Mark Sutton
Karen Boto

The use of Deferred Prosecution Agreements (DPAs) has been an established practice in the U.S. for years, but the use of DPAs was just introduced into the U.K. in 2014, and there have as yet only been a very small number of cases involving DPAs in the U.K. In the following guest post, Mark Sutton and Karen Boto take a look at the developments surrounding the use of a DPA in connection with the DPA recently agreed to between the U.K. grocery store firm Tesco and the U.K. Financial Conduct Authority (FCA). I would like to thank Mark and Karen for allowing me to publish their article. I welcome guest post submissions from responsible authors on topics of interest for this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Mark and Karen’s article.

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Since the introduction of Deferred Prosecution Agreements (DPAs) into the UK in February 2014 there have been four reported cases to date.

DPAs are appealing to both corporates and the Serious Fraud Office (SFO). They allow corporations to escape criminal prosecution by paying a fine and improving compliance. This avoids lengthy, expensive and often complicated trials, spares the corporation concerned and can assist with the SFO’s publicly reported resourcing issues.

The Tesco DPA 

In March 2017 we saw one of the largest fines being imposed in the UK under the DPA system. This was imposed against Tesco Plc who agreed to pay a fine of approximately £129m in order to suspend the prosecution of allegations relating to false accounting by its subsidiary, Tesco Stores Ltd.

At the same time the Financial Conduct Authority (FCA) announced that Tesco had also agreed to a redress scheme to compensate its investors (to the tune of £85m).

Three former Tesco executives were then accused of wrongdoing over the alleged £250m accounting scandal and were criminally prosecuted.

As a result of the criminal proceedings, the exact terms of the DPA, including the agreed Statement of Facts, was not made public so as not to prejudice those prosecutions.

The acquittals  

The last of the three former executives was cleared of wrongdoing by a criminal court on 23 January 2019; the other two being cleared of charges in December 2018. In both cases the executives were acquitted based on the prosecution’s “weak” evidence and it being established that there were no cases to answer.

The Statement of Facts 

Following the collapse of the criminal trial, on the very same day that the final executive was acquitted, the terms of DPA agreed between Tesco and the SFO was published for the first time.

Unlike the other three DPAs signed in the UK to date, the Tesco DPA is the first to publicly name individuals (which is not a requirement).

The Statement of Facts clearly ascribes wrongdoing to the former executives.   It says that the three former executives were “aware of and dishonestly perpetuated the misstatement [of figures]” leading up to market disclosures in August and September 2014, “thereby falsifying or concurring in the falsification of accounts or records made for an accounting purpose”. It also stated that one of the individuals “signed off false numbers in Tesco’s accounting system” and that they all failed to alert others to the issue and “instead concealed the true position“.

Who has really benefitted from the Tesco DPA? 

It is difficult in the current circumstances to see who the real winner is, if anyone is.

Although the former executives applied to Lord Justice Leveson, (the judge who approved the DPA in April 2017), to redact their details in the light of the acquittals, this was not successful.

Under the legislation he held he had no jurisdiction to do this but noted that the DPA “related only to the potential criminal liability of Tesco Stores Ltd and did not address whether liability of any sort attached to Tesco Plc or any employee, agent.”

However, this analysis does not assist the former executives who, having  been cleared via the criminal court process,  have now been labelled as dishonest persons in a private document, which has been released to the public. This is clearly a prejudicial and distressing outcome for those concerned.

Also, with some pretty scratching comments being levelled at the SFO over its apparent lack of evidence, its credibility maybe impacted.

The inconsistent court rulings also raise serious questions for Tesco as to whether it concluded its own investigations, and the DPA, too quickly (paying a hefty fine) in circumstances where no individual has been convicted.

Conclusion

There is no doubt that this decision raises important concerns about the DPA process.   Is it adequate for a DPA to be agreed by a Court before a thorough examination of all the evidence has taken place?  Is it right that there are no powers to prevent a subsequent publication? It will be interesting to see if DPAs now undergo urgent reform.

From an insurance perspective, it demonstrates the importance of the severability language commonly found in D&O policies in the London market.   This example highlights the dangers that would exist if statements and admissions of wrongdoing, which have perhaps been made for commercial and reputational reasons, could be imputed to the directors and officers for the purposes of analysing the coverage position.  In the absence of this language, such statements might allow insurers to deny liability for a claim by relying on the conduct exclusion (to the extent it triggers upon a written admission) and/or the prior consent requirement (to make an admission) which would be unjust if those admissions and statements subsequently turned out to be incorrect.

