A top US investment bank resigned as a key adviser to Mike Ashley’s Sports Direct because of concerns that the retail company had manipulated its share price, according to claims made in a high court document.
Bank of America Merrill Lynch had concerns about Sport Direct’s corporate governance and the “propriety” of share transactions in 2012 around its employee bonus scheme, according to allegations in legal filings by Jeff Blue, previously one of Ashley’s key allies.
The claims raise further questions about the management of Sports Direct and the stewardship provided by the board of directors. The retailer has been involved in a string of scandals since an investigation by the Guardian a year ago revealed it is effectively paying staff in its warehouse less than the minimum wage.
Blue is the company’s former strategic development director and a former Merrill Lynch banker. He is suing Ashley, the founder and chief executive of Sports Direct, for £14m over claims that the retail boss breached an agreement to pay him a £15m bonus if the company’s share price rose above 800p. In court documents, Blue claims he bolstered the reputation of Sports Direct in the City and used the resignation of Merrill Lynch as corporate broker to show the improvements that needed to be made. He quit Sport Direct last year.
Shares in Sports Direct peaked at 922p in April 2014, but closed at just over 300p on Monday. The retailer is scheduled to publish its half-year results on Thursday, when Ashley will update the market on the company’s performance but also face questions about a controversial arrangement between Sports Direct and a delivery company owned by his brother that is being scrutinised by the Financial Reporting Council. He also faces allegations that the retailer tried to secretly record a private conversation between MPs who visited its warehouse to check on working conditions.
Blue alleges that Merrill Lynch resigned as corporate broker to Sports Direct in autumn 2012 after share purchases in August that breached financial regulations. The investment bank was concerned that Sports Direct had provided the funding for its employee benefit trust to buy more than £20m of shares from workers, who had been awarded them as a bonus payment and were looking to cash them in, he claims. Under City rules, companies must inform the market in advance if they want to buy their own shares and must not purchase more than a quarter of the shares traded on a typical day.
If the employee trust had not purchased the shares then Sports Direct could have been required to offer them to the wider market, potentially suppressing the company’s share price as it would have increased the number of shares for sale. This would have benefited hedge funds who were betting that the share price would fall as a result of employees looking to cash in their bonuses.
In the legal filing, Blue says: “In autumn 2012, Merrill Lynch withdrew from acting as Sports Direct’s corporate broker. Merrill Lynch did so as a result of concerns that it had regarding Sports Direct’s corporate governance, including the propriety of Sport Direct’s decision in August 2012 to fund the Sports Direct Employee Benefit Trust to buy-back shares for the benefit of Sports Direct’s employee share scheme, without complying with the Buy-back and Stabilisation Regulation as would ordinarily be required by a buy-back of shares by the Sports Direct itself.”
The Financial Conduct Authority, the City regulator, is aware of the allegations. Despite Merrill’s resigning in the autumn 2012, Sports Direct did not confirm its departure until it confirmed Espirito Santo and Oriel Securities as its joint corporate brokers in a statement in February 2013.
Blue, Sports Direct and Merrill Lynch declined to comment.
