Source: https://thelawreviews.co.uk/edition/the-securities-litigation-review-edition-3/1144259/england-wales
Timestamp: 2018-02-21 13:25:34
Document Index: 114747001

Matched Legal Cases: ['art 6', 'EWCA ', 'UKHL ', 'EWCA ', 'art 36', 'EWCA ']

England & Wales - The Securities Litigation Review - Edition 3 - The Law Reviews
There are other prosecution authorities with the power to investigate and prosecute criminal offences of market misconduct, the most relevant being the Secretary of State for Business, Innovation & Skills, the Director of the Serious Fraud Office (SFO) and the Crown Prosecution Service. It is these prosecution authorities, rather than the FCA, which have the power to bring criminal prosecutions in respect of criminal fraud or offences under the Theft Act 1968.
Private securities litigation is in the relatively early stages of development in England and Wales, but the most obvious claims that investors in securities may deploy include claims under the statutory liability regimes provided for by FSMA. These give a cause of action for untrue or misleading statements in prospectuses or listing particulars, or the omission of necessary information from such documents, and for recklessly misleading statements in, or dishonest omissions from, other information published by issuers of securities. Other potential claims include common law claims in fraud or negligent misstatement. The likely targets for such claims are, naturally, the issuer of the securities, its directors and, possibly, the professional advisers and other parties involved in the publication of the relevant information. However, it remains largely untested in the case law how far responsibility for that information will be extended in practice, making claims brought by investors against issuers’ advisers less certain.
Section 90 FSMA provides a cause of action to an investor where listing particulars or a prospectus relating to securities contains any untrue or misleading statement or if it fails to include information that is required by statute. Section 87A FSMA sets out the principal requirement that the listing particulars or prospectus includes the information necessary to enable investors to make an informed assessment of the issuer7 and the rights attaching to the securities. The applicable fault standard is essentially negligence (albeit with the burden of proof reversed so that it is for the defendants to show that they were not negligent by establishing a defence of ‘reasonable belief’ that the contents of the document were complete and accurate), reflecting the nature of the documents to which the Section applies as intended to encourage the purchase of securities. The cause of action allows any person who has: (1) acquired the securities in question; and (2) suffered a loss as a result of the defect in question, to claim for compensation under Section 90 FSMA against any person responsible for the defective document. The list of persons responsible for a prospectus or listing particulars naturally encompasses the issuer and (in equity capital markets at least) its directors,8 as well as those who accept responsibility in the offering document or who authorise its contents.9 The breadth of this means that, while it is clear that issuers and the directors of issuers are the most likely defendants to a Section 90 claim and the point is so far untested in the case law, it is in theory possible for a claim also to be brought against a third-party adviser to the issuer (if it can be established that the adviser has accepted responsibility for the contents of the document).
Although market practitioners might think it an obvious assumption, there is no express requirement in the statute that limits claims only to material defects in the prospectus or listing particulars; it merely requires that the document includes ‘necessary’ information. However, the better view is that there must be some ability for the issuer to select the information that is considered to be material to investors for inclusion in the document, not least to avoid deluging investors with unnecessary information. In addition to this common sense argument, one can argue that a proper interpretation of the Prospectus Directive and Prospectus Regulation builds in a materiality component to what is ‘necessary’ information. In any event, a Section 90 cause of action is incomplete without the investor establishing causation and loss, which ought to prevent a successful claim for immaterial information defects.
Although the issue has not been tested, on the face of Section 90 it is not necessary for the claimant to show that he or she relied on the defective prospectus or listing particulars when purchasing the securities. It is, on the drafting of the legislation, the loss suffered by the claimant that must have resulted from the defect, rather than the acquisition of the securities in question. This potentially removes one of the significant hurdles that investors face in bringing a claim on behalf of large numbers of investors, given the obvious practical difficulties for claimants in having to show that they each placed reliance on the defect in question when purchasing securities (given that some may not even have read the prospectus or listing particulars in full in any event).
