Identity Theft – Experian, TalkTalk and Optimal Payments

There have been a spate of cases of digital identity theft or breaches of security from UK listed companies of late. Their shares prices have all been affected to a greater or lesser extent.

On the 2nd October, Experian (EXPN) reported that 15 million US consumers who had applied for T-Mobile services had been the subject of theft of their personal information. T-Mobile is reviewing its relationship with the company, but the share price only suffered a temporary setback even though the information disclosed was quite extensive, but did not include payment or banking information. Experian do a lot of on-line credit checking, so it is of course of particular concern when the gate keepers seem to have poor security themselves.

On the 23rd October, TalkTalk Telecom Group (TALK) reported a cyber crime attack on its web site that might have caused the disclosure of personal information including banking and credit card details. The share price fell by 18% over two days perhaps because the company handled the affair in a rather ham-fisted away (such as apparently claiming it was a Digital Denial of Service – DDOS, attack which is a different kind of security breach). Their position was not helped when it was reported that the police had arrested a 15 year old boy in Ireland in connection with the event and some customers reported fraudulent payments.  Although a lot of hackers are kids in bedrooms, this raised questions about the strength of the companies defences against intrusion – for example was the customer data encrypted so that even after gaining access it could not be read?

Respected IT commentator Richard Holway was quoted in the FT as saying that “TalkTalk did not have a great reputation before and they constantly came our worse than competitors in customer satisfaction surveys”. He suggested they had a serious reputational problem and that the “company might need to consider changing its name”.

On the 29th October, Optimal Payments (OPAY), reported that it had received allegations about data breaches by subsidiary or acquired companies between 2011 and 2012 (Neteller, Moneybookers/Skrill, etc.). It has commenced an investigation.  The share price dropped as much as 18% on the day of the announcement, but subsequently recovered. Perhaps fortunately the company was already in the process of changing its name to “Paysafe Group“, but that might get a few laughs.

Perhaps the impact of these disclosures is not as bad on the companies concerned as might be feared because there have been numerous data breaches – the Financial Times reported the loss of 600,000 customer records in 2014 alone including a large proportion obtained from Government databases. Yes everyone is at risk, and all companies who hold personal data or credit/debit card information are vulnerable.

Some of these risks are easy for companies to guard against with technology, but others are not. A corrupt employee in a sensitive role can be a problem for even the largest company. However, it is very clear that the level of awareness, and how to combat security breaches, in many companies is dire.

Incidentally you might wonder how ShareSoc guards personal and payment information. We do not hold credit card payment or bank information from Members at all because we redirect customers to a secure Paypal web page – as experts in electronic payments we would expect them to understand what is required to keep the information secure and validate “card not present” transactions. We deter telephone credit card payments for the same reason and only one of our directors is even authorised to take such payments, which does inconvenience some Members but web payments or even cheque payments are potentially safer.

How can you as a consumer avoid the inherent risks? One way which this writer uses is to pay with a “pre-paid” credit card – I have several – which is only loaded with the amount I wish to pay, so any large or fraudulent payment is defeated. I particularly use them when I do not trust a supplier. Another way is not to have a company you are purchasing from retain your credit card information (some give you the option), or use those who are using a third party payment service like ShareSoc does rather than handling payments themselves. Lastly, pay via a credit card, not a debit card as you might have a low credit limit on a credit card, while debit cards can be used to empty your bank account, and large transactions are more likely to be queried on a credit card.

There are lots of listed companies that have an interest in personal identity checking. For example, GB Group (GBG) have been on a roll of late because of the growing demand for on-line identity verification. Intercede (IGP) is another AIM listed UK company with some great technology in this area but who seem unable to turn that into growing revenue and profits – a common failing in technology companies.

Note that this writer does hold some of the above shares simply because I consider on-line payments and identity verification to be growth markets so it’s certainly an area worth learning about. The key question investors have to ask is whether a really bad attack would cause a company to lose business in the longer term – TalkTalk certainly appears to be at risk in that regard.

