Page No

Description / Interpretation of Document

1

RNS of Suspension on 1 June 2003

2-13

RNS of Final Results released 22 September 2003

14

RNS of Suspension lifted on 25 September 2003

15-16

Chronology of how AIM was informed of the Market Abuse by John East & Partners

17-18

Further re the Chronology - this memo shows that the AIM were aware that Evolution did not want the share issue vetoed - as they needed the shares to settle the short positions.

JE did not reveal the members of the consortium, but it shows that he did call the AIM on 20 October immediately after the AGM vote to say that the AGM resolutions on the dilution had been passed. This must be where Simon Clements rushed out to phone the LSE (and possibly Evolution) to tell them that the dilution would go through.

AIM found out that a Rule 9 was in effect, so there were aware that Evolution could not buy the dilution shares even if they were issued till the offer was completed under Takeover rules.

19

This is the file note of the market status announcement on 20 October 2003 by the AIM that:
“There are currently a significant number of outstanding settlement positions relating to Room Service Group plc”

20-21

This is a memo from Nick Bayley to John Newbury on 21 October 2003 about an Action Plan. It shows that they were in liaison with JE and the POTM.

More importantly it shows that they knew there were potential AIM rule breaches (short settlement and market misconduct) by Evolution and were liaising with the FSA about this. It also suggested that the FSA were researching a connection between Evolution and the concert party - i.e. a conspiracy to commit market abuse.

However they were still only thinking about potentially suspending the share and sending a message to firms with short positions to remind them about settlements.

It also shows that they were preparing documentation for meetings with Evolution and their CEO Alex Snow. It shows that they were researching the AIM rule breaches and working out who they were going to interview at Evolution.

22-23

This was a file note that the share was suspended at the request of the company on 22 October 2003. They decided to continue the market status message because of the short.

24-26

This was a file note on the first meeting with Evolution - see Evolution meetings page on this website

27

This was a file note on the first meeting with the FSA - see FSA meetings page on this website

28-29

Internal LSE Email by Jamie Whitehorn on 28 October 2003 about telephone call with John East about the placing  and debt conversion figures.

John East state that there is an arrangement fee for the placing - so they had an interest in the placing being made and the shares restored at the earliest opportunity

John East very aware of the >100% short and very worried about it. Worried that shorter cannot deliver. John East also said that the PR firm Hansard had call from Potts (Evolution) to ask when the share was coming back as he was off on his holiday.

30-32

This internal email shows that the LSE were aware of the crisis - that the offer would now make it impossible for the Exchange to restore the share with the offer in place - to give the cum-entitlement shares to all that were shorted. They realised that Evolution could not buy the shares cumentitlement if the shares were restored ex-entitlement. As Evolution would onlu be able to buy ex-entitlement stock. They even discussed Evolution becoming one of the placees (at the Exchange’s suggestion) to buy cum-entitlement stock, but realised that this would appear as if they had set up the whole thing (or were insider trading).

On being asked to recommend a solution by David Shrimpton (head of trading services), Jamie Whitehorn said:

“I recommend running for the hills”

They use the word “white-washing” a lot and this is suggested to be agreement to the offer going through, but it also does connatate with concealment of an embarrassment to the Exchange.

33-35

This is a fax from John East about the placing and offer proposals that were sent to the POTAM and the LSE.

It gives the list of names on the placing, but you will note that there are many names missing. This document (Page 34) appears to have been redacted without the corresponding note that it should have. It could be that some of the participants are connected with Evolution and this was concealed deliberately to avoid controversy.

It is clear that on page 35 that some of the information is missing deliberately, as they state that the fax could not be converted to text.

36

This is another internal email on 3 November 2003 after JW at LSE spoke with POTAM about the placing.

What is noticeable is that the LSE were aware that the placees reserved the right to sell the shares despite the Offer period under Rule 9 and that POTAM might have to announce this fact. This will relate to the announcement that was made after the placing announcement on 2 December 2003 where certain placees were named as not being in the concert party and therefore free to sell their shares on the market.

The point of this is that the placing shares were Ex-entitlement to the offer, so even if they had sold these shares to Evolution (as they probably wanted to) they would not have been able to replicate the value that would be contained by the cum-entitlement shares - as these were entitled to obtain 10 shares for 1 in the offer. After the Settlement Offer, the Exchange gave permission for these Ex-entitlement shares to be sold and it was these that Evolution bought to close the shorts.

37-38

This is an internal LSE email on 5 November 2003 to discuss the Action Plan that they were proposing with John East.

It appears from the plan that the Exchange were willing to let the placing go through and then to get Evolution (by force or agreement) to buy the necessary shares to cover the 10-1 entitlement for the 3 million shorted shares = 30 million shares. Evolution would then have to buy these shares in the market - to the extent that they receive claims (from the shorted).

39-40

This is another internal email at the LSE on 5 November 2003 to review the position of the Action plan.