 

Everyone involved in any way in D&O insurance transactions has seen an insurance buyer choose to buy a policy that while less expensive provides narrower coverage. Sometimes the price difference might be slight, sometimes the difference could be significant. But the fact is, the most expensive policy is the one that doesn’t provide coverage when it should, and in the event of a claim, narrower coverage can translate into a claims denial.  Anyone who wants to see what this might look like in action will want to consider the recent ruling out of the Middle District of Florida, in which the court held that the securities exclusion in a private company D&O insurance policy precluded coverage for an underlying claim against the policyholder and certain of its directors and officer. The January 2, 2019 decision in the case can be found here. A January 25, 2019 post on the Wiley Rein law firm’s Executive Summary Blog about the decision can be found here. Continue Reading D&O Insurance: Policy Wording Matters

John Reed Stark

Among the agencies largely closed by the current partial U.S. federal government shutdown is the U.S. Securities and Exchange Commission (SEC). In the following guest post,  John Reed Stark, President of John Reed Stark Consulting and former Chief of the SEC’s Office of Internet Enforcement, takes a look at what the SEC’s closure means for the processes and responsibilities that constitute the agency’s watch. Stark calls on the country’s political leaders to end the stalemate and re-open the government, including the SEC. Every day the shutdown continues, and the SEC staff remain at home, Stark says, the risks to U.S. markets increase. A version of this article originally appeared on Securities Docket. I would like to thank John for allowing me to publish his article as a guest post. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is John’s article. Continue Reading Guest Post: Why the Shutdown Must End

Giulio Zanolla
John F. McCarrick

In the following guest post,  Giulio Zanolla, a principal at Zanolla Mediation,  and John F. McCarrick, partner and chair of the Financial Lines Practice Group at White and Williams LLP, take a look at the ways that parties to a D&O insurance coverage dispute can make the most of the policy-mandated mediation process. I would like to thank Giulio and John for allowing me to publish their article as a guest post. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Giulio and John’s article. Continue Reading Guest Post: Maximizing Mandated Mediation in D&O Coverage Disputes

In the following guest post, Ulrike Binder, a corporate partner in Mayer Brown’s Frankfurt office, Jan Kraayvanger, a partner in Frankfurt office of Mayer Brown’s Litigation & Dispute Resolution practice, Burkhard Fassbach, Legal Counsel to Howden Germany, take a look at recent corporate governance and executive liability developments in Germany. A version of this article previously was published as a White Paper by Mayer Brown written in cooperation with Howden Germany. The original version also contains a chapter about D&O-Insurance in Germany authored by Marcel Armon, CEO Howden Germany, which can be found here. I would like to thank Ulrike, Jan, and Burkhard for allowing me to publish their article on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ article.
Continue Reading Guest Post: Compliance-Hype in Germany

In recent years, plaintiffs’ lawyers have filed a number of management liability lawsuits against the executives of companies that have experienced high-profile data breaches. These lawsuits have either been filed as shareholder derivative lawsuits or securities class action lawsuits. By and large, the cases filed as shareholder derivative lawsuits have been unsuccessful. However, in a development that represents a milestone in several different respects, the parties to the Yahoo data breach-related derivative lawsuit have agreed to settle the case for $29 million. As discussed below, this settlement may have important implications for future data breach-related derivative litigation. The Court’s January 4, 2019 order approving the settlement can be found here (see calendar Line 5 in the order). Continue Reading Yahoo Data Breach-Related Derivative Suit Settled for $29 Million

As I have noted in prior posts (for example, here), a few plaintiffs’ law firms have launched a wave of lawsuits under the Americans with Disabilities Act (ADA) based on website inaccessibility allegations. In one of the first appellate court decisions on the legal issues these cases present, the Ninth Circuit recently reversed a lower court dismissal of a website and mobile app accessibility lawsuit that had been filed against Domino’s Pizza. The appellate court’s ruling underscores the exposures companies face for these kinds of lawsuits. The Ninth Circuit’s January 15, 2019 opinion in Robles v. Domino’s Pizza can be found here. Continue Reading Ninth Circuit Addresses Website and Mobile App ADA Accessibility

Jonathan Legge

In a three-post series, Jonathan Legge, a Senior Vice President at RT Pro Exec, is taking a look at the key insurance issues relating to Private Capital Investment. In the first of the three articles in the series (here), Jon examined the issues involved with getting the insurance for private equity-backed portfolio companies right. In today’s post, the second in the three-part series, Jon discusses transactional risk insurance, and in particular, contingent liability insurance. I would like to thank Jon for allowing me to publish his series of articles as guest posts on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Jon’s article. Continue Reading Guest Post: Don’t Forget About the Other Transactional Solutions

The risk of extreme weather events resulting from climate change and the collective global failure to address climate change represent the most significant current global risks, according to the World Economic Forum’s annual survey of global risks. These kinds of risks represent significant concerns for human safety, social and business disruption, and property loss. As discussed below, and as recent claims have shown, these risks may present management liability concerns as well. The World Economic Forum’s January 15, 2019 Global Risks Report can be found here. Continue Reading Thinking About the World Economic Forum’s Global Risks Report

As I noted at the time (here), on December 19, 2018, Delaware Vice Chancellor Later held that under Delaware law, a corporate charter provision specifying that liability actions under Section 11 of the Securities Act of 1934 must be brought in federal court are invalid and ineffective. A copy of Laster’s opinion in Sciabacucchi v. Salzburg (referred to below as the Blue Apron decision) can be found here. In the following guest post, Paul Ferrillo, Robert Horowitz, and Steven Margolin of the Greenberg Traurig law firm take a look at the Blue Apron decision and examine whether or not Congress will act to eliminate concurrent state court jurisdiction for state court claims. The authors also examine the steps companies should take now in light of the possibility of facing litigation in both state and federal court. I would like to thank the authors for their willingness to allow me to publish their article as a guest post. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit an article. Here is the authors’ article. Continue Reading Guest Post: Section 11 Claims May Remain in State Court; How Will Companies and D&O Carriers Respond?