On 28 March, the Serious Fraud Office (SFO) announced that it had reached an agreement with Tesco Stores which, if approved by a Crown Court on 10 April 2017, would result in a Deferred Prosecution Agreement (DPA) becoming effective. The DPA involves a fine for Tesco Stores £128,992,500, as well as the SFO’s full costs in prosecuting the case, which relates to a misstatement of the retailer’s profits in 2014 based on false accounting by the Tesco subsidiary. The SFO’s costs are not disclosed anywhere, though the Tesco Group expects to take a total exceptional charge of £235 million booked as an “adjusting post balance sheet event” for fiscal 2016/17.
The DPA addresses only the potential criminal liability of Tesco’s Stores. It does not address whether any liability attaches to Tesco in regards to the misstatement. The DPA is a voluntary agreement under which Tesco will not be prosecuted, provided it “fulfils certain requirements.” In cooperating with the investigation, Tesco has undertaken an extensive change programme, that includes changes to “leadership, structures, financial controls, partnerships with suppliers, and the way the business buys and sells.”
On the same day as the SFO announcement, the Financial Conduct Authority (FCA) also announced that Tesco had agreed to a finding of market abuse in relation to the Tesco trading statement announced on 29 August 2014, when it overstated its profits for the previous quarter. This profit announcement, said the FCA, gave false and misleading impressions about the value of Tesco stock. Tesco has agreed to pay compensation to investors who purchased Tesco stock during the period between the announcement and the correction, which was issued on 22 September.
Dissemination of information that gives a false or misleading impression as to traded securities harms the integrity of our markets. The FCA is committed to UK markets being fair, transparent and thus competitive. Tesco and its board are doing the right thing here, taking appropriate responsibility and agreeing to rectify the consequences of the misconduct. They have cooperated fully with us and this sets a good example for the market and so is a good outcome for Tesco and investors.
Andrew Bailey, Chief Executive of the FCA
While this is not the first time the SFO has fined a company, it is the first time that the FCA has used its powers under section 384 of the Financial Services and Markets Act to fine a company for market abuse. On 29 August 2014, Tesco indicated that its profits would be in the region of £1.1 billion. A month later, it announced that this was an overstatement. This announcement had the effect of inflating the value of Tesco stock, thus resulting in purchasers paying a higher price per share than they should have. The FCA has instituted a compensation scheme for shareholders, whereby Tesco will pay an amount equal to the inflated amount for each share to those who purchsed stock during the period: “Each net purchaser of shares will be entitled to compensation of 24.5p per share purchased, plus interest at 1.25% per annum if the net purchaser is an institutional investor or 4% per annum if the net purchaser is a retail investor, in each case with such interest running from 19 September 2014 until approximately 4 months after the opening of the scheme.”
While the artificially high price lasted only a month, the compensation scheme will apply to a large number of shareholders. The FCA estimates that around 10,000 retail and institutional investors purchased some 320 million shares during the period. The amount of compensation paid will be around £85 million. The scheme will be launched on 31 August this year and will be administered by KPMG.
Over the last two and a half years, we have fully cooperated with this investigation into historic accounting practices, while at the same time fundamentally transforming our business. We sincerely regret the issues which occurred in 2014 and we are committed to doing everything we can to continue to restore trust in our business and brand.
Dave Lewis, Tesco Group Chief Executive
Dave Lewis, Tesco’s CEO, addressed remarks to the media at the time of these announcements. “Today we are paying the penalty due and the compensation necessary,” he said. He also stressed that Tesco did not admit any liability or blame for the misstatement. Lewis noted that the problems were “historic” and that the company has made significant changes to its financial controls. He also noted that there were ongoing criminal proceedings related to the case, though because of legal restrictions he was unable to go into these. Both Tesco and the FCA carefully state that, in making its finding, the FCA “is not suggesting that the Tesco Board of Directors knew, or could reasonably be expected to have known, that the information contained in that trading statement was false or misleading.”
While an investigation by the Serious Fraud Office and the Financial Conduct Authority did not act as a deterrent in this case, the exposure, the severity of the fine, the costs of the compensation scheme and the adverse publicity surrounding the case are likely to act as a deterrent for other companies with potential weak internal controls. It appears to be a financial conduct apparatus that is functioning effectively.