Firsts for UK SFO with in principle false accounting DPA, and for FCA with market abuse compensation, against Tesco

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Following a two-year investigation, Tesco PLC has announced that its subsidiary Tesco Stores Limited (Tesco Ltd) had agreed in principle the terms of a Deferred Prosecution Agreement (DPA) with the UK Serious Fraud Office (SFO), subject to final judicial approval at a hearing scheduled for 10 April 2017 before Sir Brian Leveson PC.  The DPA would result in Tesco Ltd paying a £129m fine to the SFO, together with the SFO’s costs.  It is also likely to include an admission of criminal liability and an agreed statement of facts, albeit publication of details may be withheld to avoid prejudicing the ongoing prosecution of former Tesco executives.

SFO investigation

The SFO launched its investigation into Tesco Ltd’s accounting practices in October 2014, after the company announced on 22 September 2014 that it had overstated its profits by £263m between February and September 2014, a figure which Tesco Ltd later revised to £326m.

In September 2016, the SFO charged three former Tesco executives with offences of fraud and false accounting. These defendants are due to stand trial at Southwark Crown Court in September 2017.

If approved by the court on 10 April, this DPA would be the fourth which the SFO has secured, following agreements with Standard Bank Plc, XYZ Limited, and Rolls Royce.  The Tesco Ltd DPA, has once more confirmed the SFO’s ability and willingness to pursue investigations into some of the largest corporate names, and exercise its powers to resolve them without prosecution.

This is the first UK DPA in which the offences did not relate to bribery or corruption, did not involve any foreign governments or government officials, and which appears to relate to purely commercial operations in the UK only. A further distinguishing feature of the DPA is that, given the relatively short four-month timeframe in which the conduct in question took place, the £129m fine appears significant and, as with the Rolls Royce fine, comparable to a US penalty.

FCA Enforcement

Separately, Tesco PLC and Tesco Ltd agreed with the FCA that they committed market abuse in relation to a trading update published on 29 August 2014 which gave a misleading impression about the value of publicly traded Tesco shares and bonds, and have agreed to establish a scheme to compensate certain net purchasers of Tesco ordinary shares and listed bonds who purchased those securities for cash in a 3-week window between 29 August and 19 September 2014 and held them on 22 September 2014.  The level of compensation is designed to reflect the price inflation caused by the misstatement, and will be based on the difference in price of the relevant shares and bonds between market close on 19 September 2014, being the trading day prior to Tesco PLC’s announcement that it had identified an overstatement of its expected profit, and market close on 22 September 2014, with additional adjustments for industry-wide effects on the market.

The compensation has been estimated by Tesco and the FCA to be around £85m excluding interest. The FCA has not imposed any separate fines on Tesco.  This is the first time that the FCA has used its powers under section 384 of the Financial Services and Markets Act to require a listed company to pay compensation for market abuse.

Prosecution of individuals

If approved, the DPA would concern only the potential criminal liability of Tesco Ltd; it does not address whether liability of any sort attaches to Tesco PLC or any employee or agent of Tesco PLC or Tesco Ltd. In respect of the three former Tesco executives charged by the SFO, this issue will be determined at their trial in September 2017.

In the light of the upcoming proceedings, the court has issued an order under s.4(2) of the Contempt of Court Act 1981 in respect of the publication of any information or commentary relating to the DPA which may prejudice the administration of justice in the criminal trial. As such, only a limited amount of detail in respect of the DPA has been made publicly available.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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