A defendant12 to a Section 90 claim can rely on any of the defences set out in Schedule 10 FSMA, which, broadly speaking, provide that the defendant will not be liable where it reasonably believed the contents of the document to be complete and accurate, reasonably relied upon an expert or official source to verify the accuracy of the content in question or took reasonable steps to (or did in fact) cause a correction to be made before the investor acquired the securities. The investor will also fail in its claim if it can be shown that it knew (not merely suspected) that the statement complained of was inaccurate or incomplete. Interesting questions arise as to the steps that will need to be taken to satisfy the Schedule 10 ‘reasonable-belief’ test, the most significant of the available defences. For example, is it sufficient to ensure that reasonable processes have been followed in the conduct of due diligence and verification of the contents of the document? How far down the chain of command within the issuer does the investigation need to go for belief to be attributable to the issuer? How easy will it be, often many years after the drafting of the document in question, to explain the key judgements on materiality to the court (particularly in relation to the omission of information) unless the rationale for those decisions was well documented at the time? These, and other issues, are likely to be fertile ground to be explored in the first cases brought to trial under Section 90 in which the reasonable-belief defence is deployed. It will also be relevant for directors to show the extent of their personal executive (or non-executive) responsibilities, potentially raising the prospect of diverging interests between different directors in defending claims.
An investor is entitled on a Section 90 claim to recover its full loss on the securities in question, calculated by reference to the true value of the securities (i.e., their price had the inaccuracy or omission not been made) against the actual price paid. Critical questions arise, not yet determined by the English courts, about the appropriate method of identifying the true value, and at which point in time that value should be assessed. There is also debate as to whether the right to recover loss extends to consequential losses arising from the purchase of those securities, such as the opportunity cost of what the investor would otherwise have purchased had it not purchased the securities in question. However, the better view is that such compensation would not ordinarily be available under Section 90 and an investor would have to bring a claim in the alternative in fraudulent misrepresentation (deceit) to recover damages on that basis.
Section 90A FSMA has a broader application than Section 90 but is in a sense much more narrowly confined. It applies to all publications an issuer makes to the market, or whose availability is announced, through a recognised information service (other than prospectuses and listing particulars, which are subject to Section 90). It provides a remedy to investors who have suffered loss as a result of reliance when buying, selling or holding securities on published information (other than listing particulars or a prospectus) containing a misleading statement or omission, or where there is a delay in publishing that information. However, the fault standard is higher than for Section 90 and is akin to recklessness (rather than negligence): the issuer is only liable if a director knew that, or was reckless as to whether, the statement was untrue or misleading, or if they dishonestly caused a delay in disclosing a material fact.
As with Section 90, there is no express requirement for the defect in question to be material. However, in addition to the need for the information to be material for loss to follow, the cause of action requires each investor to establish that their reliance on the defect was reasonable. The need to show reliance, in contrast to Section 90, provides a serious hurdle to bringing a claim. In the absence of any court guidance or established techniques for claimants to use to show reliance other than on an individual basis, it will be interesting to observe any attempts to import methods that have been adopted in other jurisdictions to overcome this challenge.13
Section 90 does not prevent claims being brought under common law, albeit that the advantages of the statutory cause of action make them less likely. By contrast, Section 90A does create a safe harbour for issuers, which prevents claims being brought other than under Section 90A (with its high fault standard). However, claims in contract, under the Misrepresentation Act 1967 and where responsibility for the allegedly defective statement has been assumed, are carved out of that safe harbour (so such claims remain potentially viable).
As with Section 90 claims, there is no settled case law on the appropriate methodology for determining loss, but the difference between the price paid (or received) and the true value of the security in question is likely to be the appropriate measure, subject to difficult questions of approach to calculating quantum.
