On 26 January 2011, the FSA announced that it had fined JJB Sports plc (JJB) £455,000 for failing to disclose information to the market about the true cost of two acquisitions. The failure led to the creation and continuation of a false market in JJB's shares for over nine months.
The first acquisition related to the purchase by JJB of Original Shoe Company (OSC). JJB made an announcement regarding that acquisition on 18 December 2007. While the announcement disclosed the £5 million purchase price, it failed to disclose the additional stock consideration that was payable by JJB. The stock consideration paid by JJB amounted to £10.038 million.
The second acquisition related to the purchase by JJB of Qubefootwear (Qube). JJB made an announcement regarding that acquisition on 22 May 2008. While the announcement disclosed the £1 purchase price, it failed to disclose that JJB had agreed to settle Qube's overdraft prior to completion. The cost to JJB of settling the overdraft was £6.473 million.
The liabilities in respect of the OSC stock consideration and the Qube overdraft were not disclosed until JJB's 2008 interim results announcement published on 26 September 2008. The interim results announcement contained other negative news. Following the interim results announcement JJB's share price fell by approximately 49.5%.
Breaches of DTR 2.2.1 and Listing Principle 4
The cost of each acquisition (that is, the purchase price together with the liability to pay and an estimate of the stock consideration in respect of OSC, and the purchase price together with the liability to settle and estimated cost of settling the overdraft in respect of Qube) was inside information and should have been disclosed as soon as possible. Failure to do so constituted a breach of DTR 2.2.1 (Requirement to disclose inside information) of the Disclosure and Transparency Rules. The failure also constituted a breach of Listing Principle 4 in that JJB did not communicate information to holders and potential holders of its listed equity shares in such a way as to avoid the creation or continuation of a false market.
These failures gave a false impression as to the costs of the acquisitions and the impact of the acquisitions on the true nature and costs of JJB's strategy for 2008 that led to the creation of a false market for over nine months.
In determining the financial penalty, the FSA took into account various factors including the fact that JJB had cooperated with the investigation and the fact that all of the executive directors and nearly all of the non-executive directors had changed since the events in question.
View the FSA announcement (web page).
View the FSA Final Notice for JJB (14 page pdf).