Patisserie Holdings: who dropped the cake?

Tuesday, Jan 22 2019 by
Patisserie Holdings who dropped the cake

It was a winding up order that started it, presented to The Gazette on a quiet September’s day, where it sat for a month like a ticking time bomb. Not even the board of the company in question knew a countdown had started.

This was not Act One of the Patisserie Holdings (LON:CAKE) fraud saga. Nobody knows how deep the rot goes, apart from the perpetrators. The fictitious accounts that propped this fraud up like a house of cards could even pre-date the May 2014 initial public offering. No-one has yet indicated otherwise.

The gig’s up. A few bad actors have dented a lot of people’s wallets. When good investors fail, they learn and move on - after all, experience is what you get when you don’t get what you want. Patisserie Holdings has been dishing out quite a lot of experience, recently.

It’s a curious feeling, revisiting the group’s half-year update from 2018, less than five months before that announcement in October. Can any of the figures be trusted or was it all a desperate work of fiction? I’m squinting at the screen, looking for hints of what was to come.

Surely, the diligent investor can’t be so easily duped? And yet nothing jumps out. The numbers are great but not stratospheric. They have been well-judged by a competent liar. Perhaps, in retrospect, they are too neat, too tidy. Easy to say, with hindsight.

Like the rest of the market, I didn’t have a clue about Patisserie Holdings. People want to trust other people. An unfortunate corollary of this is that smart, committed fraudsters can create a surprisingly large mess.

It’s a sad state of affairs. As Paul Scott notes, other frauds “such as Quindell, Globo, and Carillion, were easy to spot a mile off - indeed we warned investors of all 3 here, long before they blew up. Patisserie Valerie however, appeared to be a wonderful, cash generative business…”

Investment post-mortem: such a grim phrase to apply to a purveyor of cakes...

Following the crumbs - a brief timeline of events

Before the storm

  • 14 May 2014: CAKE raised £32.8m (before expenses) through the Placing, the net proceeds of which were used “to repay the Group's existing outstanding senior debt and shareholder loans.

    • Selling shareholders also received gross proceeds of £46.5m pursuant to the Placing

  • 27 June 2014: Options…

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Patisserie Holdings PLC is a United Kingdom-based cafe and casual dining company. The Company offers cakes, pastries, snacks, meals, and hot and cold drinks across the United Kingdom. The Company's segments include Druckers, Flour Power and Philpotts. It offers products, such as coffee, dairy, fruit, packaging, cocoa and wheat items. It offers cakes in various categories, including celebration cakes, gluten free cakes and wedding cakes. The Company operates under various brands, including Druckers-Vienna Patisserie, Philpotts and Flour Power City Bakery. The Company offers a range of cakes, such as Gluten Free Flapjack, Gluten Free Chocolate Chip Muffin, Cortina, Chocolate Box, Carrot Cake, Cheesecake, Blackforest, Exotic Fruit Tart, Pecan Tart, Citron Tart, Choc Mousse, Mixed Berry Mousse, Raspberry Tart, Madame Valerie Slice, Mille-Feuille, Gluten Free Chocolate Brownie and Gluten Free Marble Cake. more »

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79 Comments on this Article show/hide all

Jack Brumby 22nd Jan 2 of 79

In reply to post #439238

Sad... It's good to see Luke Johnson extending the loan for staff payments. I don't think he had anything to do with it but it happened on his watch

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ACounsell 22nd Jan 3 of 79

Hi Jack,

A fascinating and staggering analysis of the debacle that is Patisserie Holdings (LON:CAKE) and an interesting link to the Z-score which as you say showed no indication of any problems at the company. Your analysis combined with the IPO prospectus and statutory reports up to and including the 15 May 2018 interims would make an excellent case study for an MBA finance course - even more so if and when the details of exactly how the alleged fraud was perpetrated are in the public domain. Clearly whoever perpetuated this alleged fraud (and I am sure there are more than one culprit/criminal) was very clever in their manipulation of statutory accounts and financial reporting. I assume all your information is from the annual and interim reports and assuming it is correct (perhaps a rash assumption with £CAKE!) then I have a some questions for clarification:
1. Is it a coincidence that the number of shares issued under a second LTIP on 20th July 2018 were exactly the same as those issued under the original LTIP on 27 June 2014?
2. Related to 1. - if these were part of an LTIP how were Paul May & Chris Marsh able to sell in the market immediately?
3. Also related to 1. Was this the same LTIP award that was not shown in the notes to the accounts as has been reported in the media?
4. Your analysis suggests that all the options under the original LTIP vested at £1.70. I assume the £1.99 options went to lesser minions within Patisserie Holdings (LON:CAKE).

If your analysis is correct what is truly staggering if you add up all the share sales is that the key directors and shareholders (and pre IPO debt providers) have pocketed cash just shy of £100m including c. £20m to named directors !!! This from a potential fraud which could have existed from the time of the IPO. I hope that the SFO, FCA, PwC and whoever else is investigating this are aware of these share awards and transactions and will be seeking financial redress from the directors along with jail terms if the alleged fraud is proven in a court of law.