Negligent misrepresentation is a statutory claim under Section 2(1) of the Misrepresentation Act 1967 that is established when an investor can show that he or she entered into a contract in reliance upon a misleading statement of fact made by or attributable to the defendant. The defendant will be liable if he or she cannot show that he or she reasonably believed the statement to be true at the time the contract was made.14 Accordingly, once the statement is shown to have been false, the burden of proving that the statement was made with reasonable belief in its accuracy shifts to the defendant.
The remedies available are favourable to claimants and include both damages, assessed on the measure usually reserved for actions in deceit, and rescission of the relevant contract. However, Section 2(1) only allows for that remedy to be claimed from the contracting counterparty. In a surprising first instance decision in Taberna Europe CDO II plc v. Selskabet AF1,15 the court found that Section 2(1) of the Misrepresentation Act could be relied upon by a secondary market purchaser for a misstatement made by the issuer to the primary purchaser, notwithstanding that the misstatement was made in respect of a different contract. However, the Court of Appeal16 overturned this decision confirming that in the event of a misrepresentation made by the issuer, the remedy under the Misrepresentation Act is only likely to be available for subscribing shareholders, rather than those who purchase on the secondary market.
The existence of a duty of care for the content of published documents will depend on all of the circumstances and the proper boundaries of the law of tort in this area are the object of much debate and a large body of case law. In broad terms, the investor will need to show that the statement was made (or the information omitted) by someone who has ‘assumed responsibility’ to investors for the content of that statement, and that it is fair, just and reasonable for the court to impose a duty of care in the circumstances. Whereas the courts have found that statutory auditors did not assume responsibility to the purchasers of shares in the company they audited,17 it might be expected that the directors of an issuer, for example, who take responsibility for the contents of a prospectus or other published information to investors, might be likely to have assumed responsibility for the accuracy and completeness of its content. It is uncontroversial, for example, that directors assume responsibility to shareholders for the content of circulars issued for the purpose of resolutions to be voted on at an issuer’s general meeting. The standard for such a duty has been held to be that directors must provide investors with sufficient information for them to be able to make a reasonably informed decision on how to vote.18
Civil liability in the tort of deceit can arise if the investor can establish that the false information was intended to be acted on and that, when stating it, the defendant knew it was false, or was reckless (i.e., he or she did not care) as to whether or not it was false.19 The burden is therefore great but, if that intention is established, a presumption is raised that the investor relied upon it and the burden will shift to the defendant to show that the investor did not, as well as potentially extending limitation periods. This cause of action also gives the investor the advantage that it will be able to recover all of its consequential losses, rather than merely those that were reasonably foreseeable. However, it is likely to be a matter of evidence whether the investor can establish on the facts what its actual counterfactual investments would have been.
FSMA establishes a number of statutory claims available to investors who have suffered loss as a result of a breach of FSMA itself or of rules made by the FCA in addition to claims under Section 90 (referred to above). An investor will have a claim where the investment agreement was made with, or through a person who was not authorised by the FCA, but should have been, or where the investment was a result of an unlawful financial promotion.20
Under Section 138D FSMA, a private person21 will have additional claims available where an authorised person has breached eligible22 provisions of FSMA or the FCA rules and that breach has caused the claimant loss. These claims are most commonly used by a private person where there has been a failure on the part of an authorised adviser to ensure its advice is suitable or where he or she was misled in some way as to the nature or description of the investment.
In the context of securities litigation, the English courts had previously confirmed that a claim under Section 138D FSMA was not available in respect of an alleged breach of the civil market abuse provisions in FSMA or of listing rules made pursuant to Part 6 of FSMA.23 However, with the advent of MAR, which replaced the civil market abuse provisions in FSMA, the position is less clear.
