Three former executive directors of the collapsed contracting giant Carillion are facing fines totalling almost £1m for covering up the true state of the construction firm’s finances in the months before it went to the wall.
The Financial Conduct Authority said it had decided on provisional fines of £397,800 for former chief executive officer Richard John Howson; £318,000 for former finance director Richard Adam; and £154,000 for Zafar Khan, also a former finance director.
It said Howson, Adam and Khan had referred their individual FCA decision notices to the Upper Tribunal, which will decide whether to uphold the regulator’s findings and proposed penalties, or whether other action should be taken.
The FCA said Carillion had broken market rules and Howson, Adam and Khan “acted recklessly and were knowingly concerned in Carillion’s contraventions” in the months before a 2017 profit warning that took analysts by surprise and prompted the company’s downfall.
Carillion went into compulsory liquidation in January 2018. At the time it was the UK’s second-largest contractor and held approximately 450 contracts with government. Clients included the Department for Transport, the Department for Education, the Department of Health and Social Care, the Ministry of Justice and the Ministry of Defence.
Two PFI hospitals for which it was the main construction contractor – one in Sandwell in the West Midlands and the other in Liverpool – were among the high-profile jobs immediately thrown into jeopardy. Those contracts alone were originally worth a combined £1.4bn.
Last year the Insolvency Service said Carillion’s “total deficiency” at the time of its demise was £3bn.
Alongside its proposed fines for Howson, Adam and Khan, the FCA said it would have imposed a £37.9m fine on Carillion for the company’s conduct, were it not insolvent and in liquidation. Instead, the regulator opted a public censure.
The FCA said Carillion had “recklessly published” announcements on 7 December 2016, 1 March 2017 and 3 May 2017 that were “misleading and did not accurately or fully disclose the true financial performance” of the business.
“Those announcements made misleadingly positive statements about Carillion’s financial performance generally and in relation to its UK construction business in particular,” it said.
“The announcements did not reflect significant deteriorations in the expected financial performance of Carillion’s UK construction business and the increasing financial risks associated with it.”
An £845m profit warning on 10 July 2017 prompted the firm’s share price to plummet by 70% over the course of three days. Days later government started making contingency plans for the business’ demise, a National Audit Office report subsequently revealed.
Government ministers refused January 2018 bailout requests from Carillion for aid totalling £370m to keep the business afloat, the latter one described by MPs as a ransom note.
The NAO found that in the months following Carillion’s first profit warning, the company announced £1.9bn of new government work, including £1.3bn of HS2 contracts. Many had been agreed before the profit warning, although in some cases contracts were signed, or variations agreed, afterwards.
The FCA said Howson, Adam and Khan were each aware of the deteriorating expected financial performance within Carillion’s UK construction business and the increasing financial risks associated with it ahead of the July 2017 profit warning.
But the regulator said they failed to ensure that the Carillion announcements they were responsible for accurately and fully reflected matters.
“Despite their awareness of these deteriorations and increasing risks, they also failed to make the board and the audit committee aware of them, resulting in a lack of proper oversight,” it said.
Mark Steward, executive director of enforcement and market oversight at the FCA said Carillion had failed to take reasonable steps to establish and maintain adequate procedures, systems and controls so it could comply with its obligations under the listing rules.
“Its true financial position remained hidden over many months and the effects of its collapse were aggravated, causing substantial harm to shareholders and creditors,” he said.
“This is market abuse, and as damaging to market integrity as insider-dealing and manipulation, though not often described in this way. It should be.”
Howson, Adam and Khan were on an eight-name list of directors the Insolvency Service published last year for whom it is seeking disqualification from office orders that would bar them from holding director-level posts for up to 15 years.
Howson resigned as a director of Carillion PLC on 10 July 2017 but retained directorships at other Carillion companies until January 2018. Adam resigned as a Carillion PLC director on 31 December 2016. Khan resigned as a Carillion PLC director on 11 September 2017 and also stood down from his other Carillion directorships.