What Happened? Shares in Silver Chef Limited (ASX: SIV) plunged on Friday from $11.07 to an intra-day low of $8.90 before recovering to close at $9.90 following a market update that shocked investors.

Why? At a time when ASIC is clamping down on a number of sectors in the finance industry for their conduct, Silver Chef announced that it had “been the victim of a material fraud attack involving fraudulent customers working in conjunction with fraudulent GoGetta equipment vendors”.

The company’s GoGetta business offers funding for businesses that need larger pieces of equipment. Media reports suggest that the alleged fraud surrounds the use of fake customers purchasing fake fitness equipment and fake compressors in around 60 finance contracts worth an average of less than $65,000 per contact.

Interestingly the company suggests that it doesn’t have anything to do with the broker in question, but rather it appears to be a sophisticated and planned operation.

What Now? Silver Chef is exploring all options of financial recovery through insurance and other channels but warned that the recovery process is likely to be protracted. The Company will take a once-off after-tax impairment charge of $2.2 million for the half year, resulting in earnings after tax to 31 December forecast to be between $4 million and $5 million, against $10.3 million in the previous corresponding period.

Management reported that “underlying” earnings, which strips out one-off factors such as the fraud, will be between $6.3 million and $7.3 million, down from $7.6 million a year earlier.

As more and more transactions move online, the threat of digital fraud will increase. Finance companies and brokers must remain vigilant for cases like these because insurance won’t always protect or reimburse companies.

Similarly, fraud will likely attract attention from regulators, which investors don’t seem to appreciate. Silver Chef now boasts a solid forward dividend yield, but investors should be aware that lower profits may mean lower distributions.

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Motley Fool contributor Andrew Mudie owns shares of Silver Chef Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.