Tesco Stores Limited: Restitution Arising Out Of Market Abuse
On 28 March 2017, it was announced that Tesco Stores Limited had agreed, in principle, a deferred prosecution agreement (‘DPA’) with the Serious Fraud Office (‘SFO’). The DPA, if approved by the Crown Court on 10 April 2017, will put to bed a long-running SFO investigation into an inaccurate trading update published to the market by Tesco plc in August 2014 (the ‘August Statement’). To somewhat less fanfare, but of no less interest, 28 March also saw the Financial Conduct Authority (‘FCA’) issue a Final Notice to both Tesco Stores Limited and its parent Tesco plc (collectively, ‘Tesco’) in which the regulator, for the first time, used powers to order a listed company responsible for market abuse to pay restitution to persons who had suffered a loss as a consequence of the publication of the profit warning.
In the Final Notice, the FCA found that Tesco was responsible for market abuse within the meaning of section 118 of the Financial Services and Markets Act 2000 (‘FSMA’, or the ‘Act’): by overstating expected profits through the accelerated recognition of income, and delayed accrual of costs, the August Statement gave a false or misleading impression as to a qualifying investment, namely shares in Tesco.
Section 384 of FSMA provides that where the FCA is satisfied that a person has committed market abuse within the meaning of the Act, and that third parties have suffered loss as a consequence of that market abuse, the FCA may require restitution to be paid to those third parties ‘as appears to be just’ and ‘having regard to the extent of loss’.
The FCA found that, as a consequence of that act of market abuse, parties that had invested in Tesco shares following the publication of the August Statement had suffered a loss, given the fall in share price that followed the later announcement that the August Statement was inaccurate. The FCA determined that the appropriate sanction was therefore to make a restitution order pursuant to section 384 of the Act, requiring those parties to be compensated through the establishment of a scheme, the details of which were annexed to the Final Notice. The total restitution payable is expected to be in the region of £85 million. The FCA also determined to publish a public statement censuring Tesco for its conduct (although not expressly stated in the Final Notice, the decision not to impose a final penalty on Tesco was, inevitably, a consequence of the parallel DPA negotiations between Tesco and the SFO).
The FCA has been provided with a broad armoury of powers to obtain restitution for those who have suffered loss as a consequence of an act of market abuse. In addition to the section 394 administrative power, by section 383 of the Act the FCA may alternatively apply to the High Court for a restitution order (the FCA’s Handbook provides guidance as to when the regulator will elect to bring court proceedings, as opposed to imposing an administrative sanction). Where the FCA has successfully prosecuted a defendant for the insider dealing offence contained in the Criminal Justice Act 1993, in common with other prosecutorial agencies, the regulator may invite the Court to make a compensation order in addition to imposing any penalty. Yet, to date, the FCA would not appear to have obtained either an order under section 383, or a compensation order, in cases of market abuse, and the instances in which restitution orders under 384 have been obtained are rare (most recently, in June 2016, the FCA secured restitution of some £1,850 from a person subject to administrative proceedings arising out of an act of insider dealing).
The Tesco Final Notice reflects an increasing focus on the part of securities regulators on compensating parties who have suffered losses as a consequence of market abuse. In December 2013, in the first case of its kind, the Hong Kong Securities and Futures Commission (‘SFC’) used section 213 of Hong Kong’s Securities and Futures Ordinance to obtain a court order requiring Du Jun, the former Managing Director of Morgan Stanley Asia Limited, to pay some HK$24million to investors who had suffered loss as a consequence of insider dealing for which he was convicted in 2009. The SFC has since obtained similar ‘restoration’ orders against a number of parties, including – following extensive litigation before the Hong Kong courts – Tiger Asia Management LLC.
The emphasis on restitution, compensation, restoration – however described – that the Tesco Final Notice reflects is notable in an environment where aggrieved investors arguably enjoy ever greater opportunities to vindicate their rights before the civil courts. In England and Wales, the availability of group litigation orders, and the use of innovative agreements with litigation funders, conditional fee agreements and damages based agreements, does raise legitimate questions as to what extent the regulator’s limited resources should be deployed to advance the interests of, in particular, large institutional investors. Some commentators have suggested that apparent difficulties faced by aggrieved third parties in vindicating their rights before the civil courts of Hong Kong is one reason why the SFC has so vigorously pursued restoration orders, mindful of the need to preserve investor confidence.
Those broader questions of policy aside, the Tesco Final Notice highlights the exposure that may arise for listed firms – irrespective of whether they operate in financial services – from failing to accurately report to the market, quite apart from any criminal or civil penalty that may accrue as a consequence of that conduct. This may present particular challenges for firms and their advisors, requiring a complex assessment of the extent to which potential regulatory liability overlaps with any vulnerability to claims in contract or tort – doubtless an unhelpful distraction at a time where the firm’s focus should be on resolving the underlying substantive proceedings.