Corporate fraud cases can take an interminably long time to come to court in the United Kingdom, and the success rate for prosecuting major companies is decidedly mixed. But it looks as though the Serious Fraud Office (SFO)—the country’s main enforcement body—is prepared to continue with its case against the former bosses of supermarket giant Tesco after its first trial collapsed.
In March, the SFO issued a short 32-word statement to say that it is seeking a retrial of three ex-Tesco executives for alleged fraud offences committed between February and September 2014. The fraud squad began its investigation into the retailer shortly after the company came clean in 2014 and charged the three former directors in September 2016.
The original trial was abandoned on 5 February this year after one of the defendants, Carl Rogberg, the company’s former U.K. chief financial officer, had a heart attack just days before the jury was about to begin its deliberations. Rogberg and his co-defendants Christopher Bush, former U.K. CEO, and John Scouler, former U.K. commercial food director, are each facing one count of fraud by abuse of position, and one count of false accounting. They deny the charges. A hearing will take place on 16 April. If convicted of both charges, each faces a maximum 17-year prison sentence.
Tesco admitted in 2014 that it had overstated profits by £250 million (U.S.$352 million) by booking payments from suppliers as revenue to help bolster the supermarket’s balance sheet. On 28 March 2017 the group agreed to a deferred prosecution agreement (DPA) for its subsidiary, Tesco Stores Ltd., and also agreed to pay the SFO a £129 million (U.S.$181.6 million) fine. The High Court approved the DPA two weeks later on 10 April. The details of the agreement and the judgment of the court are prohibited from being reported until the retrial is concluded.
As well as the SFO fine, Tesco also agreed with the Financial Conduct Authority, the United Kingdom’s financial regulator, that it had committed market abuse and would pay about £85 million (U.S.$119.7 million), plus interest and legal costs, in compensation to investors affected by a trading statement the company released on 29 August 2014 that overstated profits.
In a media call at the time, CEO Dave Lewis called the overstatement “hugely regrettable,” but added that the issues at the company were “historic” and that the company had subsequently “undertaken a comprehensive programme of change” right through its business.
Lawyers have mixed views about why the SFO is seeking a retrial, with some citing the amount of public interest—not to mention the amount of public money spent on the case already—as a reason for continuing. They add, however, that the agency’s willingness to continue does not mean that it will win its case.
“The fact that the SFO has made a decision to seek a retrial in respect of the three former Tesco executives does not indicate that the SFO is confident in securing convictions,” says Peter Grogan, head of business crime and regulation at law firm JMW. “The prosecution is entitled to seek a retrial where an irregularity in the former proceedings resulted in the jury being discharged. The prosecution and the court were following guidance that would apply in any case in which a jury is dismissed.”
“The fact that the SFO has made a decision to seek a retrial in respect of the three former Tesco executives does not indicate that the SFO is confident in securing convictions.”
Peter Grogan, Head of Business Crime and Regulation, JMW
One lawyer suggests that a retrial may pose some advantages for the SFO. “One must assume that counsel advising the SFO must have concluded that there was still sufficient evidence to proceed and that prosecution witnesses had come up to proof on the evidence that they gave,” says Michael Potts, managing partner at law firm Byrne and Partners. “The SFO will not necessarily be confident of convictions, but it will have had the added advantage in a retrial of having seen the defendants give evidence and have a better understanding of their approach.”
While the existence of a DPA does not suggest that the Tesco board of directors knew, or could reasonably be expected to have known, that information given to investors was false or misleading, lawyers say that agreeing to a DPA could still influence the thought process of a juror. “Such risks have always been present in every high-profile, widely reported criminal case,” says Grogan.
Since they were first introduced into English law in 2015, there have been just four DPAs that agreed with the SFO (besides Tesco, the others are Standard Bank, a company anonymised as “XYZ,” and Rolls-Royce), though the agency has suggested that there will be more.
Companies may find such agreements appealing as they enable them to draw a line under the scandal; show that they are cooperating with the investigation; pay a fine; work to restore confidence with investors, regulators, and consumers; and then move on—all while avoiding prosecution.
“A DPA will remain an attractive prospect for many companies, particularly those that are publicly traded,” says Kelly Hagedorn, a partner at law firm Jenner & Block. “While recognising that every DPA will be different, entering into an agreement with the SFO or other prosecutors allows the company to pay a penalty for its wrongdoing, reform where necessary, and continue operating without a criminal conviction. If one looks to the U.S., it can be seen that the DPA is considered an attractive option, and the same is likely to be true in the United Kingdom,” she adds.
What advantages do DPAs offer companies, executives, and the SFO?
