The Hut Group, the Manchester-based e-commerce company preparing a £4.5bn stock exchange listing, cancelled a previous flotation following the discovery of a multimillion-pound fraud at the firm.
Details of the fraud and the subsequent collapse of the share offering – which dates back to 2011 – are contained within a 2014 judgment in a high court case that included THG being ordered to pay £10.8m to settle a claim from the owner of a business it had acquired.
The judge’s ruling explored how THG’s aggressive business culture during that time contributed to the fraud and stated how attitudes within its finance department had “allowed the fraud to flourish”.
The news of the historical accounting problems comes just a day after THG confirmed its intention to float, in a move that could value the company at £4.5bn and raise it around £920m of new funds.
Founder Matthew Moulding, who was THG’s chief executive in 2011 and is now executive chairman, is said to be in line to receive £700m if the company reaches a valuation of £7.25bn by December 2022. He is also insisting on retaining a “founder’s share” to block unwanted takeover bids.
The court documents state that in May 2011, THG acquired the sports brand Myprotein from its founder Oliver Nobahar-Cookson for £58m, which was made up of £30m of cash plus shares representing 12% of the combined company.
Cookson claimed he had been led to believe the shares were then worth £28m and that he would quickly be able to sell them for a significant profit when the company floated in the autumn of the same year, according to the judgment.
The documents show that a fraud inflating THG’s valuation was discovered in September by THG’s auditor, PwC. Mr Justice Blair stated: “I am satisfied that the reason that the [flotation] went off was the fraud and the discovery of the losses concealed by the fraud.”
THG’s then financial controller, plus another member of the accounting department were sacked, with Darren Rajanah, then finance director and now working in THG’s Ingenuity division, put on gardening leave before returning to the company.
Rajanah’s conduct was criticised in the judgment including how “a bonus of £50,000 which had been awarded to Mr Rajanah … was paid into [the fired financial controller’s] bank account to hide it from Mr Rajanah’s wife, from whom he was undergoing a divorce.”
The judge added: “I am satisfied that [the sacked financial controller] was under pressure to produce figures which would be used in the acquisition [of Myprotein], and that though not personally fraudulent, Mr Rajanah, as finance director and a member of the board, has to take some responsibility for an atmosphere within the finance department which allowed fraud to flourish.”
He concluded: “In my judgment, [the] fraud is to be attributed to THG.”
It was not suggested that Moulding had prior knowledge of the fraud.
A THG spokesperson said: “This historic [sic] matter related to the actions of two junior individuals back in 2011. Contemporaneous independent reviews and the court found THG was not aware of their actions nor the systems issue causing the reporting inaccuracy and [THG] took immediate corrective action on discovery.
“At the time, the company was considering the option to list or raise money privately and had not engaged any investors prior to identifying the accounting system error.
“A private placement was then completed in September 2011, which the Myprotein founder participated in.”
In the same case, THG successfully claimed £4.3m for its losses because of inaccuracies over the Myprotein accounts.