Roger Lawson

Globo – the Last Straw

Subsequent to my last blog post which covered the attack by Quintessential Capital Management (QCM) on Globo, this morning the company has made three further announcements:

  1. After an emergency board meeting, the CEO (Costis Papadimitrakopoulos), and the CFO (Dimitris Gryparis) have resigned and the COO has been suspended. A committee of non-executive directors has taken over after “certain matters regarding the falsification of data and the misrepresentations of the Company’s financial position” were brought to their attention.
  2. The joint corporate broker, Canaccord Genuity, have resigned.
  3. The company advised that Costis has sold 42 million shares (more than half his previously reported holding) and pledged another 10 million under a loan agreement. The company does not yet possess all relevant information about these dealings.

This certainly appears to validate many of the claims by QCM and the outlook for shareholders is undoubtedly bleak, with the shares continuing in suspension of course.

One focus of the new board and of investors will undoubtedly be the role of auditors Grant Thornton in this debacle. As QCM suggested, is this another Parmalat? That was an Italian dairy company which ten years ago was the subject of a major fraud where Grant Thornton were the auditors.

One problem all investors have is that they normally have to rely on what the management of the company say, and on what the auditors report (who also typically rely on the word of the directors to some extent). If there is consistent misrepresentation then it can be difficult to detect. But some commentators such as Paul Scott who writes for Stockopedia have been consistently negative about some aspects of the Globo accounts, and he must be thanked for his warnings. However, other commentators have been positive on the company and tipping it as a “buy” until quite recently (for example in Investors Chronicle as late as this October by respected commentator Simon Thompson).

Neither I nor ShareSoc give buy or sell recommendations of course, but we have covered the company in the past. For example as long ago as January 2012 was the first mention in our newsletter where I declared my interest at the time and subsequently described it as a “double whammy of risk” in February 2012. Reports on all the Annual General Meetings of this company have been available to ShareSoc Members and the questions posed by shareholders covered many of the issues raised by negative commentators. My concluding comments in the last report were negative on the debt raising and I substantially reduced my holding at that time. But regrettably I have sometimes criticised some of the complaints about Globo and the shorting attacks but it did not seem an unusual business profile for an early stage software company in my experience. For example the comments on capitalisation of software development costs were dubious as I pointed out in the previous blog post. Like others though, I did rely to a large extent on the statements by the directors and the accounts as published.

Now if there is a clear fraud as seems quite likely at this time (e.g. overstatement of revenue, even assuming the reported cash held is accurate), then what do investors do? To a large extent they need to rely on the company directors to pursue those persons responsible (although shareholders can pursue “derivative actions” in some cases if the company does not). That might include actions against the auditors if they were grossly negligent but such actions are exceedingly difficult.

It might be useful to form a committee of shareholders to support the remaining directors in stabilising the company and pursuing recovery of losses if possible. Any private investors who were significant holders of shares in this company might like to contact ShareSoc for some advice on this matter and further support. You can register your interest in this matter and receive further information on this web page: http://www.sharesoc.org/globo.html

Roger Lawson

Blogging and Shorting – Globo and Valeant

An organisation called Quintessential Capital Management (QCM) published a report on the 22nd October on Globo. The next morning the shares were suspended at the request of the company so as to enable them to provide a detailed response but they immediately refuted all the allegations in the report.

QCM acknowledged that they are active in short selling and have taken a short position in Globo. They also have links to Simon Cawkwell who was also involved in a similar attack on Globo in 2013. The main allegations then were that the Go!Enterprise product was not a useable software product and that profits were not turning into cash. The company’s share price subsequently recovered although criticism has continued on some bulletin boards.

The company recently tried to raise some high yield debt to enable it to make further acquisitions, but it has now abandoned that (perhaps because the appetite for high yield debt has substantially receded as the FT recently reported). Many investors, like myself, may have taken a dim view on this business strategy for a software company in any case although the low Globo share price made it difficult for them to make acquisitions using equity.

The latest allegations include the same ones as before but they also specifically focus on the company’s links to “suspected satellite” companies and partners/distributors even though I understand the company is now more focussed on direct sales based on recent comments from management. QCM claim that 60% of Globo’s sales may be fraudulent but they do acknowledge that “Globo’s cash balances may be genuine and backed by bank statements”. They also say that “it is also notable that, unlike many of its peers, Globo capitalizes its software development expenses, including a substantial portion of workers’ salaries” which seems odd when there are specific accounting standards that probably require them to do so nowadays – they may have limited discretion in that regard.