What is interesting in this email is that the Exchange were still going ahead with the placing and planning to unsuspend the share in the process. They were also aware that there might be a connection between Evolution and the USP scandal too.

One key fact is that they were preparing the ground for the disciplinary hearings against Evolution on LSE Rules

• 1010 (unsuitability)
• 3700 (settlement) and
• 3300 (distortion of price & causing other to break the rules).

So this shows that as early as November 2003 the LSE knew that Evolution has potentially broken not one, but many of the LSE’s own rules.

There is also the first mention that they were aware of the Action Group and the fact that we had contacted the press and were posting on the BBs.

41-42

This is an email from Jamie Whitehorn to John East on 6 November 2003. It shows that the LSE were aware that there was no clear solution to the market abuse, but only a compromise solution for the various interested parties.

It states that the Exchange recognises that by allowing Evolution to obtain cum-entitlement stock that:

1. there is severe danger to the reputation of the Exchange.
2. it would provide “unjustified salvation” for the market makers that should have had their own settlement plan and
3. that the shareholder offer would have to be scaled back to avoid the concert party being diluted.

The biggest admission is that  they say:

“I know we agree that it is the shareholder interests and the reputation of AIM that are at the forefront of all our thinking and we ultimately believe that neither is served well here.”

I would opine that they were far more worried about the risk of the Exchange’s reputation being destroyed than the shareholders’ interests as if the Exchange had allowed the MMs to escape this way, it would openly appear that the Exchange were covering up the MMs abuse by providing them an escape route - and that this may have been Evolution’s plan all along.

It mentions for the first time a ‘surrogate offer’ to run alongside the placing. This is what eventually developed into the Settlement Offer. At this stage they were only discussing the possibility of the MM acquiring shares from the placing and delivering these, then the entitlement at a latter date.

They then say that they recognised that a price distortion might occur because of the short position and that steps would have to be taken to protect investors from any squeeze (Pity they didn’t consider this when Evolution distorted the supply & price during the abuse!).
It does state that the Exchange:

“has an obligation to preserve market order”

Again a pity that they ignored this in failing to suspend the share on 16 October 2003 when they were first made aware of the disorderly market.

It also shows that the Exchange considered cancelling the transaction, but whether this represented the placing & offer or the shorted transactions is not clear. They do state that they are against this as investor value would be lost, so it tends to make me believe that it is the former rather than the latter.

They finish by saying that they are working closely with the FSA on this and that they are behind their approach and partners in “resolving this connundrum”.

43-46

This is a copy of the email from John East that was forwarded around the LSE on 6 November 2003 and shows the placing & offer by Chiddingfold and concert party was organised quite early on. It suggests that they may have had the whole placing & offer ready before the abuse took place and that would suggest that Chiddingfold and the Room Service people organised the revised offer quite early on. So the cancellation of the Ј100k debt conversion may have been planned and part of the conspiracy.

You can see that the email was not only sent to the LSE, but also Peter Abbey, Gerald Gold, Nick Greenstone (Abbey’s henchman) and Ray Harris (Greenstone’s bag man).

You can see that John East expected that the shares would be unsuspended on the placing/offer, as they showed the timing as indicating the unsuspension in November.

47-49

This is another internal email after a telephone call between JW and Richard Pullford of the POTM on 7 November 2003. It suggests that they were checking to see if any of the concert party had purchased Room Service during the prior year as this would set the price for the placing/offer and could cancel the deal going through. The email was then forwarded to Margot Marshall at the FSA on 10 November 2003 with the anticipated date for announcement / unsuspension on 10 or 11 November 2003.

50-51

This email from JW at LSE to John East dated 10 November 2003 is a reply to the email in 43-46 above. It shows that the Exchange made minor correction to the announcment, but still intended to keep the share suspended until the shares were admitted on the 3rd day after the announcement.

52-57

This email contains a revision to the same email mentioned in 50-51 above and 43-46 above. The correction was to amend the previous announcement about the placing and ensure that the correct number of shares to be to be issued under the open offer (12,422,500) was mentioned.

58-60

This email from Nick Bayley to John Newbury shows the action plan as laid out by the Exchange. At the meeting of NB and JW they set the announcement dates for the placing.

The Action plan on page 60 (primary market) shows that they have a full list of the current shareholders.

In the secondary markets box it shows that they had already discussed how the share would trade on restoration.

In the rule breach section they said that they would give Evolution 24 hours after announcement to come up with proposals to settle the short problem and emphasise that the Exchange was taking it seriously. They also planned to ask Evolution to come over and discuss their plans as well as get the tapes and emails in light of the one month rule.

They also planned to hold discussions with the Evolution Supervisor, Martin Creydon. They were also in discussions with the FSA about communication with the leader of the Action Group - Nigel Smith. It also shows that they were aware of the development of Shareholders Action Groups as well as complaints and the potential press comments together with bulletin board discussions.