Private parties have in certain contexts been able to rely on breach of an EU regulation in civil proceedings. Where a requirement imposed under an EU regulation such as MAR is sufficiently precise or unconditional to be relied on in the national courts, or is capable of creating rights for individuals, then in principle breach of that requirement may provide an additional legal ground around which to base a claim.24 It would be necessary to establish a link between the interest on which the person concerned is relying and the protection afforded by the provision in the regulation, and that the person has suffered loss as a result of the breach, and it may also be necessary for that person to avail themselves first of other available rights of recourse.25
Claims against issuers for the publication of false, misleading or incomplete information to the market, such as the claim brought brought by Mr Geltl and others against Daimler,26 will be confined to relief under Section 90A (and Schedule 10) of FSMA. However, claims by counterparties who suffer loss as a result of insider dealing or market manipulation could provide a source of litigation. Where loss is suffered by a private person, the FCA (or other prosecutors) may also obtain an order for restitution or compensation for their benefit.27 It is not inconceivable that buy-side parties in receipt of inside information from an issuer or its financial advisers as part of a market sounding, in respect of a transaction for which no cleansing announcement is made, may consider exploring injunctive relief as an option; the FCA also has power to compel issuers to make an announcement.
In England and Wales, the procedural features of a private securities claim are largely governed by the Civil Procedure Rules, which form a procedural code governing all aspects of the conduct of civil court claims, with the overriding objective of dealing with cases justly and at proportionate cost.28
Claims will be commenced by the claimant filing and serving a claim form, which will be accompanied or followed by detailed particulars of the legal and factual basis for the claim. Assuming the defendant intends to defend the claim and does not dispute the English courts’ jurisdiction, it will file and serve a defence, setting out in detail which parts of the claim it admits, those it denies and those it requires the claimant to prove.29 While the court has wide discretion to determine the subsequent conduct of the claim, the parties are then typically required to give extensive disclosure of documents, including in particular those documents that undermine their case or support another party’s case, and to exchange witness statements of those individuals each intends to call to give evidence at trial. Factual witness evidence will often be supplemented by expert evidence on issues that the court permits to assist it in the assessment of the issues in dispute.
A key feature of litigating in England and Wales (which might be thought likely to act, to some extent, to temper the growth of securities class action claims) is that, where a party is unsuccessful in bringing a claim, it will generally be required to pay the defendants’ reasonable legal costs of doing so. This may extend to any third-party funders who assist in financing an unsuccessful claim. While in practice the costs awarded will not represent the full costs a party has incurred in the litigation, these sums are still usually significant and act as a strong deterrent to bringing weak or speculative claims. A recent increase in the size of court fees for large claims may also help to deter unmeritorious claims.
One unusual feature of the jurisdiction, however, is that there is a formal regime in place30 whereby either party to the litigation can make an offer to settle, which, if the other side refuses to accept but then fails to beat at trial, can reverse the usual rule as to liability for costs.
The FCA has a range of powers to investigate and sanction authorised firms, approved individuals or listed issuers who it suspects have breached FSMA or the FCA’s rules. It also has the power to impose administrative sanctions on any person in respect of breach of requirements under MAR.31 For the most part, the regulator will have the power to impose sanctions directly where it concludes that a breach has occurred. In those cases, it will issue a decision notice, notifying the firm or individual of its findings and imposing what it considers to be the appropriate penalty. That decision notice will usually be published. It will then be for the recipient of the decision notice to decide whether it wishes to refer the FCA’s decision to a specialist court known as the Upper Tribunal, which will hear the matter afresh, and determine the appropriate action to be taken by the decision-maker (this could include an increase in penalty). The matter is then remitted back to the FCA.
The FCA also has the power to investigate and prosecute certain criminal market misconduct offences, including insider dealing,32 making a false or misleading statement intended to induce someone to invest in securities,33 creating a false or misleading impression in relation to relevant markets or securities34 or in respect of benchmarks.35 The FCA shares the power to prosecute those offences with other prosecutors including the Secretary of State for Business, Innovation & Skills, the Director of the SFO and the Crown Prosecution Service.36
Where the FCA decides to commence an enforcement investigation, its first step will be to appoint investigators, who will usually be FCA staff.37 A notice of that appointment and the reasons for it will usually be given to the individual or firm that is the subject of that investigation. There will then follow scoping discussions to determine the likely structure and timescale of the investigation.
