More than 125 institutional funds have collectively filed a civil lawsuit against Tesco in the High Court on Monday, 31 October. They are claiming more than £100m ($122.3m) in damages from the supermarket chain over its overstatement of earnings two years ago.
The case centres on Tesco's 23 October 2014 announcement. It had then said that the chain had previously overstated its profits by £263m. This announcement, which was accompanied by a 92% drop in interim profits, led to Tesco losing £1bn in market capitalisation. This was in addition to the £2bn it lost in market cap while making the initial disclosure in September 2014.
In the first collective legal action against the supermarket, the funds have claimed that they lost millions of pounds amid Tesco's actions. They have alleged that Tesco had made misleading statements to the stock market, which did not include material information. The funds said they had unfortunately relied on these statements while making their financial decisions, hence making them undergo a loss.
The claim was filed by law firm Stewarts Law. The litigation-only law firm based in London and Leeds, is acting for the group of asset managers, hedge funds and pension funds that are suing the supermarket chain.
On the other hand, the action is being funded by Bentham Europe, a group that specialises in funding such lawsuits. This firm is controlled by US activist hedge fund Elliott Management.
In a statement, Jeremy Marshall, Chief Investment Officer of Bentham Europe, said: "The misstatement of profits leading to a dramatic collapse in the Tesco share price caused substantial damage to many shareholders who manage money for thousands of investors.
"Investors have a right to rely on statements made by companies to ensure that they correctly allocate capital. The claim will assert that Tesco's misstatements are in clear breach of its obligations under the Financial Services & Markets Act and investors must be compensated."
Sean Upson, the partner at Stewarts Law, who is leading the case, said: "Tesco has misstated its accounts, and in particular its treatment of payments from suppliers, to give the appearance of static trading margins. The reality was that those margins were falling. Institutional investors were therefore misled when making investment decisions in respect of Tesco. This is precisely the type of wrongdoing which the Financial Services and Markets Act was designed to redress and therefore to prevent".