61-62

This file note shows the sequence of events after the announcement of the placing. You can see that the contact with Evolution figures pretty high on the list. What is especially interesting is in the list under 5. It clearly states that the LSE were aware of:

• A number of Exchange rules have been breached, including damage to the fairness and integrity of the market.
• They also wanted to Evolution to come to the LSE offices, explain their strategy and tell them that the Exchange was taking it extremely seriously.
• Most important of all it says that they are expecting to find out how Evolution intends to deal with the additional shareholders it has created by the oversell and how this has effected the Open Offer of 10 for 1 shares.

They also said that they would ask for the tapes

63

This telephone note shows that John Newbury contacted CREST to discuss Room Service and the Open Offer. The most interesting point though is that JN noted that he told CREST:

That they knew the market would be disorderly - in other words, the Exchange was expecting the disorderly market - something which they are specifically supposed to prevent under REC2 Recognition Requirements (General safeguards for investors) Section 2.6.6 which says:

In determining whether a UK RIE is ensuring that business conducted by means of its facilities is conducted in an orderly manner (and so as to afford proper protection to investors), the FSA may have regard to the extent to which the UK RIE’s arrangements and practises: include procedures which enable the UK RIE to influence trading conditions or suspend trading promptly when necessary to maintain an orderly market;

64

This is a note of the telephone call by Nigel Smith to the Exchange on 12 November 2003. Philip Caine refused to disclose the shorting market counterparties. He acknowledged that there was a substantial short position in the market. They also said that they were working with the market makers to ‘expedite’ a resolution. Crucially:

• They acknowledged that shareholders had been buying shares to prevent the refinancing deal.
• They refused a request to organise talks (with the market makers) to resolve the problem

65-68

On 14 November 2003, Nick Bayley sent an email to the Exchange distribution list concerning a meeting requested by the FSA. This was to discuss:

• their respective positions
• the timing of actions with respect to Evolution and what to do if they would not cooperate and
• initial discussions to prevent re-occurance

A point of note is the Room Service Plan attached which shows that they:

• were aware of severe settlement difficulties
• they were aware of the market impact of a settlement backlog and
• that the Exchange has rules which govern the members in situations like this.

But most important of all they were aware that:

• there is still a severe settlement problem that could impact shareholders’ ability to participate in the corporate action and
• that they were working with the market participants to resolve this.

As we know the Exchange was not cooperating with or working with the shareholders who were the victims in this scandal. They were market participants and victims, yet they were never consulted and this was bias in favour of their market members - the market makers.

69

This telephone call from the FSA to the LSE showed that the FSA were happy for the placing to go ahead as they thought it would protect the shareholders!

NB at LSE explained that David Shrimpton had contacted the Takeover Panel. Then there is a Redacted section - which must still be about Room Service as the discussion continues at the start of the visible text.

NB indicated that the announcement would be made that day (18 November 2003) and they would then go ahead with the plan - including another visit to Evolution to discuss their plans for resolving the settlement problems.

NB suggested another meeting with FSA/LSE/POTM to discuss the matter before the announcement.

70

This telephone note records a return telephone call by Kelly Green from David Shrimpton’s Office (Head of Trading Services). It notes that the shareholders believe that:

1. the Exchange is talking to the FSA, DTI, Room Service, Evolution, but not the shareholders
2. that nobody is speaking with the shareholders
3. the press knows about the scandal
4. that the politicians were informed - including DTI and Downing Street.

71-72

This is the telephone note of a call from Nigel Smith to Nick Bayley at the LSE. It notes that several key points were raised. Namely:

1. That the Action Goup members had shareholdings comprising 160% of the company’s issued capital
2. That no-one is listening to the Action Group
3. That Evolution has been contacted by the Action Group but not responded any further
4. That the Action Group is losing patience and the press are willing to write the story
5. That the Action Group requested round-table talks between the 3-4 parties involved to resolve the problems
6. That the Action Group wanted the shares to remain suspended until the matter was resolved
7. That if the MMs did not negotiate with the Action Group, that the Group would have to take legal action.

NB said that the Exchange was taking it seriously, but would not say what the Exchange intended to do. NB was aware that the Action Group were losing patience and that the press are ready to report the story.

73-74

This document is a copy of an email from Jamie Whitehorn LSE to John East. It states that the Exchange will coordinate the announcement of an AIM Notice with John East when they announce the Open Offer. It also shows that they intended to keep the share suspended until such time as the new shares were admitted to trading.

• The document acknowledges the severe settlement difficulties significantly in excess of the total share capital.
• Crucially, they also admit that the share price is likely to be affected by the short position and stay there for some time - this indicates that the Exchange knew that the share price would rise dramatically and stay high until the shorts were cleared.

It says that the Exchange is concerned about the impact of the settlement backlog on the Open Offer entitlements. It says that the trading rules govern the Exchange members settlement responsibilities and that the Exchange is working to resolve the situation in an orderly manner.

