Tesco gets more bad news as pension fund sues for fraud

Philadelphia: Tesco Plc and its directors misled investors about its financial health, according to a Texas retirement fund that sued the UK’s biggest retailer just as it’s facing an onslaught from rival European companies.

The grocer’s sales have fallen under pressure from German discount rivals Aldi and Lidl, and its finances are being stretched. Net debt rose 7.1% to £7.5 billion ($12 billion) in the first half of the year, while non-current liabilities, or long-term borrowings, increased 18% to £16.5 billion, according to the retailer’s accounts.

The Irving Firemen’s Relief and Retirement Fund, of Irving, Texas, alleged that it bought Tesco stock at artificially inflated prices. It suffered “significant losses” when Tesco said in September that accounting irregularities caused it to overstate profits, according to the complaint filed on Thursday in federal court in Manhattan.

Tesco shares plummeted on 22 September after the supermarket chain said some income was booked before being earned and costs were recognized later than incurred. The news prompted investors, including Warren Buffett, to cut their stake. On Thursday, the Cheshunt, England-based company said the accounting caused it to overstate profit by £263 million ($422 million), with more than half of that amount pre-dating this year.

Tesco declined to comment on the complaint by the fund, which has 463 members, according to its web site.

Shareholders

The Irving fund is seeking to represent all Tesco shareholders who purchased the company’s American depositary receipts, each representing one ordinary share, between 2 February and 22 September, according to the complaint.

Tesco’s ADRs fell about 43% during the class period from a high of $16.97, the fund claimed.

Tesco “carried out a plan, scheme and a course of conduct” which was intended to deceive the investing public, the fund said in the complaint.

Tesco has cut its profit outlook three times in two months after losing UK market share, sending its shares to the lowest in more than 11 years. Chief executive officer (CEO) Dave Lewis, who joined the firm less than two months ago, has also had to contend with the discovery of accounting issues that led to the suspension of eight senior managers.

Chairman Richard Broadbent said on Thursday that he plans to step down. Also on Thursday, Moody’s Investors Service lowered its credit rating on Tesco to Baa3, the lowest investment-grade level, and said the rating may be cut further to junk status. Fitch Ratings took similar action. Bloomberg

Paul Jarvis in London also contributed to this story.