Out-Law News 2 min. read

Tesco agrees deferred prosecution agreement and to compensate shareholders for profit mis-statement

UK retailer Tesco has agreed to pay just under £129 million in fines plus costs to the Serious Fraud Office (SFO) under the terms of a deferred prosecution agreement (DPA), in relation to historic accounting practices and its false statement of profits in August 2014.

The retailer has also agreed an £85m compensation scheme for shareholders and bondholders who lost out by purchasing overvalued shares between 29 August 2014 and 22 September 2014, when the error was corrected. The scheme, which will be administered by KPMG, is the first to be agreed with the Financial Conduct Authority (FCA) under section 384 of Financial Services and Markets Act (FSMA), under which the regulator can require a listed company to pay compensation for market abuse.

High Court judge Sir Brian Leveson QC will hear the DPA application at Southwark Crown Court on 10 April 2017. The DPA concerns only the potential criminal liability of Tesco Stores Ltd, and does not address whether liability of any sort attaches to parent company Tesco Plc or any employee or agent of Tesco Plc or Tesco Stores Ltd.

Three individuals will be tried at Southwark Crown Court on 4 September 2017 in connection with the incident, the SFO said.

In a statement on its website, Tesco said that it had "fully cooperated with the investigation" over the past two and a half years, and had "undertaken an extensive programme of change, which the SFO has recognised in offering the DPA".

"This programme includes extensive changes to leadership, structures, financial controls, partnerships with suppliers, and the way the business buys and sells," it said.

The SFO will not prosecute Tesco provided that the DPA is approved by the court and provided that Tesco complies with all the terms of the agreement, according to the announcement.

Prosecutors in England and Wales have had the power to put DPAs in place with corporate offenders since February 2014. The agreements, which are based on those available in the US, are designed to encourage businesses to self-report wrongdoing in the hope of more lenient treatment, including the possibility of avoiding a criminal investigation and potential prosecution if strict conditions set by a judge are met.

The compensation scheme agreed between Tesco and the FCA will be made available by 31 August 2017, and will be open to corporate and private investors that purchased more Tesco shares or bonds than they sold between 29 August 2014 and 22 September 2014. Around 10,000 retail and institutional investors who purchased a total of 320 million shares over that period could be eligible for compensation under the scheme, according to the FCA.

Compensation will be payable at a rate equal to the inflated amount for each share or bond, plus interest, according to the announcement. The inflated amount was decided on by the FCA with the input of an independent expert, the regulator said.

"Dissemination of information that gives a false or misleading impression as to traded securities harms the integrity of our markets," said FCA chief executive Andrew Bailey.

"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," he said.

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