Tesco Pays $12m Over Profit Hole Legal Claim

Tesco (Xetra: 852647 - news) has agreed to pay $12m (£7.9m) to settle a class action lawsuit by US investors over its overstatement of profit expectations last year.

The action was taken against the company and "certain of its former directors" in New York, on behalf of investors holding around 2% of its stock.

Tesco announced in September last year - shortly after the arrival of new boss Dave Lewis - that it has overstated first-half profit expectations by £250m because it incorrectly booked payments from suppliers. The extent of the profit blackhole has since risen to £326m.

The scandal prompted a probe by the Serious Fraud Office.

Tesco said its settlement was subject to confirmation by a court. A separate case in Ohio represents holders of investments equivalent to 0.2% of shares.

US investors took action against the company after the initial disclosure of the profit overstatement sent the value of their holdings, known as American depository shares, down by 15% on the next trading day.

The New York lawsuit claimed that Tesco and top executives misled investors into believing the company was performing well when it was instead reporting profit incorrectly, taking too long to recognise costs. and overstating its inventory.

Tesco's settlement shows that the supermarket is still dealing with the fall-out from the scandal more than a year after it first emerged.

Last month the supermarket reported a 55% fall in half-year operating profits to £354m, for the six months to August 29.

New (KOSDAQ: 160550.KQ - news) boss Mr Lewis has been shutting unprofitable stores as he battles to turn around the company's fortunes. UK supermarkets are locked in a ferocious price war as they try to head off the threat of discounters Aldi and Lidl.

Shore Capital analyst Clive Black said the latest settlement was "small beer in the big scheme of things ... but another example of the distraction that the present management team has had to face from tidying up prior challenges and issues".

He added: "Whilst the devil is in the detail, we deem this development to be another notch of good news, allowing senior management to focus that little bit more on the more important day job of turning this once great business around."