How An Afternoon Tea Shop Was Part Of A Multi-Million Pound Fraud

Posted on Sunday, January 15, 2023 by Lydia SinclairNo comments

There are several trends that emerge when exploring cases of financial fraud so great that they alone create intense demand for forensic accounting jobs, and in a few cases, there are obvious signs that something is amiss.

For someone like Bernie Madoff, the numbers simply did not add up from his supposed investment scheme. In the case of Enron, the business model was so deliberately obtuse that it was hard to understand. FTX distracted people with a new and highly desirable technology.

There are often early warning signs, but the story of how the charming afternoon tea and cake shop Patisserie Valerie collapsed almost as quickly as its meteoric rise in a wave of financial irregularities and fraudulent activity that led to its auditor being fined millions of pounds shocked almost everyone.

The culprit was shocking, as was the scale of the fraud, but perhaps the most stunning aspect of this is that Patisserie Valerie also survived.


The Slow Path

Patisserie Valerie was for a very long time a single coffee and cake shop opened in Sutton in 1926, only expanding to a grand total of nine cafes in the Piccadilly and Kensington area by 1987 when the company was bought by the Scalzo brothers from the family of its Belgian founders Theo Vermeirsch and Esther van Gyseghem.

In what was seen at the time as a somewhat unusual move, self-proclaimed financial projector Luke Johnson, formerly the chairman of Pizza Express, acquired the Scalzos’ controlling stake in the company with a plan to rapidly expand it nationwide in a similar fashion to Pizza Express in the 1990s.

The pizza chain went from 12 restaurants to over 250, with the share price increasing by 2,250 per cent in the process. Patisserie Valerie expanded over the next decade from eight shops to 192, as well as selling cakes in supermarkets such as Sainsbury’s.

It went public in 2014, its 170p share price doubling very quickly and the chain was generally seen to be in relatively rude health.

That ultimately turned out to be a lie.


The Sudden Turn

There were a few warning signs that not all was well with the company, when the CEO, finance director and non-executive director all cashed in shares, with other members of the board cashing out as well for a grand total of £13m by May 2018.

Typically huge sell-offs can have multiple meanings, but in this context, it is often a warning sign that all is not necessarily well with a company and a dip is on the horizon.

That came on 10th October 2018, when an internal audit revealed significant accounting irregularities that revealed a huge shortfall in its accounts, turning the company from an unlikely success during a downturn to facing collapse overnight.

The finance director, Chris Marsh, was suspended from his position and later arrested on suspicion of fraud, as the difference between the accounts and the actual state of the company was a difference between having £28m available to being £10m in debt.

Mr Johnson, completely blindsided by the fraud, provided a £20m loan and a controversial yet necessary share issue to raise another £15m, stabilising the company whilst an external auditor undertook a forensic investigation.

By January, still unsure about the true state of the business, it became clear that the financial irregularities were far more significant than had been expected, with thousands of false entries. It filed for administration in mid-January 2019 and a total of 70 stores immediately closed as a result.

Causeway Capital eventually stepped in to buy out the company, reducing the number of sites to 75 but ultimately keeping the company afloat.

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