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Tesco faces US lawsuit over profit overstatement Tesco faces US lawsuit over profit overstatement
(about 5 hours later)
A US law firm is asking Tesco shareholders to join a group seeking billions of pounds in compensation for losses relating to the British retailer’s overstatement of profit last year. Tesco is facing a new threat of legal action as a US law firm asks British shareholders to join a group seeking billions of pounds in compensation for losses relating to the supermarkets’ profits overstatement last year.
Tesco said in September it had overstated first-half profit by £250m. It raised that figure to £263m when it published first-half results on 23 October. Tesco Shareholder Claims Limited (TSC), a group funded by US litigation firm Scott + Scott, said on Tuesday it aims to bring an action against Tesco on behalf of institutional shareholders, arguing that the retailer’s profit overstatement “caused a permanent destruction of value to shareholders”.
The overstatement led to a sharp decline in the market value of Britain’s biggest retailer, driving its share price down to a 14-year low, and prompted a criminal investigation by Britain’s Serious Fraud Office. The potential legal battle comes after Tesco’s admission last September that first-half profits had been artificially inflated by £250m because income from suppliers had been mis-stated. The grocer later raised that figure to £263m and admitted the accountancy problems went back at least two years after an internal investigation led by accountancy firm Deloitte. .
Tesco Shareholder Claims Limited (TSC), a group funded by US litigation firm Scott + Scott, said on Tuesday it would seek to bring an action against Tesco on behalf of institutional shareholders, arguing that the profit overstatement “caused a permanent destruction of value to shareholders”. The overstatement combined with poor performance in Tesco’s stores at home and abroad to prompt a sharp decline in the market value of Britain’s biggest retailer. Tesco’s share price dived to a 14-year low as the Serious Fraud Office and the Financial Reporting Council both launched investigations into the accounting scandal. The grocery industry watchdog, the Groceries Code Adjudicator, is also investigating the firm’s relations with its suppliers.
Tesco declined to comment on the news. Scott + Scott has already filed a legal claim against Tesco in the US. David Scott, managing partner, said international institutions had asked the firm to find a way to help them launch action in the UK. British law firm Stewarts Law launched a similar move in November, alleging that Tesco directors and senior managers knew or were reckless about whether the firm’s statements to the market were untrue or misleading.
Scott + Scott has already brought an action against Tesco in the US, while British law firm Stewarts Law launched a similar move in November, alleging that Tesco directors and senior managers knew or were reckless about whether the firm’s statements to the market were untrue or misleading. John Bradley, chairman of the TSC, said: “Tesco is one of the widest held stocks in the UK and this loss has hit pension funds and investors across the UK and beyond. We look forward to bringing this claim to court”.
TSC will be represented in the UK by McGuire Woods.
“A permanent destruction of value has occurred and had the accounting irregularities not taken place the share price, and value of the company, would today be materially higher,” said TSC. TSC, which will be represented in the UK by McGuire Woods, said: “A permanent destruction of value has occurred and had the accounting irregularities not taken place the share price, and value of the company, would today be materially higher”.
The group said it expected the claim,which is open to any institutional shareholder that bought shares in Tesco prior to the firm’s 22 September announcement, to be in the region of 50-70p per share. Tesco has 8.1bn shares listed, suggesting the claim could be for billions of pounds. The group said it expected the claim, which is open to any institutional shareholder that bought shares in Tesco prior to the firm’s 22 September announcement, to be in the region of 50-70p per share. Tesco has 8.1bn shares listed, suggesting the claim could be for billions of pounds.
Shares in Tesco were down 0.6% at 245.2p in early trading on Tuesday, valuing the business at about £20bn.
TSC said it was in talks with institutions in the UK, Europe and the US about joining the claim on a no-win, no-fee basis.TSC said it was in talks with institutions in the UK, Europe and the US about joining the claim on a no-win, no-fee basis.
Tesco’s accounting practices are also being investigated by the UK’s Financial Reporting Council, while the grocery industry watchdog, the Groceries Code Adjudicator, is investigating the firm’s relations with its suppliers. It is unlikely the claim will reach court until next year.
Tesco declined to comment on the potential legal claims.
The latest action against Tesco is part of a new wave of shareholder litigation in the UK. Last year a group of investors filed a claim against Lloyds Banking Group for losses they claim they incurred during the rescue of HBOS in 2008. Meanwhile, hundreds of Royal Bank of Scotland investors, including Standard Life and M&G, are pursuing a claim worth more than £4bn against the bank which they allege misled them during an emergency rights issue in 2008. That effort is being bankrolled by Bentham Europe, which specialises in funding litigation. Bentham is also backing the Stewarts Law action against Tesco.
The Investment Management Association, which represents 200 UK asset managers who oversee more than £5tn for their clients, said investors should focus on examining how mistakes happened and could be prevented in future.
Daniel Godfrey, chief executive, of the IMA said: “Shareholders must have the right to take action for loss against a company but the bar needs to be set high and we should not be encouraging opportunistic class actions. ”
Shares in Tesco slipped more than 1% to 243.8p on Tuesday, as analysts said that the likely cost of legal action had largely been already taken into account by the market.
“This latest action is not entirely a surprise,” said Bruno Monteyne at Bernstein Research. “These numbers are very high but seem quite a stretch. Just because someone launches legal action doesn’t mean they are going to be successful. It’s too early for investors to be materially worried at this stage.”