As you say Jack private investors had very little chance of spotting this fraud despite many people claiming with hindsight they saw evidence of it in the day-to-day personal experience of Patisserie Holdings (LON:CAKE) and comparisons with other chains which didn't seem to stack up. Perhaps the only sign of anything being amiss was the number of LTIP shares/options issued to Chris Marsh on both occasions, 666,666 - the number of the beast twice! Not a religious person but this term in the Book of Revelation, of the New Testament (last book in the Bible) that is associated with the Beast of Revelation would seem appropriate in the circumstances! Perhaps they should throw the good book at the directors of £CAKE!

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ACounsell 22nd Jan 4 of 79

In reply to post #439238

Well I guess that was inevitable though to be honest I am not sure I share Jack's confidence with regard to Luke Johnson's involvement (see comment 2). Arguably he is going to be significantly out of pocket even allowing for his share sales at the time of the flotation and subsequently given his remaining shareholding and the cash injection he has made. Nevertheless he should have had oversight and his reputation as a brilliant entrepreneur and businessman must now be in tatters. Perhaps he would like to extend a loan to all those private investors who have lost money in this appalling fraud! Alternatively his fellow directors should return all their ill gotten gains and this should be used to recompense small shareholders. Well pigs might fly but it will be intersting to see what else comes out of the woodwork.

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Jack Brumby 22nd Jan 5 of 79

Hi ACounsell, thanks for the post.

The LTIPs left me scratching me head. The company itself is still trying to figure out what's happened... You're right in assuming the data I got is from updates and company accounts.

1. Not sure! Commentary on the LTIP scheme was frustratingly sparse. This is from note 6 to the 2017 accounts:


The number of options held according to these notes is the same for every year: 1m for P May and (as you note) the number of the beast for Mr. Marsh. It appears that both the directors had at least twice this amount of options in the LTIP. Perhaps May and Marsh got 1m and 666,666 options every year - if this is the case that would mean they had built up LTIP options of 4m and 2.666m respectively between 2014 and 2018.

If anybody has a different take, I'm all ears.

2. The options were exercisable between 27 June 2017 and 27 June 2019. Assuming no retention period, then they should be able to exercise and sell quickly.

3. I assume so, although I haven't cross-checked with any news articles. All I have looked at are Director Shareholding RNS' and Full Year Accounts. This would go some way to backing up point 1 and how the directors were able to sell twice the reported amount of options...

4. Yes - LTIPs exercise at 170p, ESOS (minion) options exercise at 199p

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Snoo 22nd Jan 6 of 79

Genuinely very surprised it has come to this. Had expected a really bombed out share price, but that if the business got the cash to keep it going it would be fine. 

Maybe Mike Ashley to the rescue? He seems to be in for every other failure.

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LongValue 22nd Jan 7 of 79

A low-tech business, UK-based, easy to monitor, established, profitable, no debt, pays a dividend. And it's backed by one of Britain's most respected businessmen/commentators. It ticked all the right boxes and yet it collapsed. The only possible solution I have come across is to accept events like this as inevitable and to spread the risk. Simplistic but does anyone have any other solutions? Today it was Patisserie Holdings (LON:CAKE) but I dare say that it will happen again in a slightly different format.

For those who look to Warren Buffett and his focus on a small portfolio of stocks, it might be worth remembering that the latter was the son of a stockbroker and member of the US House of Representatives. Basically, forget all the folksy stuff. He is very much a member of America Inc and he's an establishment player. He will have far greater access to information than almost any private investor. Maybe the rest of us need to accept our fallibility.

For those interested, I wrote something broadly covering why I think diversification makes sense:

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mmarkkj777 22nd Jan 8 of 79

In reply to post #439288

Hi Longvalue,

A really sad case and a real shame for the unsuspecting investors (not a holder, by luck only). You hit the nail on the head, adequate diversification is really the only way to mitigate the risk of this happening (when there are no warning signs).

(EVEN) Warren Buffet had his fingers burned on Tesco for similar reasons. Misrepresentation.
However, despite what he says, Warren is actually very diversified with Berkshire Hathaway. There are a large number of wholly owned companies within the group, in addition to the major holding in others companies. It is diversified across sectors too (I hold in my pension). Not sure he has access to better info. outside of his group companies.  He is probably much better than most at reading between the lines and puts a lot of faith in having a trusting relationship with his CEOs (but can still get it wrong and I honestly believe anyone can from time to time). Hence diversification.

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veritas 22nd Jan 9 of 79

The statement noted by Jack from January 16 I find most telling in this sorry affair:

Forensic accountants since then have revealed that the misstatement of its accounts was extensive, involving very significant manipulation of the balance sheet and profit and loss accounts. Among other manipulations, this involved thousands of false entries into the Company's ledgers.

I am unable to comment on how much time and effort it took the forensic accountants to reveal the significant manipulation of the accounts, but given the relatively short time scale since news of the alleged fraud broke on October 11, it would seem reasonable to assume that the task of uncovering the deceits proved none too onerous for those charged with the task.

