TescoGate: UK investors could join US shareholders and fire legal action against senior chiefs

By Richard Siddle

Published: 10 November, 2014

Tesco UK and European investors could join US shareholders in taking legal action against the beleaguered retail chain in the wake of its £263 million overstatement of profits.

A class action lawsuit was filed at the end of October in the US which accuses Tesco and the two named defendants, former chief executive, Philip Clarke, and ex-chief financial officer, Laurie McIlwee, of making false and misleading statements and failing to "disclose the truth regarding the company's financial condition". This subsequently resulted in Tesco misstating is profits by £263 million.

The detailed lawsuit sets out the legal case against Tesco and in it names Dan Jago, the suspended head of beers, wines and spirits, as being one of the company's senior executives that has been told to step aside during what was an initial internal investigation and has now escalated to a full blown inquiry by the Serious Fraud Office.

The US lawsuit, which has been filed behalf of the Texas-based Irving Firemen's Relief and Retirement Fund, is looking to claw back money for US investors that bought Tesco's American Depository Receipts (ADRs) between February 2, 2014 and September 22, 2014.

In the class action it states it is looking to "recover damages against Defendants for alleged violations of the federal securities laws under the Securities Exchange Act of 1934 (the "Exchange Act")."

UK investors in Tesco are not eligible to join the Irving class action, but it is understood some are considering a separate collective class action under UK law.

The Financial Times reported yesterday that US law firm Scott & Scott "is in talks with several European institutional investors about filing legal claims against Tesco". It is in talks with UK solicitors about potentially representing them.

David Scott, a partner at the law firm, told the FT: "There has been a tremendous amount of interest both in the US and among UK investors in obtaining more information about [Tesco].

"I have spoken to asset managers and pension funds in the UK and on the continent. Several European clients are asking us to look at their holdings and determine where the best forum for them to file a class action would be."

The misstatement of profits has seen the value of Tesco's share price plummet by half in a year and by 25% since September 1 hitting a low of 164p.

US law firms are clamouring to get American investors to join the class action.

The class action claims that "throughout the Class Period, the Company made false and/or misleading statements and failed to disclose material adverse facts about the Company's business, operations, and prospects. Specifically, Defendants made false and/or misleading statements and/or failed to disclose the truth regarding the Company's financial condition".

It continues: "The overstatement concerned specific treatment of commercial income and costs from UK suppliers as well as extra incentives, often called 'rebates,' that Tesco received from suppliers for hitting a certain level of sales or for support for promotions."

In section 48 of the US lawsuit it states that on October 14 "it had suspended three more executives amid an investigation in to the company's accounting practices. The three new executives were in charge of Tesco's UK food business: William Linnane oversaw the impulse-purchase unit; Dan Jago oversaw the wines and spirits; and Sean McCurley oversaw the convenience store operations."

The lawsuit claims there could be potentially "hundreds or thousands of members in the proposed Class". Investors have until December 22 to join the class action.

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