75-78

This email shows that JW at the LSE sent a copy of the AIM announcement for after the Open Offer had been announced to John East. They sent it back with modifications. As above:

• The document acknowledges the severe settlement difficulties significantly in excess of the total share capital.
• Crucially, they also admit that the share price is likely to be affected by the short position and stay there for some time - this indicates that the Exchange knew that the share price would rise dramatically and stay high until the shorts were cleared.

This message was communicated onwards to Nick Bayley and John Newbury.

79-80

This is the first letter from Nigel Smith of the Action Group after the telephone call on 24th November 2003. It shows that the Action Group were aware of the massive short and that legal action could now be taken - which would be damaging to the reputation of the Exchange. Furthermore it requests the LSE to urge the MMs to start negotiating with the shareholders/victims.

• It states that the Exchange were aware of the market abuse through the Nomad sometime before the majority of the market abuse occurred.
• And that the Exchange was having discussions with the Market Makers and the company and that if the shareholders were excluded they would have to seek legal remedy and report this to the media. It also stated that we had contacted the politicians.

81-82

This is a note of the telephone call made by Nigel Smith of the Action Group to Nick Bayley on 26 November 2003. It is a follow-on to the letter sent the previous day. In the call certain points were made:

• That the share price would have risen under the shorting and speculation and that EBG kept it artificially low. Possibly to 35p or even GBPЈ1
• NB was given the example of U-media that went from 0.8p to 52p in three weeks.
• That some of the brokers were ‘closing ranks’ and not being cooperative with their shareholder clients.
• That the shareholders interests were damaged by their being prevented from voting at the AGM - directly because of the short selling and that shareholders were attempting to prevent the dilution.
• NB said that the letter should state clearer that the LSE is not holding tripartite talks, but NS countered by saying that the LSE was talking to the company and the MMs.

A written repsonse was requested

83

This is the acknowledgement letter sent by Nick Bayley in response to the telephone call above.

This is quite an important document, as it is the first letter in which the Exchange states their primary duty - under the RECs (the Recognition Requirements). You can see this in the second paragraph. They say:

I would like to assure youof the continued importance that the Exchange attaches to the protection of investors interests when pursuing such matters.

Now this is important because it establishes that the Exchange are aware of their duty:

”to the protection of investors interests”

which is enshrined in the REC under section 2.6 and section 2.6.5 concerning “General Safeguards For Investors”

The letter also states that the Exchange is:

“taking the issue very seriously and are working closely with the FSA in that respect”

The other documentation in the Evidence file also repeats that the Exchange is taking it seriously. However, if we are to believe that the Exchange is taking the case seriously, then they should have:

1. carried out disciplinary procedings against the rule breakers
2. been aware that there was bias in only negotiating a solution with one side - the Market Makers (market abusers)
3. been aware that influencing the valuation by creating parameters was also biasing the resultant offer in favour of the market abusers
4. That in using a valuer with a known conflict of interest, they were also risking a reckless bias in the valuation result
5. and that this action would be in direct contravention of their duty to afford the proper protection to investors interests under the REC section 2.6 and 2.6.5.

84

This is the note of a telephone call made by John Newbury to Richard Griffiths on 26 November 2003 to arrange a meeting with Evolution to discuss the settlement backlog and what Evolution’s strategy is to deal with this. The reasons given are stated that:

• Observed settlements have now dried up - probably due to lack of available shares
• That the Exchange has been approached by firms in the market
• That the Shareholder Action Group is “stirring things up”

They state that they want the meeting to be short and specific. FSA hasa requested that all questions and answers be recorded for future reference. So they will not be discussing:

1. Disciplinary matters
2. Primary market issues

The relevance of this is that Evolution and the Exchange were aware of the disciplinary breaches and that discussion of these would possibly lead to admission of guilt.

Secondly the Primary market issues relate to AIM rule breaches, Corporate issue or Takeover Panel issues.

In other words, by avoiding any discussion of the MMs market abuse, they were focussing on measures to resolve the Exchange’s embarrassment at the Settlement backlog, the disorderly market and the fact that the Action Group were now getting a lot of attention in the media.

85-91

This is a note on the meeting held between the Exchange and Evolution Beeson Gregory at their offices in Wood Street on 27 November 2003.

The Exchange stated that they had not called the meeting in response to the press coverage, but to establish what Evolution intended to do to resolve/sort out the issue.

However NB noted that Nigel Smith (Shareholders Action Group) was making a great deal of noise and that Evolution’s name was now in the public domain.

NB said that the Exchange were not there to review what had happened, but to work out how the situation could be resolved.

Richard Griffiths for Evolution was not sure of how it could be sorted whilst the share was still suspended - indicating that without being restored, the situation could not be sorted.

Grahame Dell listed the measures that Evolution had taken so far. Evolution also agreed that they accepted the Exchange’s point (about the magnitude of the % short position) and that they had implemented controls to prevent positions over 10% or 25% without a review by management of the trading position.

