Serco faces landmark shareholder lawsuit over mischarging scandal

Leading institutional investors are set to face off against Serco in court next week over an overcharging scandal that caused the UK outsourcing company’s share price to plummet, in what would be the first case of its kind in England to go to trial.

Allianz and Russell Investments are among a group of shareholders taking part in the lawsuit against the London-listed company, which stems from investment losses they sustained after Serco was found to have overcharged the UK government for the electronic tagging of offenders.

The case, which barring a last-minute settlement will be heard by the High Court in London on Monday, comes as US-style shareholder lawsuits against other UK companies gather pace. Glencore, Barclays and BT are among those facing such claims over stock-price drops.

“The Serco case represents a potential turning point for securities litigation claims in this jurisdiction,” said Andrew Poulton, a partner at Linklaters in London who is not involved in the case.

Despite a wave of lawsuits, none has yet gone to trial. Several investors groups have reached settlements in such cases, including in a case against Serco’s rival outsourcer G4S that had been scheduled to be heard earlier this year.

If the Serco case proceeds, lawyers said, it could help determine the prospects of success for other claims and establish important legal precedent.

Chris Warren-Smith, partner at Morgan, Lewis & Bockius, the US-headquartered law firm that is representing investors suing Serco, said his clients were “seeking confirmation that the law holds companies accountable to their shareholders for serious misconduct that destroys shareholder value”.

Serco said in a statement: “We don’t consider the claimants’ allegations to have merit. We will therefore be robustly defending their claims against us.”

The UK government accused Serco in 2013 of overcharging it on an electronic tagging contract by tens of millions of pounds, including billing it for offenders who had died or had left the country. Serco agreed to repay £68.5mn to the government at the end of that year.

The scandal led to an investigation by the Serious Fraud Office, which fined Serco £19.2mn plus costs in a deferred prosecution agreement in 2019 for three offences of fraud and two of false accounting committed between 2010 and 2013. The SFO’s prosecution of two former Serco executives collapsed during its 2021 jury trial, however.

It was one of several scandals that hit the outsourcing group’s reputation, costing it other government contracts and pushing it to the brink of collapse. Serco shares lost about 70 per cent of their value during 2013 and 2014.

The Serco investors claimed in their lawsuit that they suffered loss and damage as a result of “misleading or untrue statements and omissions” in the company’s annual reports and other documents.

“The fact that a company or companies within Serco Group had been systematically overcharging and defrauding its biggest and most important customer over many years was highly material.”

Serco, represented by Clifford Chance, said in its defence filed with the court that there were “fundamental deficiencies in the claimants’ pleaded case”.

These included that the individuals alleged to have known about the overcharging were not involved in the publication of Serco’s annual reports or other relevant published documents.

There is “no causal link between the allegedly untrue or misleading statements or omissions said to have been relied upon by the Claimants and the loss claimed by them”, Serco’s defence added.