The Serious Fraud Office (SFO) has opened a formal criminal investigation into the accounting errors that occurred at Tesco.
This increases the seriousness of the scandal that has greatly damaged the reputation of the UK’s largest grocer.
Tesco was notified last week of the SFO’s intention to launch an investigation into the error which overstated Tesco’s first-half profits by £263 million. Eight senior members of staff have already been suspended in relation to the scandal.
United States Lawsuit
Tesco is already embroiled in a lawsuit from an investor in the United States over accounting irregularities. The lawsuit was filed in the New York Federal Court; this coincided with the company reporting an even bigger than anticipated gap in its finances resulting the resignation of chairman, Richard Broadbent.
The lawsuit is being brought by Irving Fireman’s Relief and Retirement Fund on behalf of purchasers of Tesco's American depository shares from 22 February 2014 to 22 September 2014. Those bringing the claim accuse Tesco, former Chief Executive Officer Philip Clarke, and ex-Chief Financial Officer Laurie McIlwee, of making false and misleading statements and also failing, "to disclose the truth regarding the company's financial condition."
The lawsuit outlines the announcement by Tesco on 22 September 2014 that it had overstated its profits by £250 million for the first half of the year. This announcement led to Tesco's American depository shares to fall 15 percent. Tesco has declined to comment. However, the complaint has not made reference to Tesco’s even more recent announcement that the correct figure of overstatement was £263 million as opposed to the £250 million originally stated.
UK Investigations
The position of the SFO has accelerated quickly; they had previously stated only last week, they would be monitoring the situation closely.
Even prior to the SFO stating they were becoming involved in launching an investigation, accounting watchdog the Financial Reporting Review Council was also investigating how the error materialized.
However, for an SFO investigation to be launched, there must be significant and convincing reason to believe that the conduct involved in the incident may involve complex fraud or bribery, as SFO investigations can take years to complete.
The law treats making false or misleading statements about profitability of a company as a serious fraud on investors – they are not being given a true and fair reflection of the company’s profitability.
Tesco has made clear that the eight employees that have been suspended remain employees of the company but have been asked to stand aside whilst the SFO investigation takes place – it also added that there was no suspicion of wrongdoing.
Tesco is currently battling a severe slowdown in trading and has received in multiple recent profit warnings resulting in almost halving its market value this year.
The supermarket giant was already being investigated by the Financial Conduct Authority (FCA) for the accounting irregularities, an internal report outlining findings of the investigation conducted by a legal team instructed by Tesco have been given to the FCA, Tesco stated last week. It has also instructed counsel, should a criminal prosecution be carried out. A representative for Tesco said it would, “continue to co-operate fully with the FCA and other relevant authorities considering this matter”.
The FCA have the power to make criminal prosecutions for making false and misleading statements, however it is currently unclear whether the FCA investigations will continue now that the SFO have become involved.
How is making false & misleading statements treated?
The Financial Services Act outlines the law regarding making false and misleading statements. This crime can carry up to a seven year prison sentence.
However, the FCA and its predecessor, the Financial Services Authority, have had mixed success in bringing prosecutions in this area. Two recent criminal cases have been brought in relation to making false or misleading statements. The first was as a result of an investigation into software company AIT in 2005. The result of this prosecution was that the company’s former CEO and the former finance director were imprisoned; a third person connected with the crime was acquitted.
The second case involved iSoft, another software company. The trial of two directors was entirely unsuccessful; in the first instance the jury failed to reach a verdict, and in the second the trial completely collapsed. This demonstrates the difficulty of bringing a criminal prosecution for this kind of crime.
From a civil perspective, the company may face an unlimited fine if it is found to have breached listing rules, or to have made misleading statements.
Contact Lewis Nedas Specialist Solicitors
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This blog post is intended as a news item only - no connection between Lewis Nedas and the parties concerned is intended or implied.