GD admitted that they had been visited by the supervision division of the FSA. That the FSA had spent a couple of days at Wood Street and had reviewed procedures and controls. GD said that the FSA spent most (75%) of their time on understanding the trade flows. GD said that Evolution would implement a automatic system to monitor trading positions in real time. That if they were not implementing this in the New Year that the FSA would have insisted on it. Another FSA department asked for the (telephone) tapes from 15 September.

NB said the LSE was pleased with the new systems and controls. NB wanted to know what Evolution had been doing to resolve the short position.

Alex Snow (Evolution’s CEO) said that it was clear to Evolution that Room Service:

“is bankrupt and has been for some time”

Evolution did not do regular analysis on Room Service. The market makers saw information in the public domain - and acted on it.

They assumed that the company would go into liquidation (wrongly as we now know) as the company was technically insolvent. NB for the Exchange agreed that the company was technically insolvent from the balance sheet perspective.

NB asked what Evolution intended to do about their short position again? NB asked if Evolution thought something might happen to the company that would help Evolution’s position?

Griffiths said that they were powerless to control the company and resolve the issues. Next is the important bit though. Griffiths stated:

that Evolution were of the view that there were leaks somewhere because they could not see how else their name would have got into the market.

Indeed Alex Snow also said something very similar:

that Evolution believed that the company is worthless but they were concerned about the damage to their reputation (from the press).

Griffiths then repeated that:

he was very concerned as to how Evolution’s name got into the press and asked the Exchange how this happened.

You see Richard Griffiths and Alex Snow were more interested in finding out about how their name was leaked to the press (through Evolution or through the brokers - other market members) than with the consequences of their market abuse.

They wanted to find out who had leaked their involvement in the scandal and dropped them in the Public Relations mire?!. It seems quite obvious that it was Evolution that put Evolution in the mire. It was their own greed that caused them to break the law.

NB (for the Exchange) noted that the volume of trades on 15 to 17 October 2003 was known to the market and as there were only 3 market makers and that Nigel Smith was clearly aware of Evolution’s involvement. AS then said that it was unlikely that the Exchange or Evolution would be able to find out how their name was known - not realising that nearly all the brokers had disclosed that it was Evolution that was doing the majority of the short selling, followed by Shore Capital and Winterflood.

Alex Snow said that Evolution had never done any research on Room Service (so why take a short position?!) and that he was astounded that investors wanted to buy the shares (so why take advantage of them?!) He assumed that they were taking (speculative) punts, but he said that Evolution had never told anyone to buy it (but they were obviously quite willing to oversell it!) and thought the company should have made an announcement on the share price movement.

Griffiths was more concerned about Evolution’s share price dropping 5% in the morning press (Daily Telegraph) and RG said that Room Service trading was abnormal (Yes - because Evolution made it abnormal by keeping the price artificially low!) and there should have been an announcement about this.

The next bit is quite priceless as it is an outrageous statement by Evolution’s chairman. the note says:

Richard Griffiths said it is the Exchange’s job to protect shareholders not Evolution’s job.......!!!

This is coming from the company that committed the market abuse! The Chairman of the market abuser stating that the Exchange should have protected the victims - not Evolution. What about Evolution’s duty to abide by the law? - the Financial Services and Markets Act?

A quite ridiculous statement, which is akin to the mugger blaming the police for not being around to protect the victims and stop the mugger from breaking the law by assaulting and robbing them.

Of course it is the Exchange’s duty to protect the victims under the REC Section 2.6 and 2.6.5, but that does not give the market maker / mugger the right to break the law, to abuse and rob their victims!

In my opinion, this shows that Evolution viewed the victims as ‘fair game’ and that it was up to the Exchange to protect the victims and not Evolution. By inference, that it was the Evolution’s job to act as the ‘mugger’ and the Exchange’s job to act as the ‘policeman’ in this analogy.

Griffiths stated that they had put in controls to prevent the same level of short selling.

Griffiths re-iterated that the Exchange should be protecting people but claimed it was not and consequently, he said that Evolution is losing financially and all Evolution have done is sell shares to people who wanted to buy them...

Griffiths seemd to be forgetting that there are FSMA rules about market distortion and LSE rules about settlement and that Evolution broke both rules on multiple occasions. Evolution artificially held the share price down which caused even more buying and increased distortion.

Griffiths then has the gaul to say that Evolution is suffering financially because they sold shares! Conveniently forgetting that it was Evolution that abused the market!

Evolution did not have a duty to commit market abuse. They did not have a right to distort the market and they did not have a right to take advantage of investors by selling shares at distorted prices, with the intention of failing to deliver these shares.

Evolution took it upon themselves to take advantage of the investors and abuse them for the purpose of making a profit at the investors’ expense. Evolution had no right to do this.

The Exchange wanted to know how Evolution intended to settle the short position. Richard Griffith’s reply shows how much Evolution abused the market. He stated that

Evolution couldn’t settle their position.