I will refrain from commenting further until the company issues it’s rebuttal. But some bulletin board commentators have already decided that the debate about this company is settled which seems premature before more information is available and analysis undertaken. Probably the best comment on this matter was that of Ed Page-Croft of Stockopedia who said those companies most discussed on bulletin boards are indeed those that may be most risky. I totally agree with that comment, if nothing else because they can easily become the target of speculators (as they are highly liquid) and hence vulnerable to stock promoters and shorters of all descriptions. We shall no doubt be discussing this area at our Masterclass event on the 4th November (see http://www.sharesoc.org/masterclasses.html ) where Quindell, another highly discussed and traded stock among private investors, will be on the agenda.

Incidentally, as there have been a number of problems with AIM companies (Chinese stocks, mining/oil companies) in recent years and ShareSoc has criticised AIM for lax regulation, it was interesting to learn at the London Investor Show yesterday from an attendee that AIM is recruiting more lawyers to assist on regulatory and investigatory matters.

Valeant

Another example of an attack by short sellers on a public company which was extensively covered in the Financial Times on the same day as the Globo suspension is that of Valeant in the USA. This company was already controversial because of its abrupt and large raises in drug prices after acquiring the producers. Now there is an allegation that revenues have been inflated by links to a network of pharmacies and short seller Citron suggested it was “Enron part deux”. Valeant has disputed the allegations, but the share price dropped by 40% over a few days.

This looks very much like a typical shorting attack, i.e. publish a highly critical article, without giving the company time to comment or rebut the allegations. Usually these allegations are published in the USA where libel law is more relaxed and make it more difficult for companies or their directors to contest such claims in the courts.

Note that the views above are solely those of the author. I have been refraining of commenting on Globo of late as the effort involved in analysing the conflicting claims and evidence, and debating the issues, was more than I cared to spend. But the above news seemed worthy of coverage.

Roger Lawson

After the Storm, at the High Pay Centre

I attended a seminar organised by the High Pay Centre last night on the new public company pay regulations introduced two years ago. Speakers were Vince Cable who lead those changes when he was in power, and Ben Chu of The Independent, with the former promoting his new book “After the Storm”.

Vince covered some past history and his current concerns. That included a comment that interest rates were now lower than they had ever been before – indeed since Babylonian times according to Andrew Haldane of the Bank of England (who recently published an interesting paper on that subject), and it was not clear how that situation would change soon. But interest rates will clearly have to go up again. He suggested that the Tory attack on the fiscal deficit was too aggressive and it might squeeze the economy too much.

Vince also focussed on the housing problem – a chapter in his new book is called “The British Housing Obsession” and is well worth reading. He highlights how the house construction industry is now dominated by the big listed companies (Persimmon, Barratt, Berkeley, Bovis, et al) with smaller builders disappearing, social housing construction declining and with little “self-building” as in other countries. His comment on the “Help to Buy” scheme was that it was like pouring paraffin on the fire, and that housing policy in general is a disaster. You can see exactly why the big housing companies are making hay at present.

He claimed the legislation on pay (more disclosure and votes) he introduced did have some effect. But admitted it has not had enormous impact. He could not be too aggressive on pay because he was concerned that the managers of public companies would simply take them private if they felt threatened. He was keen to tackle the issue of high ratios between low and high paid in companies, and supported the concept of managers having to consult employees on pay.

He discussed the banking crisis and the subsequent legislation to tackle bankers behaviour. Indeed apparently he had been offered the chance to join a new bank that was being set up, but after he had looked at the obligations he would be taking on decided against it.

In response to a question on directors taking into account the views of employees and others, he said the Companies Act is very enlightening on this issue but he was not sure many company directors had read it. He’s probably right there.

After collecting a signed copy of his new book, which at a quick glance is certainly worth reading, I spoke briefly to Vince. The last time I had done so was outside the Houses of Parliament when the Northern Rock problem was in the news. I disagreed with him them on what should be done about it, but I agree with many of his subsequent actions on such matters as pay and his comments on the housing sector are certainly worth studying.

