Citywire AA-rated manager Paul Mumford has reacted with dismay after high street bakery chain Patisserie Valerie reported a 'devastating' fraud involving 'thousands of false entries into the company's ledgers'.

Patisserie Holdings (CAKEP) yesterday revealed that 'the misstatement of its accounts was extensive, involving very significant manipulation of the balance sheet and profit and loss accounts'.

It said cash flow and profitability was likely to be 'materially below' that announced in mid October after a £40 million accounting black hole was discovered. 

Mumford, manager of the £66.4 million Cavendish AIM fund, said he felt 'misled', having invested in 'good faith' a further £100,000 in the company in November as part of its deeply discounted £15 million rescue rights issue. 

Before the shares were suspended in October last year, they had traded at 429p. Mumford's holding in the company prior to the suspension accounted for 1.6% of his fund.

‘It looks like the fraud has been going on for years,' said Mumford.

‘It’s interesting when you see these thousands of entries being covered up you wonder, what was going on? The balance sheet can’t have just gone from net cash to net debt just like that.

‘These substantial losses must have been going on for years, not picked up on. The auditors [Grant Thornton] should have spotted it.’

Mumford (pictured) did, however, spare some sympathy for chairman Luke Johnson, the former Pizza Express Owner who set up Patisserie Holdings in 2005. Johnson ‘commendably’ put £20 million of his own money into Patisserie to keep it afloat in October when it faced a winding up order from HM Revenue & Customs.

‘Johnson has been legged over as much as anyone else,’ said Mumford.

The AIM stock picker said he just hoped a ‘decent business would come back to market’ when the company’s issues were resolved, though added that it was ‘anybody’s guess’ as to how long it would take to unravel the thousands of fraudulent notes.

EdenTree UK Equity Growth manager Phil Harris, another holder of the shares, was at least vindicated in his decision not to back the rights issue.

‘Given the speed - because of necessity - of the equity raise I was not comfortable that they had fully scoped the fraud,’ he said. ‘I think now there is a chance that the stock is effectively worthless and might require more capital that I’m not sure existing equity holders would back.’

Harris had a 1.8% stake in Patisserie in his fund when the scandal broke last year.

Other funds with stakes in Patisserie include Rathbone UK Opportunities, managed by Alexandra Jackson, which had a 2.3% exposure to the business when shares were suspended. Jackson participated in the rights issue ‘in a small way’ but pledged to learn from the scandal.

Fund group Invesco appears to have been a major backer of the rights issue, increasing its stake in the company to 7.8% of the shares. Jonathan Brown held shares in his Invesco Perpetual UK Smaller Companies (IAT) investment trust and fund of the same name.

The BlackRock Income & Growth (BRIG) investment trust said Patisserie was the largest detractor from its performance in its 2018 annual results, which reported 4.5% fall in net asset value in the 12 months to the end of October, versus a 1.5% loss for the FTSE All-Share.

Patisserie has called in KPMG to review its options to recover from the ‘devastating effects of the fraud’, while RSM has been appointed auditor.

Lee Ginsberg, a non-executive director and deputy chairman at Patisserie, resigned today following the news, the latest in a slew of executive exits from the business over the past few months.

In yesterday’s announcement, Patisserie said it had appointed a new chief executive to replace Paul May, who resigned in November. It has also hired an interim chief financial officer, after Chris Marsh was suspended, arrested and then left the business in October. A new commercial director and production director were also taken on, as well as other management appointments.

The Financial Reporting Council (FRC) is investigating Grant Thornton for its auditing. The FRC is also investigating the ‘preparation and approval’ of Patisserie’s financial statements and other financial information provided by Marsh.