JN for the Exchange then pointed out that under the Exchange Rules, they could give permission to trade in suspended stock to cover a short position (Rule 3045). Griffiths replied that:

he though there was no single, large shareholder that Evolution could go to and ask to buy their stock

NB asked how many counterparties (brokers) Evolution owed stock to (for retail contracts) and RG said:

that he thought there was about 30 (counterparties/brokers), but he did not know and Evolution have not looked into it.

The next statement is almost as outrageous as the previous one by the chairman. Graeme Dell, the Finance Director of Evolution then went and said:

that Evolution did not feel under pressure to do anything further while the stock was suspended. He said that Evolution had received no calls about the unsettled stock and had had no requests to discuss cash settlements.

This indicates that Evolution felt no ‘pressure’ to comply with their contractual obligations, just as presumably they felt no pressure to obey the Financial Services and Markets Act when they abusively shorted the victims and distorted the market.

It was well known that at this time, that Evolution was in breach of the LSE Settlement Rules as well as numerous other LSE Rules concerning causing other Exchange members to breach their settlement obligations. They had an absolute duty under these rules to ENSURE delivery by the contracted settlement date and had completely failed to fulfill all of their contracts on time.

Alex Snow, Evolution’s CEO said that there ‘will be 2 likely outcomes’:

• Liquidation
• refinancing

Yet he had already stated that he considered “is bankrupt and has been for some time” (see above). AS said that he did not have a clue which one would happen, but something would.

The next section of the report gives a strong clue as to why Evolution took the abusive trading strategy that they did.

Griffiths noted that the MMs had been speculating about a placing and that this was not the first time that the MMs had speculated in this way. In situations like this RG said that companies are likely to need to refinance and through short selling and pushing the share price down, the market makers make the refinancing more likely. A self-fulfilling prophecy.

The Expectation of liquidation or refinancing is the sole basis of Evolutions settlement policy.

In other words, Evolution were expecting an insolvency or a dilution of some kind and deliberately short sold the shares anticipating that they would either:

• not have to deliver shares in an insolvent company or
• that they would be able to pick up cheap shares from a dilution - even if that dilution was a long way off and the shares would not arrive in time for them to complete their settlement obligations.

Evolution’s strategy was to make the short trades and wait for circumstances to change to enable them to escape their contractual obligations. The FSA considered that they traded abusively because they did not have an exit strategy to fulfil their contracts.

Evolution’s strategy can be interpreted to be that they deliberately took advantage of the investors and created a disorderly market and then were bailed out by a change in the company’s circumstaces or the actions of the Exchange - which were abusive in their own right, since they were in contravention of the RRIECHR General Safeguards for investors REC 2.6.1 & 2.6.5 and the Human Rights Act 1998 s6(1)

The Exchange noted Evolution’s statement about their strategy, but the company had gone 250% short and settlement had ground to a halt. They wanted to know what Evolution intended to do.

Richard Griffiths then said that the MMs had made a bet (at whose expense?!) and the company would go bust of be refinanced.

NB pointed out that Evolution had contracts to deliver on and asked what Evolution intended to do? To which Griffiths replied that:

they (Evolution) had not considered what they would do (they had no exit strategy as the FSA stated in their Final Notice) and asked for the Exchange’s view on the action Evolution should take?

The Exchange noting that share could not settle asked if Evolution had considered cash settlement? JN suggested that they could contact the counterparties and ask if they would be happy to receive cash? RG said that he thought this could be a feasible solution. GD wanted to ask why the Exchange didn’t simply void all contracts from 22 September 2003 onwards, but NB stated that some of the investors may have wanted delivery of the shares. GD then claimed that the refinancing announcement by Room Service was factually incorrect. GD implied that the announcement of a loan at 1p per share, followed underneath by the consolidation news at 100 for 1 shares was encouraging people to buy the shares because they were misled by the company.

What GD failed to realise though, is that many shareholders were buying because the share price was held artificially low - by Evolution and the other MMs. These shareholders would have realised that Evolution had an obligation to deliver on their contracts and they had sold too many shares to be able to buy enough to cover their obligations. Other shareholders could see that it was possible to obtain the shell company and stage a takeover by merging the interests of the major shareholders. The Action Group alone had 84.37% of the company in notifiable holdings over 3%. The entire Action Group had holdings in excess of 160% of the issued share capital. Had these shares been delivered a takeover could have been completed very quickly and there was someone able to refinance the company immediately.

RG stated that Evolution’s settlement strategy might be to buy in the securities in the market. GD then stated that on the basis of the AGM, the annual report and the Chairman’s statement being accurate, that there should be plenty of securities to buy.

GD must have presumed that the shareholders would be selling the shares at a loss. However, he failed to take account of the fact that:

1. some people were aware of the market positions, Evolution’s settlement obligations and the true market value of the shares under the short position.
2. other people wanted to take over Room Service and were buying shares for that purpose.

