What goes up, can come down. In a special Insider investigation Steve Brauner examines the strange tale of Merseyside gas company Alta Gas, and the bad smell its collapse has left amongst investors and employees.
The year 2000 could hardly have been better for Peter Bradley and Alta Gas. He was named as one of Ernst & Young's north region entrepreneurs of the year and the company's financial results made it the 16th fastest growing business in the UK, according to the PricewaterhouseCoopers/Sunday Times Profit Track 100 survey. The growth of the company was reflected in its second placing in the Insider ranking of the 50 fastest growing companies in the region.
But Alta Gas, on the face of it a rapidly expanding distributor of bottled gas led by a successful serial entrepreneur, was not what it seemed. Since the company collapsed into receivership last November it has become evident that as well as butane, propane and liquid petroleum gas (LPG), its products included another gaseous substance - fresh air. Much of the "gas" it turned over did not exist and was either falsely invoiced or "sold" to fictitious customers.
The last audited accounts for the year to 31 December, 2000, which were never filed, showed turnover of £325m. Accountants who have investigated the company's affairs now estimate that this was overstated by a staggering £39.4m. The previous year's turnover of £313.3m is also estimated to have been overstated, to the tune of £33m.
Joint administrative receiver Kevin Mawer, of Grant Thornton, says: "We reckon that in the last three years there were £326m worth of false invoices and identifying them has proven to be relatively simple. The actual business was probably no more than 60 per cent of what was in the books."
Things appeared very different in October 1998, when venture capital firm 3i paid £32m for a 12.5 per cent stake. The business then had an annual turnover of nearly £38m, trading as Alta Gas, Maxigas and Mersey Gas, and was already one of seven principal players in the UK market. Unusually, 3i took only ordinary shares rather than a mixture of ords and prefs, but was clearly excited about the company's prospects, voicing a hope that it might one day come to rival the UK market leader Calor and later featuring it in a glossy brochure as one of the year's top investments in the North.
Will Clark, who co-ordinated the deal on behalf of 3i in Liverpool, spoke glowingly at the time of Bradley's credentials, saying: "You cannot but be impressed by Peter's drive and commitment. He effortlessly combines all the ingredients to be a successful entrepreneur - drive, enthusiasm, commitment, market knowledge and business acumen.
"We see a lot of would-be entrepreneurs who display a number of these characteristics," he continued, "but it is rare that we are dazzled by a real gem such as Peter. Supporting entrepreneurs is key to our business and we understand the nature of risk, both for ourselves and the individual involved.
"Peter has the drive and the enthusiasm to make a difference, not only in Merseyside but also, because of his industry contacts, to become once again a formidable force in the UK LPG market and we are keen to have him on our portfolio."
Supplying bottled gas ought to be the simplest of businesses. All you need is a filling station, a lot of cylinders and a few trucks to ferry them around in. Alta Gas built up a network of filling plants and also had around 750 distributors and stockists around the country as Bradley pursued a strategy of acquiring independent distributors and developing a "hub and chain" network.
There is a well-established market for the product, which is used in everything from caravans and fork lift trucks to portable heaters and by people who live remote from the mains gas network. Bradley claimed that a new market - gas for outdoor barbecues - was driving his company's turnover to new heights and neatly solving one of the problems
of the businesses, its seasonal cyclicality.
In fact, much of the rapid growth of the business existed only on paper. Mawer points out that it was not enough just to issue false invoices - it had to look as though those invoices were being paid. Alta Gas was receiving genuine invoices from a supplier, which were subsequently credited as the goods were re-sold to finance companies, but the credits were not being posted by Alta Gas. Monies paid to the supplier were refunded to Alta Gas and recorded as receipts in payment of the false sales. Instead of supplying gas to a fast growing but very small gas barbecue market, it was the company's books that were being cooked.
As a result of recirculating monies through the supplier in payment of a liability that had been met by a large number of finance companies, this false turnover - and falsely inflated profit - was not picked up in the reconciliation of cashflow.
In addition the balance sheet was riddled with fictitious or overstated trade debtors and "payments" for non-existent assets - often supposedly being goodwill for falsely valued or non-existent acquisitions to build the "hub and chain" of the business.
According to its accounts, Alta Gas owned £345m worth of cylinders. This would equate to in excess of two million, but the receiver has only been able to locate a little more than one million in total. A charismatic personality with the raffish smile and patter of a born salesman, Bradley found it easy to persuade venture capitalists to back him and to invest in Alta Gas. He regaled them with stories about how his daughters Daniella and Francesca, both minor Alta Gas shareholders, used to delight in frosty mornings because they knew cold weather was good for business.
