FCA orders listed company to compensate investors following market abuse

The Financial Conduct Authority (FCA) has ordered that Tesco plc and Tesco Stores Limited (together, Tesco) pay compensation to certain Tesco shareholders and bondholders following the FCA's finding that they committed market abuse in relation to a trading update published in August 2014. 

On 29 August 2014, Tesco plc published, via a regulatory information service, a trading update which contained a statement as to its expected trading profit for half-year period just ended (the August trading update).  In producing that update, Tesco plc relied on information provided to it by its wholly-owned subsidiary, Tesco Stores Limited, which was not correct.  On 22 September 2014, Tesco plc published a further trading update in which it announced that it had “identified an overstatement of its expected profit for the half year, principally due to the accelerated recognition of commercial income and delayed accrual of costs.”

The FCA found that the August trading update gave a false or misleading impression as to the value of Tesco plc's shares and publicly traded bonds issued by other Tesco group companies. As such, Tesco had engaged in market abuse contrary to section 118(7) of the Financial Services and Markets Act 2000 (FSMA) (now Articles 12 and 15 of the Market Abuse Regulation (MAR)).  The FCA does not suggest that the Tesco plc board knew that the information was false or misleading. 

On 28 March 2017, the FCA publicly censured Tesco for its conduct.  In light of Tesco's agreement to pay compensation to investors under the FCA's compensation order, Tesco's high level of cooperation with the FCA and the DPA with the SFO), discussed below, the FCA has not imposed a financial penalty for the market abuse.  

Separately, Tesco Stores Limited has entered into a Deferred Prosecution Agreement (DPA) with the Serious Fraud Office (SFO) relating to false accounting, under which it will pay a penalty of approximately £129 million.  In the UK, DPAs provide a means of resolving offending by corporate entities. Under a DPA, a company agrees to certain conditions, which are likely to include a financial penalty, and in return the company will not face prosecution. DPAs are public and must be approved by a court before coming into effect. The DPA concerns only the potential criminal liability of Tesco Stores Limited and does not address whether liability of any sort attaches to Tesco plc or any employee/agent of Tesco plc or Tesco Stores Limited.

Comment

This is the first time that the FCA has used its power under section 384 of FSMA to require a listed company to pay compensation for market abuse.  Section 384 enables the FCA to require a person who has engaged in market abuse to compensate those persons suffering a loss, or otherwise adversely affected as a result of the market abuse.  The FCA considers that those who purchased Tesco shares or specified bonds after the August trading update and before the correction paid a higher purchase price than they should have, and that the loss they suffered is the overpayment for those securities, less any amount by which the loss was mitigated, for example by hedging or sales during that period. The compensation scheme will launch by 31 August 2017 and will be administered on Tesco’s behalf by KPMG. Further information is available on KPMG’s website, and in FAQs published by Tesco.  The FCA estimates that the compensation payable will be approximately £85 million, plus interest. 

In its final notice, the FCA commended Tesco plc and Tesco Stores Limited for being "extremely cooperative", noting particularly that they were "proactive in the offering of information" and "responded promptly and constructively to requests made of them".   As the FCA took care to note, it considered the approach of the Tesco plc Board to have been exemplary, in particular in agreeing the findings with the FCA. 

The FCA's current view of internal investigations conducted by firms who suspect wrongdoing is also reflected in the final notice.  Mark Steward, the FCA's Head of Enforcement, commented last year that that it was vital  that “independent public body investigation … is able to conduct itself early enough with a free hand and without, if you like, the crime scene being trampled over” and that an internal investigation that involves third parties coming in to do the work, followed by self-reporting, is "almost inevitably a waste of time".   Strikingly, in this final notice, the FCA stresses that the companies "refrained, at the FCA’s request, from interviewing witnesses or taking statements; they disclosed voluntarily material which appeared to them to be significant to the FCA’s enquiries; and they generally helped to facilitate a swift conclusion to the FCA’s enquiries".   Whilst the FCA's decision not to impose a penalty will have taken into account both the compensation to be paid under scheme and the penalty agreed with the SFO, the extent and nature of Tesco's cooperation was plainly important.  Firms about to embark on an internal investigation of an issue that may involve criminal or market abuse offences will consider their approach carefully in the light of these comments.