GD failed to comprehend that people would have other reasons why they would be buying the shares and some of these would be to do with the fact that Evolution had been abusively shorting the share with no regard as to how they would settle their contract bargains. Evolution intended to take advantage of the shareholders during a dilution and instead found that they were foiled by their own strategy of selling more shares than existed, with no means of obtaining the shares to close the contracts.

NB noted that the people who were buying shares had taken a particular view and it was not for the Exchange to judge this view as right or wrong.

This could mean that NB may have understood that the people buying shares did have other reasons for holding onto them (takeover) or that they were aware of Evolution’s predicament and were waiting for Evolution to correct the price to the true value, which would have been far, far higher. At which point some of them would have sold.

Once again Richard Griffiths stated that Evolutions strategy was based around the announced share dilution and the fact that they assumed they would be able to buy the shares at some point. Alex Snow cheekily noted that the private investors “should be pleased they are given the option to get out of this” However, NB said he could not speculate what the response might be (probably realising that the shareholders would reject any option that did not force Evolution to price the shares at the true market value which was far higher than the artifical price created by Evolution). NB then asked if Evolution if the counterparties would be happy with a cash offer? Then why didn’t Evolution offer cash to settle?

Graeme Dell did not agree with a cash settlement. He viewed that Room Service would either refinance or liquidate and that it could only be one of these options. NB reminded him that Evolution’s short position was two and a half times the available stock (not precisely true as it was actually two and a half times the issued stock and this is quite different from stock available to trade). NB noted that the shareholders had bought stock in good faith on the understanding it would be delivered.

RG then made another ‘crass’ statement, claiming that the MMs had also entered into contracts in good faith, (despite the fact that they failed in their contractual obligations) that they had read the company’s statements (about dilution) and established their settlement strategy (based on the company either diluting their shares or liquidating).

Which means that they were relying on the outcome of the company as to whether they would be able to fulfil their contractual obligations. As the FSA final notice points out, Evolution’s strategy was undertaken:

 “without a reasonable settlement plan in place to ensure delivery of the shares sold”

This is not a strategy that could be described as acting in good faith or entering into contracts in good faith.

Alex Snow asked the Exchange what the normal course of refinancing would be? JN for the Exchange then replied that in the case of a suspension, when the suspension is lifted the short position unwinds, but JN said that he had never been involved in a case with shorting to this extent, either across the market as a whole or by one individual.

The Exchange then suggested that if there was an injection of funds and the company was restored that there may be a situation in which individuals may wish to sell their shares - but are unable to do so because Evolution failed to deliver. Alex Snow noted that this situation would leave Evolution very short

It is important to note that NB for the Exchange then stated that this would lead to a disorderly market.

Was the market not already disorderly due to Evolution’s strategy and the Exchange’s failure to act?!

It seems completely absurd that the Exchange would fail to recognise that by unsuspending the share prior to a dilution, that they would be protecting the investors’ interests by forcing Evolution to pay the true market price for the shares in order for them to clear their short position.

This was the time-honoured method for forcing shorters to correct their mistake. ‘Shorter’s corner’ as it was known was the place on the Exchange floor where individuals who had taken extreme short positions were obliged to bid ever higher, until they had succeeded in purchasing enough stock to fulfill their contractual obligations.

Had the Exchange adopted this tactic they may have avoided committing market abuse themselves as well as infringing the Human Rights Act 1998.

Griffiths agreed (that it would lead to a disorderly market) and stated that there would be a bear squeeze but that Evolution can’t even buy stock and effect a squeeze at present because the stock is suspended.

This appears to have been acknowledgement that this method could have solved the short position.

Alex Snow said that Evolution would look to settle:

“within 10 minutes of the suspension being lifted and would go to whatever price to achieve that”.

However, JN for the Exchange clarified that they could do this whilst the stock was suspended to:-

buy back their whole position at whatever price.

They said that Evolution might have to pay more but could do this with the permission of the Exchange and:

Graeme Dell said that Evolution was now aware of this.

NB for the Exchange seemed to be encouraging the Evolution to consider these options, but GD said that currently Evolution was not pressured to do so. JN said that it was not the counterparties pressuring, but the shareholders. JN said that the Exchange had been approached by one counterparty.

Once again Griffiths seems more concerned with the bad publicity that Evolution was receiving when he states:

Griffiths said he was concerned because currently Evolution did not seem to even have the right of reply to claims by the shareholders.

The next sentence is quite interesting, as Evolution were contacted by the Shareholders’ Action Group in early November 2003, but after a brief reply by their solicitors did not communicate further.

Dell said that under FSA rules Evolution had to reply to complaints in writing. NB for the Exchange viewed that as the shareholders probably thought they would get nothing from Evolution were applyin g pressure to their brokers instead. Dell thought that the market’s view was that everything stops under suspension but that there was no pressure comign from the brokers to settle.

Griffiths and Bayley noted that the article in the Standard was not good for the reputation of Evolution or the AIM.

then Graeme Dell said that the article was incorrect as it said Room Service was a cash shell and Dell claimed it had no cash.