Only just over 12 months after the 3i investment, Mezzanine Management bought the growth story and paid Mr and Mrs Bradley £310m for a stake in Alta Gas and injected a further £320m of loans into what appeared to be a very healthy, fast growing and profitable company heading for greater things. By the middle of 2001, false invoices were helping to swell turnover to such an extent that a further round of funding was being sought - a £370m bond facility with backing being sought from a syndicate of banks led by Barclays Capital.
Before this bond could be issued, however, Bradley finally ran out of gas. The denouement came in almost comic fashion, but Mezzanine Management in particular could be forgiven for not laughing.
Progress on the bond was delayed by a combination of factors. Changes in the company's management and advisers were sought by potential investors, as the company lacked even a professionally qualified finance director. The delays were such that sufficient monies were not available to recirculate and "pay" the false debts, as a result of which the false debts rapidly got larger and more overdue, casting doubt on their recoverability.
Mezzanine, being asked for further money, became increasingly concerned as to why Alta Gas had failed to secure payment from some of the debtors listed in the accounts, especially one customer said to owe £3800,000. On making an unscheduled visit to the customer's premises, instead of a thriving business consuming large amounts of bottled gas, they found a supplier of accessories for pet dog enthusiasts with not a butane cylinder in sight. Mezzanine - and especially Angus Penman, its representative on the Alta Gas board - was about to discover to its horror that this £3800,000 debtor was just one of several major "customers" which did not in fact exist.
A meeting with Bradley followed at which he was unable to provide a
satisfactory explanation. At the request of Barclays, Grant Thornton's Mawer was appointed receiver a few days later on November 6.
Corporate lawyer David Clay, a partner at Davies Wallis Foyster in Liverpool, advised Bradley and Alta Gas for several years and took over from Bradley's wife as company secretary a few weeks before the collapse.
Clay, who hasn't spoken to Bradley since receivers were appointed, says now: "It's all a huge disappointment. He lived and slept that company and if he didn't know what was going on, nobody did.
He couldn't delegate to anybody. I remember coming back from London with him on the train at about 11pm and he was ringing up the depots to make sure you could order gas for the following day. They never knew when he might check up on them."
Clay believes the irregularities only began after Mezzanine Management invested in the company. However, Insider's inquiries have uncovered evidence to suggest that fresh air invoicing was taking place at Alta Gas even before the earlier investment by 3i. In mid-1998, the company approached invoice discounter NMB Heller seeking advances on its sales ledger. After initially accepting the business, NMB took a closer look and discovered that some of the addresses on invoices appeared to be private houses in the Merseyside area. In one case, an executive called one of the numbers on the invoices and, during the conversation which followed, heard a baby crying in the background. NMB asked Alta Gas to find another invoice discounter.
Now that the dust has settled, equity investors and lenders must be asking themselves how they failed to spot a systematic fraud which was so serious it left a gaping £340m hole in the Alta Gas accounts.
More than 35 funders, including about 30 finance and leasing companies, shared a total exposure of around £360m, including £317.4m of third party finance agreements used to fund cylinder purchases.
The leasing industry was particularly badly hit as it funded a range of assets including cylinders, vehicles and technical equipment, acquired by Alta Gas.
Establishing the ownership of these cylinders has proved difficult enough, but finding them has proved harder still. The leasing companies, recognising the extent of the fraud and the importance of keeping the business trading while the receivers sought a purchaser, supported the trading exercise and formed a committee so that they could act quickly and together. Mawer said that the ability of the leasing companies to act in this manner was crucial to achieving the sale and resulted in a much better recovery for the leasing creditors than would have otherwise been the case.
One fact which should have worried the equity investors is that Alta Gas never had a proper finance director. 3i asked Bradley to appoint one as a condition of its investment, but he never did and, presumably still "dazzled by a real gem", they let it ride. Mezzanine, too, wanted him to appoint an FD and he finally selected a candidate who, ironically, was still waiting to take up his post when the receivers moved in.
From September 1998 right up until the final collapse, the company's finances were managed by Peter Stott, an unqualified accountant who worked on a part-time, self-employed basis.
A former employee of NK Jackson and Co Chartered Accountants in Bolton, Stott was recruited shortly prior to Mezzanine Management becoming a shareholder. Mawer says of Stott: "He was sometimes represented as a finance director, but never by himself, and whilst others have claimed he was effectively a director, he was never appointed as such." Insider has not found any evidence that Stott was party to any fraudulent activity.