Roger Lawson

IPOs – Worldpay, Equiniti and McCarthy & Stone

The writer has been wading through the 300 odd pages of the prospectuses for Worldpay (already listed), and Equiniti (due to list on the 30th October). The latter will be available to retail investors via certain stockbrokers if you fancy a punt, although you’ll be taking the price that institutional investors decide to pay. In addition McCarthy & Stone are lining up to float.

I have already written a rather long article for the next ShareSoc Informer newsletter on these three companies (rather long for this blog, but as it may be published after the Equiniti float let me know if you would like an advance copy).

Being a former shareholder (when it was previously publicly listed) in retirement apartment builder McCarthy & Stone I am quite enthusiastic about this business, if the price is right. But like the others, because it is currently held by private equity owners, I suspect it will be no great bargain.

Worldpay, who are a payments company and in a sector this writer knows well, is particularly problematic because it looks quite a mature business in many ways. It may be in the “hot” electronic payments sector, but most of its business is in low margin “processing” of card payments. And could they not have found another Chairman than hyperactive Sir Michael Rake (at least in terms of the number of directorships and chairmanships he holds down)?

Equiniti, is a well diversified business but profits after taking into account interest payments and heavy investment in new technology (like Worldpay), do not seem great. The first two companies will still have considerable debt after floating.

As I emphasise in my full write-up, it is very important to read the full prospectus which will reveal a lot more about the business than you can obtain from press reports and tip sheets. But at over 300 pages you do have to learn how to speed read and skip a lot of the uninteresting content. The prospectuses of Worldpay and Equiniti can easily be found on the internet.

Roger Lawson

Possible Volkswagen Legal Action

The following note has been issued by Better Finance (a European Association of private investor groups of which ShareSoc is a member). It is self explanatory.

Dear Members,

In September, Volkswagen admitted that an estimated 11 million cars worldwide were involved in the falsified emission reports. Reports have emerged that Volkswagen’s top management had been aware of the deception since before the official ad-hoc announcement. Representing VW shareholders, the German investor association DSW, a member organisation of Better Finance, is examining the possibility of legal proceedings on the grounds that VW violated its duty to immediately disclose all information regarding the manipulation of emissions and ensuing fallout.

In collaboration with legal experts, DSW is currently assessing the probability of success in the case of legal proceedings in Germany, since German law holds that only those claimants who are successful will not be charged with fees. Particularly noteworthy is the fact that, since VW is a German company, all shareholders, regardless of their nationality, can in principle join a legal action.

With various originations across Europe currently trying to gather VW shareholders to put together a law suit, DSW would like to stress that there is no reason for shareholders to hurry. At this stage it is important to ascertain that any legal claim against VW would be beneficial for shareholders and to await clarification of important questions such as the amount of compensation that can be claimed as well as relevant time frames and the probability of succeeding.  

Ahead of possible next steps, DSW opened an information and registration service free of charge for all VW shareholders, both in Germany and abroad, who will get all necessary information in German and English regarding potential claims.

Registration to this free service should be made via the following e-mail address: kontakt@dsw-info.de .

Roger Lawson

Future ShareSoc Events – London and Manchester

ShareSoc has two Growth Company Seminars coming up in the next couple of weeks. On the 21st October we have Sphere Medical, Sprue Aegis, EG Solutions and Venture Life presenting in the City of London and on the 28th October we have Safestyle, Redx Pharma and Tracsis presenting in Altrincham near Manchester.

These are all interesting small cap companies and this is a great opportunity to ask questions of the management of these companies and meet other investors. In the latter event we will also have a talk on investing in AIM companies.

Click on these links for more information:

London: http://www.sharesoc.org/seminaroct.html

Manchester: http://www.sharesoc.org/altrinchamseminar.html

These events are FREE to ShareSoc subscribing Members with only a nominal charge to others to cover some of the cost of refreshments which are provided (anyone can attend).

On the 5th November we have the next educational Masterclass event in London. Past Masterclasses have proved very popular and we have a great panel line up and interesting topics to debate this time. See http://www.sharesoc.org/masterclasses.html for more information.

Don’t miss out on these opportunities to learn more about investment. To ensure a place, make sure you register a.s.a.p.!

Roger Lawson