Griffiths then noted that Evolution would have to fight on this matter because they couldn’t let it continue to the detriment of their own shareholders.

then what about the victims? - the shareholders Evolution abused Griffiths?!

RG then claimed that with the new controls it would not be repeated. The Exchange said that they would want more meetings with Evolution - particularly if they were under pressure (to deliver or through the media?).

But what about the meetings asked for by the victims? The Action Group asked for them on numerous occasions, both verbally and in writing.

Why did the Exchange hold so many meetings with the abusers and none with the victims? This bias is an example that the Exchange acted contrary to REC 2.6.1 and 2.6.5 in not protecting investors’ interests.

Alex Snow then proceeded to try and claim that it was the company’s fault (Room Service) for trading whilst insolvent. He suggested:

Shareholders should go to the company with their complaints... the company was trading whilst insolvent... which is an offence.

Evolution believe they are being blamed when Evolution were only facilitating trading based on information that was publicly available and responding to the demand for stock.

This is from the same Evolution that were found guilty of market abuse by the FSA.

Then Richard Griffiths then made an equally crass statement by claiming that:

Evolution was being persecuted when it was “the idiots that piled in at the other end that have caused this problem”.

So Richard Griffiths, the Chairman of Evolution was blaming the victims of the market abuse for causing the problem - which is akin to a mugger blaming an old lady for the mugger robbing her!

How is it possible that Evolution managed to get a license to trade on the Exchange as a market maker when their Chairman makes statements like this?

Why didn’t the Exchange recognise that Evolution had acted completely outside the bounds of any common decency and suspend them from the Exchange forthwith?

Why didn’t the Exchange suspend further meetings with Evolution and seek to discuss a settlement solution with all the participants - including the victims of the crime?

The Exchange tried to point out that it would benefit all if the matter was resolved swiftly and smoothly.

Griffiths then went on to say that they had suffered damage and they had received calls from their clients asking what had been going on because of the press articles.

Griffiths said that if Evolution compensated counterparties then Evolution’s guilt could be inferred:

“We have been wronged” Griffiths said.

No Richard - it was the victims of the market abuse that were wronged by Evolution! That’s like saying that the old lady wronged the mugger, because the mugger attacked her!

The Exchange noted Evolution’s concerns about their reputation, but I do wonder if this was a tongue in cheek comment? Dell asked again if the Exchange could not simply cancel all trades since 22 September 2003 and the Exchange said they would consider it.

Griffiths said that a monetary settlement was ‘inappropriate’. However, Bayley for the Exchange correctly pointed out that the situation had been created because Evolution had gone so short. However, Griffiths then replied that:

the other market makers must also be short.

then he said:

the situation wasn’t because Evolution had gone so short but because investors on the other end had gone so long.

“They created the situation, not us”

said Griffiths. Then Alex Snow agreed and said that it was totally those going long which created the situation.

It is hard to believe that a Chairman and a Chief Executive Officer of a market abusing market maker could be so blind to the fact, that their company had broken the Financial Services and Markets Act by distorting the market for Room Service shares.

Blaming the shareholders for the market abuse is a completely disgusting distortion of the true facts. Evolution committed the market abuse and they were found responsible by the Financial Services Authority.

The Exchange said that they were not there to investigate what had happened but to find a resolution to the situation. Dell tried to state that from Evolution’s view 20 trading days should not have occurred and the Exchange could cancel them. Griffiths on the other hand said that Evolution was open to all suggestions, but that now because of the press coverage, a cash settlement was not an option. Dell queried where the information was coming from (not realising that the brokers were passing the info to the shareholders who were then passing it to the press) and the FSA were realising the embarrassment that Evolution had caused the market.

Alex Snow then tried to ask if Evolution could refinance Room Service (a company that he had considered bankrupt) but the Exchange suggested that this option would not look good. The Exchange said there were a number of options they could consider and the Exchange would discuss this with them, but ultimately it was a decision for Evolution.

Griffiths said that Evolution would buy when the suspension was lifted and Snow thought that the publicity might ‘entice a buyer for the company’.

92

This is a telephone record of a call between Nigel Bence of Hargreaves Landsdown Stockbrokers and Rebekah Cain of the Exchange. Hargreaves Landsdown called because they received a telephone call from Nigel Smith of the Action Group, regarding transactions that had not completed and were believed to be short. NB of HL claimed that they would not release the name of the MMs involved. Nigel Smith told them that he had been advised to collect the name of any firms that were being uncooperative with the shareholders.

Hargreaves wanted to know if their policy of not naming MMs was still ‘appropriate’ or whether the Exchange wanted them to do so now. The Exchange said that the firms obligations remained the same and firms were not being asked to “change their current practises by the Exchange”.

This indicates that the Exchange approved of the ‘practise’ that market counterparties/brokers were denying the information about the MMs contracted to the retail investors in the shorted transactions, when requested by these same retail investors.