For the first time in its history, the Financial Conduct Authority (FCA) has used its powers to order a listed company to compensate investors for market abuse. Tesco plc, and its subsidiary Tesco Stores Ltd, were found to have committed market abuse by giving a false or misleading impression about the value of publicly traded Tesco shares and bonds in a trading update. They have been ordered to pay restitution to investors, anticipated to be in the region of £85 million.
On 29 August 2014, Tesco plc published a trading update which stated, among other things, that it expected its trading profit for the six months ending 23 August 2014 to be approximately £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. This overstatement was in the region of £250m. The FCA found that the Tesco plc board relied on inaccurate accounting information provided to it by Tesco Stores. Both Tesco plc and Tesco Stores knew, or could reasonably have been expected to have known, that the August trading statement was false or misleading: in the case of Tesco plc there was no suggestion that the board knew or could reasonably be expected to have known this, but there were people in Tesco plc who did have the relevant knowledge and they were at a sufficiently high level within the company for their knowledge to be attributed to Tesco plc.
The information in the August trading statement gave a false or misleading impression as to the value of Tesco plc's listed shares and bonds, leading to those shares and bonds trading at a higher price than they otherwise would have done. Following the September trading statement, the price fell back to a level which was not substantially affected by the August statement. In the period between the two trading statements, purchasers of Tesco shares and bonds therefore suffered loss, being the overpayment they made for the shares or bonds, less any amount by which this loss was mitigated, for example by sales of the shares or bonds in that period or by hedging.
The FCA has required Tesco plc and Tesco Stores to compensate investors for these losses under a scheme to be administered by KPMG. The FCA Enforcement Guide states that use of the power to demand restitution is likely to be used "on rare occasions only", but indicates that such action may be appropriate where a large number of people have been affected or the losses suffered are substantial. In this case, the FCA estimates there are about 10,000 retail and institutional investors who may be eligible for compensation under the scheme and that the total amount of compensation payable will be approximately £85 million, plus interest.
However, the FCA did not impose a financial penalty on Tesco plc or Tesco Stores for engaging in market abuse. This was, in part, because Tesco Stores has entered into a deferred prosecution agreement with the Serious Fraud Office (SFO) whereby it will pay a fine of nearly £130 million for false accounting. The FCA also took account of "the exemplary co-operative approach" taken by Tesco plc and Tesco Stores with both the FCA and the SFO, and the steps both companies have taken to ensure that similar misconduct will not occur in the future.
Listed companies and their trading subsidiaries should take note. In this case, both Tesco plc and Tesco Stores were guilty of market abuse – the subsidiary in providing inaccurate information to the parent company, and the parent for announcing it to the market. The penalties for market abuse are severe, including adverse publicity, significant fines and the possibility of being ordered to compensate investors for the losses they suffer as a result of trading on the basis of misleading information.
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