US funds sue Tesco over its profits scandal as grocery giant's earnings collapse

By Neil Craven, Financial Mail on Sunday

Published: 16:11 EST, 10 October 2015 | Updated: 16:11 EST, 10 October 2015

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A group of four American pension and investment funds have launched a multi-million dollar legal action against Tesco over its ‘massive restatement’ of profits that caused a collapse in its share price last year.

The claim centres on Tesco’s £263million accounting scandal in September 2014, which emerged after a member of staff brought the issue to the attention of incoming chief executive Dave Lewis.

The complaint was filed in an Ohio court on Wednesday, just hours after Tesco unveiled its latest financial result, which showed profits at the group had been all but wiped out.

Legal action: The claim centres on Tesco’s £263million accounting scandal in September 2014

Documents were filed by The Western and Southern Life Insurance Company, Western & Southern Financial Group, Integrity Life Insurance and Touchstone Strategic Trust.

The action comes amid mounting rumours that Tesco is close to reaching a so-called ‘deferred prosecution agreement’ with the SFO. Such a deal would spare Tesco from a criminal case as long as it agreed to pay a fine and compensation to any victims, as well as co-operating with any related investigations by the authorities.

The 72-page document says Tesco ‘recklessly disregarded’ facts and ‘dramatically overstated’ profit by improper recognition of charges to suppliers.

The court papers detail hundreds of purchases over a period of more than two years of Tesco American Depository Receipts – certificates representing shares – worth $65million.

Lawyers are asking for the recovery of money lost through the purchase of the shares as well as ‘treble and punitive damages’. The complaint in the documents centres on the issue of commercial income – charges to suppliers over and above the cost of the products – which it says were overstated.

The papers cite a number of people providing evidence against Tesco including a potato supplier from Ireland and two people from a sports drink supplier.

One of the people complained of being sent invoices for as much as £25,000 which had not been previously agreed. They included ‘listing fees’ for new products and even one for ‘adding small strips of paper’ with the word ‘New’ on to promote products.

The court papers say the person never agreed to pay the fees and subsequently refused to settle the invoices. In January 2015 the supplier stopped selling to Tesco.

Tesco category buying manager David Beardmore was said to have had a conversation with the second person from the supplier later that year during which it is alleged he apologised and said he was interested in carrying the products again.

The papers say the ‘purported success’ that Tesco seemed to be experiencing was ‘the result of Tesco’s fraudulent financials’.

Lawyers for the US-based funds and Tesco declined to comment.