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The Financial Conduct Authority (FCA) today announced that Tesco plc and Tesco Stores Limited have agreed that they committed market abuse in relation to a trading update published on 29 August 2014, which gave a false or misleading impression about the value of publicly traded Tesco shares and bonds.
Tesco have agreed to pay compensation to investors who purchased Tesco shares and bonds on or after the 29 August 2014 and who still held those securities when the statement was corrected on 22 September 2014.
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 compensation for market abuse. Conduct by issuers in the primary market affects the integrity of investments and securing compensation is an important step in ensuring effective access to redress for those investors, especially for the very significant number of retail investors that this redress scheme will benefit, whether they invested privately or through participation in a pension fund or similar investment.
Andrew Bailey, Chief Executive of the FCA, said:
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.
The complete FCA announcement states as follows:
On 29 August 2014, Tesco plc published a trading update in which it stated that it expected trading profit for the six months ending 23 August 2014 to be in the region of £1.1bn. 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.” Tesco knew or could reasonably have been expected to know that the information in the 29 August 2014 announcement was false or misleading. In making this finding, the FCA does not suggest that the Tesco plc board knew or could reasonably have been expected to know that the information was false or misleading.
As a result of the false or misleading information within the 29 August 2014 announcement, the market price for Tesco shares and bonds was inflated. This continued until Tesco issued a corrective statement on 22 September 2014. Purchasers of shares and bonds between these dates paid a higher price than they would have paid had the false impression not been created.
Under the compensation scheme Tesco will pay an amount to each purchaser of Tesco shares and bonds who makes a claim under the proposed scheme that is equal to the inflated amount for each share or bond. The inflated amount has been established with the assistance of an independent expert engaged by the FCA.
The scheme is open to all purchasers who acquired Tesco shares and bonds after the 29 August 2014 and who still held some or all of them on the last day of trading before the corrective statement was issued on 22 September 2014. These purchasers are described as net purchasers. Those purchasers who sold all of their shares or bonds before the corrective statement was issued on 22 September 2014 will not have suffered any loss as a result of the market abuse and are therefore ineligible to claim under the scheme.
The FCA estimates the total amount of compensation that may be payable under the scheme will be approximately £85 million, plus interest.
The FCA has a database of all reported share transactions during the relevant period which indicates there were about 10,000 retail and institutional eligible investors who between them purchased approximately 320 million shares during the period and who may be eligible for compensation under the scheme.
The FCA considers the outcome is in the public interest because Tesco has accepted responsibility for market abuse and has agreed to remediate the consequences in an appropriate way that tackles directly the loss caused by the market abuse, avoiding the costs and burden on investors of litigation.
The compensation scheme will launch by 31 August 2017 and will be administered on Tesco’s behalf by KPMG. Further information is available now on KPMG’s website at www.kpmg.co.uk/tesco-scheme (link is external). Tesco have also published FAQs about the scheme which are available at www.tescoplc.com (link is external). Full details of the scheme including how to submit a claim will be widely published by KPMG in advance of the launch date.
This scheme comes further to an announcement today by Tesco Stores Limited that it has entered into a deferred prosecution agreement (‘DPA’) with the Serious Fraud Office (‘SFO’) relating to false accounting, pursuant to which it will pay a fine of £128,992,500. As a result, the FCA does not propose to impose a financial penalty on either Tesco Stores Limited or Tesco plc. In light of the conduct of Tesco plc and Tesco Stores Limited in accepting responsibility for market abuse, in agreeing to the first compensation order under section 384 and, in the case of Tesco Stores Limited, for accepting responsibility for false accounting, the FCA will not impose any additional sanction on them for market abuse.
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 or agent of Tesco plc or Tesco Stores Limited.
The FCA acknowledges the significant assistance and cooperation of the SFO in this case.