Three former senior executives of Alfred McAlpine Slate Ltd were given jail sentences today, after admitting they had deliberately overstated the company's production and sales figures for some years. Around 44% (or over £10 million) of the company's reported debtors were fiction.
An example of deception included showing auditors a stockpile of crates of roofing slate; the outer crates full but the inner crates empty. Customer letters were created to give impression that debtors' payments were in the pipeline, delivery notes and transportation invoices for non-existent consignments were forged.
Alfred McAlpine Slate Ltd ("Welsh Slate") was wholly owned by Alfred McAlpine Plc. It represented about two or three percent of the Plc's turnover and employed around 400 workers at its quarry near Bangor. Welsh Slate was a self contained operation, seen by the parent company as low risk. However, in February 2007, the Plc informed the stock market it had uncovered systematic deception. Falsified production and sales figures in previous Welsh Slate submitted financial reports would require a restatement of its 2005 assets and a reduction in expected pre-tax profits for 2006.
The Plc also handed over the results of its internal investigation into its subsidiary to North Wales Police, who alerted the SFO. A joint SFO/police investigation opened in September 2007. In November the following year, three Welsh Slate executives were charged; Christopher Law; Managing Director, Geraint Roberts; Operations Director and Paul Harvey; Head of Sales. All three subsequently pleaded guilty to fraudulent trading contrary to s.458 of The Companies Act 1985 and today at Caernarfon Crown Court they were sentenced to two and a half years, 16 months and 10 months imprisonment respectively. Directorship bans, payment toward prosecution costs also apply and confiscation proceedings will follow.
A summary of the case is given in the following pages.
The Welsh Slate Case
R - v - Christopher John Law, Geraint Roberts and Paul Michael Harvey.
Case Summary
All three defendants pleaded guilty at previous court hearings to fraudulent trading charges contrary to s.458 of the Companies Act 1985 after dishonestly concealing mismanagement and under-performance at the company between 1 January 2004 and 26 February 2007.
Christopher Law pleaded guilty on 27 March 2009, Geraint Roberts on 8 May 2009 and Paul Harvey on 5 June 2009.
The sentences passed were as follows:
Christopher John Law (born 5/12/55, former managing director of Welsh Slate) 2 and a half years,
Geraint Roberts (born 27/10/51, former operations director for the roofing division of Welsh Slate) 16 months,
Paul Michael Harvey (born 22/04/57, former sales director of Welsh Slate - not a statutory director) 10 months.
In addition Christopher Law and Geraint Robert were disqualified from acting as company directors for four years and three years respectively. Confiscation proceedings under the Proceeds of Crime Act 2002 and costs will follow.
In passing sentence HHJ Merfyn Hughes QC said, "Those responsible for this case should be commended for the clarity of the investigation and the way it was presented."
Background
The case relates to the affairs of Welsh Slate, which was a wholly owned subsidiary of Alfred McAlpine plc until December 2007, representing around 2-3% of the Group's turnover and just under 5% of the workforce. It was self contained and remote, both geographically and by business sector. McAlpine saw it as low risk.
Concerns about the cash position of Welsh Slate and its apparent non-collection of debt led McAlpine to send an internal audit team to investigate in January 2007. It soon became apparent that much of the recorded debt was pure fiction.
McAlpine reported to the stock market on 26 February 2007 that its internal audit team had uncovered a systematic misrepresentation of production volumes and sales for a number of years by senior managers at Welsh Slate which would lead to a restatement of the 2005 net assets and a reduction in the expected pre-tax profits for 2006.
Police and SFO Investigation
After the internal investigation the matter was referred to North Wales Police and a joint investigation with the SFO commenced in September 2007. The defendants were charged in November 2008.
The prosecution case was that these three defendants collaborated with each other over a period of years to falsify the invoicing, management accounts and audited accounts of Welsh Slate.
Christopher Law was the author of the fraud, recruiting the others and giving them directions. The other two defendants played their parts in the fraud willingly and all involved more junior staff in it. The result of the fraud was to ensure that the books and records of the company systematically overstated the sales achieved by the company, making it seem more successful than it was. The company's books showed that it was owed far more money than was in fact the case and showed that it had sold more slate than it had actually produced.
The purpose of this was not directly to enrich the defendants but to convey to the main board of McAlpine that it was more successful than it was. This would ensure that the defendants continued in employment and that the company was left to their care without interference.
Consequences for Welsh Slate
- Welsh Slate had been valued at £100million in January 2007 and was sold for £31 million in December 2007.
- There was a loss of 126 jobs.
- Members of the workforce were corrupted by being required to play their parts in the fraud through the production of false invoices and in other ways.
False Records
Monthly management packs were sent to McAlpine plc. Once the first draft of the monthly figures had been created, taken from Welsh Slate's accounting system, the defendants then requested alterations to be made before the management pack was produced and sent on to Alfred McAlpine plc.
There was also outright forgery to fool auditors and support the false sales figures. Staff were instructed by Christopher Law to forge rebates and proof of delivery notes. Similarly, at Law's request and under his supervision, invoices for transport of goods were forged by someone whose writing would not be recognised by the auditors. They were faked from genuine invoices from a transport company, photocopied and with original entries and totals blanked out for the false amounts to be written on.
Extent of the Fraud
The SFO's analysis of the extent of the falsification of sales showed that the practice was on a scale that no director or debt manager could fail to notice: by the year ending in 2005 false invoices provided approaching 12% of turnover; by 2006 close to a ¼ of turnover. That analysis significantly understates the position because it excludes some additional false invoices.
By the year ended 31 December 2006, the last year of the fraud, the cumulative total of false roofing invoices which had been created was £10,291,306 and the books of the company showed that this sum was due from identified debtors when it was not. This meant that 44.02% of the debtors of the company were in fact worthless. Adding the additional invoices identified by the SFO, the figure rises to £12,652,305 or 54.12% of the total reported debtors. The debtors figure was a substantial asset of the company and its value was, by the end of 2006 very substantially overstated because of the fraud.
The Cover Up
The main problem for the defendants with the creation of false sales was the inevitable non-collection of sums apparently owed to Welsh Slate. This increased as each month of inflated sales figures was added in. The response and cover up to this varied.
False cash payments were created by including current income and cash anticipated by a certain date. But the process was cumulative. The only way it could be dealt with was by occasional reversals which the defendants instructed staff to do.
Another way to try to cover the falsity was through various manipulations of stock. In its most extreme form this involved showing the auditors empty boxes in the quarry surrounded by full boxes.
The aged debt generated by false invoices also had to be dealt with. Credit notes were raised to cancel old aged debt to avoid the auditors examining them. Also a large number of debtor's letters had to be produced to show to the auditors. They take the form of customers confirming that they owe Welsh Slate a certain sum at a given date. Customers were prevailed upon by a variety of methods either to sign these false letters or to return them to Welsh Slate unsigned whereupon signatures were forged and the letters were posted "back" to the auditors.
Notes:
- Welsh Slate was sold in December 2007 and Alfred McAlpine plc itself merged with Carillion plc in February 2008. Welsh Slate, based at Penrhyn Quarry near Bangor in Gwynedd, continues to trade under new management.
- (2) For background, SFO Press Releases issued 5 November 2008, 8 May 2009 and 5 June 2009
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