovered that the then chief executive, Brian O’Neill and his colleague, Fergus Rice, had diverted €1.4 million from the business to a company in which they were involved, Sportspread. Rice resigned in June and O’Neill followed in July. Both signed documents agreeing to repay the money, which was described as a loan, along with interest.

They also agreed to sell their stake in MarketSpreads parent, OR Spreadbetting. The upshot of this was that last month, both men agreed to judgments of €1.68 million – €1.4 million plus interest – against them in the High Court.

O’Neill and Rice were the leading figures in the buyout of the business from Worldspreads plc, which was then led by Conor Foley. It wanted to expand in the British and European markets and was interested in spinning off the Irish business.

O’Neill brought in other shareholders, including Ray and Enrique Curran, Adrian O’Carroll, and current joint chief executive and head of marketing, John McGlade. O’Neill ran the company from December 2009 until his exit in July of last year.

The deal left a bad taste. The original price agreed was €11.2 million. However, some of this was deferred and this year, MarketSpreads withheld a €1.4 million payment due to Worldspreads plc, and began legal action against it for misrepresentation and breach of warranty.

The accounts also state that the client funds inherited from Worldspreads were €740,210 short. MarketSpreads recovered this sum from Worldspreads, along with €55,000 in expenses that the original parent had incurred but not paid.

In November, MarketSpreads’ board contacted Worldspreads plc’s board and told it that it had concerns with the way in which both the Irish business and the plc as a whole were run before December 2009.

It was not possible to contact O’Neill for a comment yesterday. Conor Foley, former Worldspreads plc chief executive, who was a director of the business sold to MarketSpreads, did not comment.

It is understood that the position of Worldspreads plc and its former directors is that the people who bought MarketSpreads were running the business and would have been more familiar than anyone else with its operations and financial health.

However, the difficulty with that from the current board’s standpoint is that the key figures in the management buyout were O’Neill and Rice, who were most familiar with the company.

They left under a cloud last year and, when the case came before the court in January and last month, they never disputed the claim that they had diverted funds from MarketSpreads it to another business in which they were involved.

Special administrators, Jane Moriarty and Samantha Bewick of KPMG are investigating Worldspreads plc, which collapsed last month after its board discovered a €15 million shortfall in client funds. Foley resigned from the business days before the problem was discovered and Niall O’Kelly, the group’s financial director, departed in February.

MarketSpreads’ clients did not suffer the same fate as their Worldspreads counterparts. The Irish company began returning clients’ cash, estimated at €5 million-€10 million, this week, after an independent report confirmed it was safe and fully separate from company funds.

Its business remains suspended until the Central Bank is happy that it has dealt with all the issues. Shareholder and director Ray Curran is converting €2.4 million in loans to preference shares to meet capital requirements imposed on the group by the regulator.

That still leaves the audit issue. The company said this week it was devoting extra resources to producing 2010 accounts and it believes that its auditors will give these a clean bill of health.

A statement issued on Thursday indicated the company is still hopeful it can restart its business. In it, McGlade said that having gone through “the wringer”, the company hopes that in a few weeks, MarketSpreads will be the safest company in these islands with which to have a spread trading account.

An email to clients from McNicholl, sent on the same day, echoes that sentiment, saying the company hopes its service will be back in weeks.

The company says clients have displayed a fair degree of goodwill and understanding over the last week. The fact that their funds were returned intact will presumably have helped, but timing will be crucial to maintaining this loyalty and getting the business back on track.