Sports Direct Must Hand Over Documents to FRC, Judge Says

(Bloomberg) -- U.K. billionaire Mike Ashley’s Sports Direct International Plc must hand over documents as part of an accounting regulator’s investigation into its 2016 financial results, a London judge ruled. The retailer’s shares tumbled.

The U.K.’s Financial Reporting Council is probing the conduct of audit firm Grant Thornton and one of its employees after they failed to disclose a business relationship between Mike Ashley and his brother. The regulator is running a parallel investigation into the conduct of an employee at Sports Direct or one of its units, it disclosed Tuesday.

Sports Direct must turn over documents and emails that it said were protected because of legal privilege, according to Judge Richard Arnold. Sports Direct’s shares fell 5.3 percent in London, making the stock the worst performer on the FTSE 250 Index on the day.

The news is a blow for Ashley, a self-made billionaire, who is currently grappling with the potential restructuring of beleaguered British department store chain Debenhams Plc, in which he holds a stake. Sports Direct has taken advantage of the problems of other retailers to acquire House of Fraser Ltd., which was itself near collapse.

‘Criticism Justified’

Lawyers for the financial watchdog had previously described Sports Direct’s approach in the case “as one of obfuscation and delay verging on obstruction,” the judge said Tuesday. “In my view, this criticism is entirely justified,” he said.

The judge’s decision contrasts with a ruling earlier this month that stated that a mining company’s files were subject to attorney-client privilege and shouldn’t be handed over to a regulator.

Sports Direct said in a statement it won permission to appeal some aspects of the judgment. A spokeswoman for Grant Thornton, the fifth-largest accounting firm in the U.K., didn’t immediately comment.

The FRC is considering whether Grant Thornton failed to disclose that one of Sports Direct’s units hired a company run by John Ashley for deliveries, according to the judgment. The firm, Barlin Delivery, got a share of the revenue that Sports Direct generated from overseas orders.

Lawyers for the regulator said Thursday it was investigating a Sports Direct employee as part of the FRC’s oversight of accounting, which gives it powers to discipline accountants suspected of misconduct, according to a court filing.

The FRC also sought documents relating to the advice given by Deloitte about various Value-Added Tax structures. The accountant had provided advice to Retail Ltd. on a plan that sought to ensure that the retailer paid VAT on its sales to European customers solely in the U.K. A spokeswoman for Deloitte didn’t immediately comment.

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