Tesco enters into DPA with SFO

Following a two year investigation, the Serious Fraud Office (SFO) has entered into a DPA with Tesco Stores Limited in relation to false accounting. This is the fourth UK DPA, and the first dealing with an offence other than bribery. There are legal restrictions on the extent to which anyone may publish the terms of the DPA.

This DPA was announced before it was given final approval by the court, in the form of a Stock Exchange Announcement by Tesco PLC on 28 March 2017. This confirmed that, if the DPA was approved by the court, Tesco Stores Limited would pay a £128,992,500 penalty and comply with other requirements set out in the DPA. The DPA does not determine whether any criminal liability attaches to the parent company Tesco PLC or any other person.

DPAs in the UK require two stages of judicial scrutiny: a preliminary hearing to approve a DPA in principle and a later application for approval of the final terms. That second application is heard in private, but as the approval of the terms needs to be made in public, once the judge is satisfied that approval will be given, a separate public hearing is listed. Under this process, a DPA will not become public until a declaration has been made in open court.

As was the case with the Rolls Royce DPA, the court appears to have allowed Tesco PLC to make an announcement to the stock market after the private part of the hearing of the application to approve the terms. This reflects the fact that the judge’s indication that a declaration will be made approving the terms of the DPA constitutes inside information which must be disclosed to the market as soon as possible. Here, Tesco PLC’s announcement was choreographed so that it was issued before opening of stock market trading and coordinated with an announcement by the SFO and the FCA’s publication of its final notice on market abuse (see below). The announcements made it clear that the DPA had been approved "in principle", consistent with the fact that no final declaration had been made in court.

The publication of a statement of facts as part of the DPA process obviously carries risks of prejudicing any future trial of other persons alleged to have been involved. For that reason, the second DPA concluded in the UK did not reveal the identity of the company in question, which was referred to in the public hearing as XYZ Ltd. It is very likely that, had the Tesco case not involved a listed company that is obliged to disclose inside information to the market, this case too might have been anonymised.

At the outset of the investigation there appeared to be friction between the SFO and FCA as to who should take the lead, but in a simultaneous press release co-ordinated with that of the SFO on the proposed DPA, the FCA announced that Tesco PLC and Tesco Stores Ltd had committed market abuse by disseminating false or misleading information such as to result in a false market in Tesco shares. The FCA said it had ordered Tesco PLC to pay an estimated £85m compensation to investors who were net purchasers of Tesco shares or listed bonds during the period of the misstated accounts. This is the first time the FCA has used its powers under section 384 of the Financial Services and Markets Act to require a listed company to pay restitution in respect of market abuse. The FCA did not order Tesco to pay an additional penalty, above that which is payable pursuant to the DPA. The synchronised conclusion of investigations by the SFO and the FCA indicates a level of co-operation between agencies which appeared to be lacking earlier. For more on the FCA Final Notice, see here.

We will report further on this DPA when reporting restrictions are lifted.