Deferred prosecution agreements (DPAs) have certain advantages for companies, individuals, and the Serious Fraud Office (SFO).
For companies, DPAs allow them to pay a fine, take steps to improve their governance, and move on. They can also continue bidding for public tenders and contracts, which a criminal conviction often rules out. As a result, companies can take a view of their litigation risk, as well as the commercial consequences of a conviction, and can make a decision as to whether a DPA—if offered—makes most sense.
DPAs do not apply to individuals—only corporates—so, at first sight, a DPA offers little comfort to executives or anyone else. Even if the company has agreed a DPA, however, it does not mean that the executives have been hung out to dry (though the prosecution will have potentially accessed information to help its case). Individuals charged with white-collar crimes like fraud often fight the allegations (given they risk going to jail) and so can test the evidence in ways that are often not tested at the investigation stage: What the SFO might find damning, a jury may not. It is therefore not uncommon, say lawyers, for individuals to be acquitted even when a corporate has pleaded guilty for commercial reasons.
For the SFO, the appeal of a DPA is that evidence for any potential prosecution case against individuals is supplied by the company itself, thereby cutting investigation costs and saving time. The agency also hopes that DPAs may encourage companies to come forward at an earlier stage and admit wrongdoing, thereby protecting its budget and enhancing its reputation at the same time.
Lawyers generally welcome their introduction. Michael Hatchwell, a director at law firm network Globalaw, says that “DPAs are a positive development” because they avoid lengthy complex trials (and therefore save significant court costs and jury time), and allow corporates to do a deal while “putting income into the SFO/government coffers.”
There are concerns, however, that large corporates may be offered DPAs in circumstances where smaller corporates would not, says Globalaw’s Richard Furlong, a barrister at London’s Carmelite Chambers. “The SFO does not have the resources to investigate massive cases, and outsourcing the investigation to the corporate’s lawyers—and collecting a major chunk of any penalty imposed on the corporate which signs the DPA—is a very attractive option for the SFO.”
— Neil Hodge
The retiring SFO director, David Green, has repeatedly made it clear that he sees DPAs as having a very bright future—but only where companies under investigation are fully compliant with the SFO and are transparent in their conduct from the outset.
These caveats may make entering a DPA less appealing, as the level of cooperation required to secure the agreement may also make it easier for the enforcement agency to launch prosecutions against executives (and others); this is because, as part of the deal, the company effectively cuts the individuals loose, and the prosecutor’s evidence is supplied at the company’s expense. As a result, some lawyers question whether DPAs are quite the deal the SFO likes to make out they are for anyone other than the agency.
“By being invited to make a DPA, it is clear that the company leaves itself in the hands of the SFO,” says Grogan. “Full and genuine cooperation is required, in which the company will be required to pay a financial penalty. The compliance with such terms of the agreement will be monitored and, if not complied with, a prosecution may resume. Whilst appealing at the outset, companies may be cautious due to the onerous conditions and favourable bargaining position of the SFO in the negotiations,” he says.
Despite Tesco admitting market abuse and saying that the accounts were wrong, lawyers say that such admissions should not have any bearing on whether the executives should be found guilty—it simply depends on the weight of the evidence that is presented at trial. The prosecution of individual defendants in a criminal trial is not affected in any way by a DPA having previously been agreed upon by a company.
“Although some of the evidence may overlap between the two cases, legally they are entirely separate matters. Nothing is therefore a foregone conclusion,” says Jeffrey Davidson, managing director of Honeycomb Forensic Accounting, an investigations specialist.
“The fact that Tesco has chosen to accept liability under a DPA does not mean that the individuals accused of carrying out that conduct on behalf of Tesco will be found guilty; nor does it mean that the company itself would have been found guilty had it been prosecuted,” says Victoria Fitzpatrick, an associate at Jenner & Block. “Companies seek DPAs for a number of reasons, not least to avoid the reputational harm associated with a trial and a conviction,” she says.
More widely, lawyers tend to agree that the use of DPAs as a way to punish companies, while also helping the SFO pursue individuals for criminal charges, will continue to grow. For Potts, the Tesco retrial “demonstrates the SFO’s will to prosecute individuals even where there are hurdles and the DPA has concluded,” and “signals an intent that will probably mean similar prosecutions in the Rolls-Royce case.”
“DPAs will always appeal for corporates,” says Potts. “If individuals are later acquitted, the company will not necessarily consider that its decision to enter into a DPA was a bad one. Prosecutions can fail for many reasons. The SFO’s response to acquittals is often that you have to take the rough with the smooth, and just because an individual is acquitted, it does not mean that s/he should not have been pursued and prosecuted.”