How then was it possible for such significant manipulation of the accounts to have gone unnoticed by the company's auditors, presumably over multiple years (audits)? 

I agree with the poster who suggested that diversification of a portfolio is the best pragmatic solution to the problem of the occasional investment 'bad egg' caused by (alleged) fraudlent behaviour on the part of certain directors. Lending weight to public calls for an independent investigation and possible overhaul of the industry that oversees plc company audits is perhaps another measure private investors might want to consider by way of trying to protect their investment interests.

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smatthews1 22nd Jan 10 of 79

From reading though that time line of events, it really has presented an unbelievable disaster at the end. I have owned this share in the past, and the only reason I sold is that I felt their cafe's were very basic and didn't really offer anything special (although they were busy). So because the numbers stacked up as well, it remained firmly on my watch list. I feel I have dodged a bullet here.

I keep reading comments about 'unlucky to shareholders' whilst this is true it doesn't quite sit right with me, its almost like the accepting that there will be no repercussions for those responsible, and these things can happen from time to time.

I wouldn't be surprised to see a documentary created out of this in the future, maybe someone like Piers Morgan could ruffle up a few feathers?

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AlanJenkins2 22nd Jan 11 of 79

There was nothing suspicious about the various officers' failure to buy shares,given the fact that they were generally expensive.The only cause for suspicion without hindsight is how well the company appeared to be doing,given that other high street retailers were struggling.

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jonesj 23rd Jan 12 of 79

It would appear that the LTIP might just have Incentivised the wrong kind of behaviour.

Achieve targets via allegedly fraudulent means, collect the free shares, sell them.

No alignment of incentives with shareholders interests there.

It would be much better practice if directors were required to keep any shares awarded for at least 10 years.   Amending tax legislation to achieve this should not be difficult.

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timarr 23rd Jan 13 of 79

If fraud was committed - and it seems certain it was - the question is to what purpose?

No scheme like this can remain undetected forever - although how long it was going on ought to be a major focus of the inquiry - so the perpetrators either have an exit plan, are unable to extricate themselves from a problem of their own making or are deluded as to their own ability to evade capture. The first and the latter don't appear to be the case here, as the game was up as soon as the Revenue got involved, so we're left to suppose it's the middling option. Humans are constantly puzzling, but this does seem odd.

One thing about frauds is that they do tend to leave detectable traces, because humans cannot generate genuinely random numbers. We impose order on chaos even if we don't mean to. The red flag for Patisserie Holdings (LON:CAKE) looks like the revenue per store, which stayed static at £600K per year even as the number of stores more than doubled even as costs increased.

There's probably a business for an auto-auditor in here somewhere ...


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gus 1065 23rd Jan 14 of 79

No one expects to get caught, but even when they do the sanctions regime for white collar crime in the U.K. seem relatively light and the drawn out due process of the law makes the imposition of such sanctions a relatively remote proposition. Worst case for the directors if convicted (and the SFO record on this is not great) - maybe seven years in a low security open prison with a 50% reduction in time served for good behaviour. Unlikely assets will be sequestered (if the fraudsters are on the ball the money will be lost in the BVI or somewhere exotic) so the risk/reward (absent any sense of shame) is skewed in favour of the perpetrators and they probably make a second windfall selling the newspaper/book/film rights. Contrast the situation in the US (30+ years, detention without bail through the due process and they throw alway the keys) and one can understand why for those for those with that kind of mind set it’s a better game than mugging old ladies.


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mammyoko 23rd Jan 15 of 79

Hate to post an advert for a competitor but there is a really good article here from Richard Beddard that does get close to identifying warning signs - consistent negative working capital movements that should have been positive

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mammyoko 23rd Jan 16 of 79

Sorry, it's by Maynard Peyton!

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Graham Ford 23rd Jan 17 of 79

Trouble with comparing Cake to others is as ever are we comparing apples with apples. For example, they had some sales of cakes through Sainsbury. Were Sainsbury slow to pay? If so, could that have muddied the waters regarding changes in working capital.

If I remember correctly they didn’t publish like for like analysis of the performance of their outlets. Was that a warning sign?

I’ve lost only a small amount here fortunately. So although I’m feeling I’ve got egg (or custard pie) on my face, (why didn’t I realise it was too good to be true), I’m not going to whip or beat myself up too much about it. (Might turn into a meringue!!).

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cig 23rd Jan 18 of 79

In reply to post #439338

A classic scenario is to start with the intention of covering the fraud later with real performance (to be understated by the amount booked forward). Then the path of least resistance when the initial fraud isn’t detected and the expected reality doesn’t come true is to keep digging.

A fuzzing tool can surely be repurposed to defeat your auto-auditor.

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bobsandy12 23rd Jan 19 of 79

Thank you; useful article and posts.

Lessons; when it looks too good to be true????;when an entrepreneur takes his/her eyes to self promotion through books/press/ they really have sufficient time and motivation to be close to the business?; Diversify, diversify, diversify; LTIPS that are aggressive and much shorter term than the cycle are a high risk indicator.

As always; keep em coming

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