Mawer has interviewed many of the employees at the company's Merseyside base on Webber Road, Knowsley Industrial Park. He says: "They are open and matter of fact about their own roles in the fraud. They talk about what they have done for two hours, which could involve having committing many criminal offences where they say they have done as they were told. Then at the end of the interview some ask: "Am I in trouble?'"
Mawer concludes: "When you have a situation where customers, suppliers and employees are all prepared to work together, life can be very difficult for auditors and bankers."
In the six years up to the receivership Alta Gas was audited by Leigh-based Jackson Stephen, which declined to comment except to issue a statement saying it was co-operating with an investigation into "allegations of financial irregularities which have involved the collusion of various parties, including the management team".
Two well-known international accountancy firms looked over the books at different times in recent years for due diligence purposes. Although they both identified accounting policies they considered aggressive, and concerns were expressed regarding the ability to find and recover the gas cylinders, they did not find anything untoward.
There is no doubt that evidence pointing to large scale fraud has been found in the ruins of Alta Gas, but it is far from certain whether the matter will end up in court. The Serious Fraud Office has confirmed it is looking into the affair and investigators have held lengthy meetings with the receiver.
The company's former legal adviser, Clay, remains far from convinced that charges will be brought. He says: "I personally think it is unlikely the SFO will have a go because the only people who have suffered are the major investors and they are probably capable of looking after themselves. Nobody has got much sympathy for them."
And given that Home Secretary David Blunkett believes there is little point in locking up white collar criminals, it may be difficult to justify the expense of a possibly lengthy trial.
Mawer, who often works with the SFO, is much more hopeful. "Early criticism of the SFO continues to affect many people's views concerning their effectiveness. However, the SFO has made a great deal of progress since it was established and they are successful in the majority of the cases they decide to pursue."
In any event, Mawer believes there is a possibility of civil proceedings against a number of parties involved in Alta Gas to recover at least some of the losses incurred by the creditors.
One bright spot at the conclusion of the saga was that the receivers were able to sell what they could salvage of the business and the assets to Flogas, part of support services company DCC, in a deal which saved 250 jobs.
Despite this success, Mawer draws a bitter lesson from the affair. "People ask me how fraudsters can sleep at night after they've done what they've done," he says. "The answer is in a bigger house, in a softer bed, in warmer climes and usually with a younger woman. However, this is only temporary." Mawer is now hard at work recovering the proceeds of the fraud for the benefit of the creditors
Dramatis personae
Peter Bradley
A Scouser who began his working life in the family's electrical and gas showroom in 1967. Bradley founded Alta Gas in June 1994 but he first entered the LPG business 20 years earlier, setting up GoGas, which he sold to Hillsdown Holdings in 1987. He continued to run the business as managing director but left after it was sold again, this time to Total. Aged in his early 50s, he has been a well-known figure in Merseyside business circles for some years. He used to live on Selworthy Road, Birkdale, in a £31.5m house backing on to Royal Birkdale Golf Club.
He was a shareholder in Liverpool Football Club and regularly socialised with Merseyside footballing celebrities including the club's assistant manager Phil Thompson. Last year the house was sold and Bradley's wife Catherine, an Alta Gas director until October 2001, moved to Spain. Bradley is now living in London.
Unfortunately, we have been unable to get Bradley's side of the Alta Gas story, despite a request for an interview or comment made through his solicitor Ian Cooper.
"He doesn't want to comment at all," said Cooper, a partner at Manchester-based Cooper Kenyon Burrows. "I did put it to him and he is quite adamant that he would rather keep it under his hat."
David Clay
Corporate lawyer and partner at Davies Wallis Foyster, based at the firm's Liverpool office. Advised Alta Gas on the deals under which 3i and Mezzanine Management invested in the company.
Angus Penman
Acted as a director of Alta Gas as the nominee of Mezzanine Management but his appointment was never completed or filed at Companies House. Penman has left Mezzanine to start his own corporate finance business, a move which the firm says is unconnected with events at Alta Gas.
Will Clark
3i executive who co-ordinated the firm's £32m investment in Alta Gas in 1998. He is now a portfolio director at 3i's Liverpool office.
Kevin Mawer
Grant Thornton partner and administrative receiver of Alta Gas, appointed at the request of Barclays Bank last November. A Scouser like Bradley, he spends all of his time investigating insolvency-related fraud.
