Serco Shares Plummet as UK Government Hurls Fraud Allegations

Shares in security firm Serco plunged more than 14% as investors fled over the company's first half results, allegations of fraud in connection with a prisoner transfers contract with the UK government, and the threat of a moratorium on future public contracts.

The company said its first-half pre-tax profit declined by 2.6% to £106.1m ($164.6m, €123.2m), despite a 10.9% growth in revenues to £2.1bn.

After adjusting for exceptional items recorded last year, pre-tax profit increased by 11% to £127.1m for the first six months of 2013. In the first half of 2012, there was a £31m exceptional net profit on disposals and £15.7m of reorganisation costs.

As at 11:00am BST, Serco shares are trading at 519 pence, down 14.43%. The fall in share prices was primarily attributed to claims of fraud against the company related to management of the £285m prison contract with the UK Ministry of Justice (MoJ).

Investigation into Fraud

Both the MoJ and Serco's directors have asked for the service of City of London police to investigate the actions of staff working on Serco's Prisoner Escort and Custody Services (PECS) contract with the government.

The company also said that it found that prisoners were recorded as having been delivered ready for court, when actually they were not. However it said that there was "no evidence that this misreporting was undertaken with the knowledge or approval of management outside the contract".

"I am deeply saddened and appalled at the misreporting of data by a small number of employees on the contract," Serco CEO Chris Hyman said earlier in a statement.

Following the allegations, the contract was placed under administrative supervision with immediate effect.

Serco said that it will repay profits of about £2m since 2011 on the contract to transport prisoners to and from courts across London and East Anglia. In addition, it will not take future profits from the contract that runs until 2018.

"It's become very clear there has been a culture within parts of Serco that has been totally unacceptable, and actions which need to be investigated by the police," said Justice Secretary Chris Grayling.

"We have not seen evidence of systemic malpractice up to board level, but we have been clear with the company - unless it undertakes a rapid process of major change, and becomes completely open with government about the work it is doing for us, then it will not win public contracts in future.

"The taxpayer must know that their money is being properly used."

Positive Outlook

Despite the adverse events, the group said it remains "well positioned to take advantage of attractive market opportunities". It expects improved organic revenue growth for full year 2013, with flat adjusted pre-tax earnings.

"We have seen further excellent revenue growth in Australia and in our BPO business, the UK has seen good growth from the contracts won in 2012 and the Americas division has won significant new business despite the material challenges in the US federal contracting market," Hyman said.

"We are working closely with UK government customers on their ongoing reviews of our contracts, and have agreed to a series of actions with the MoJ regarding our PECS contract."