FSMA grants the FCA a range of powers to compel the production of documents and information relevant to its investigation.38 It will typically exercise these powers following scoping discussions with the subject of the investigation to gather the information it considers it will need to progress the investigation. However, the FCA may not compel the production of privileged documents.39
In criminal market misconduct investigations, the FCA may, as an alternative to compelling document production, obtain a search warrant from the court to enter and search premises (with a police officer) for the purposes of obtaining relevant documents.40
Typically, the FCA will follow the process of gathering relevant documents with an interview stage, and may use powers granted to it under FSMA to compel relevant persons to attend interviews. In the context of criminal market conduct investigations it may, however, choose to conduct voluntary interviews under caution, so that what is said in the interview will be admissible as evidence in a criminal court.41
Once it has concluded that it has sufficient grounds to make a finding against the firm or person being investigated, the FCA will, in administrative cases, issue a warning notice, setting out the contraventions it considers have occurred and the proposed penalty, and has the power to publish that notice.42 The recipient of the warning notice will have an opportunity to make representations on its contents before the regulator finalises its decision in a decision notice.43 The findings set out in the decision notice can be challenged by referring the matter to the Upper Tribunal for a fresh hearing,44 or seeking judicial review by the courts of some flawed aspect of the FCA’s process on narrow, public law grounds.45
The overwhelming majority of FCA administrative actions against authorised firms and listed issuers are settled at an early stage, typically incentivised to do so by a combination of factors, including reputational concerns, management time and distraction and the availability of a discount of up to 30 per cent to the financial penalty.46 Individuals facing potential loss of their livelihood may well be less incentivised by such factors.
In criminal proceedings, a guilty plea will be a mitigating factor in the court’s assessment of an appropriate sentence for a criminal conviction (often meriting up to a 30 per cent reduction in sentence) and a prosecutor retains discretion about the selection of charges that may be brought. The prosecutor may even go so far as to present a recommended sentence to the court. While a prosecutor can decide which charge to press, it is ultimately for the court to decide what sentence is appropriate in all the circumstances. The courts have in the past expressed displeasure with a prosecutor presenting a recommended sentence as a ‘done deal’.47
The Director of Public Prosecutions and the SFO now have the power to offer deferred prosecution agreements (DPAs) in relation to certain offences and when dealing with corporate defendants.48 For a DPA to come into effect, the court must determine that the DPA is in the interests of justice and its terms are fair, reasonable and proportionate. The use of DPAs in the UK is not yet widespread.49
The FCA has articulated a five-step penalty setting process.50 The FCA will usually consider disgorgement of any benefit received as a result of the breach and an additional financial penalty reflecting the seriousness of the breach. An adjustment (upwards or downwards) may also be made to reflect any aggravating and mitigating factors as well as to ensure that the penalty has an appropriate deterrent effect.51
Following the implementation of MAR, the FCA also has the power to prohibit an individual from holding an office or position involving responsibility for taking decisions about the management of an investment firm, and from acquiring or disposing of financial instruments, whether on his or her own account or for a third party.52
In addition to its formal disciplinary powers, the FCA also has the ability to impose other sanctions, including banning an individual, suspending an issuer’s securities from trading, varying or withdrawing a firm’s permission or an individual’s licensed status, and requiring redress or restitution to be paid where consumers have suffered loss as a result of a breach. In addition, the FCA may now require issuers to publish information and other corrective statements.53
The FCA can also pass evidence to the Department for Business, Innovation & Skills with a view to enabling director disqualification orders to be sought, or director disqualification undertakings to be accepted, in respect of any individuals involved in certain breaches. The UK is currently consulting on whether regulators should have power to remove the board members of authorised firms.54
The general rule is that the defendant should be sued in his or her place of domicile. Accordingly, a claim against an English domiciled issuer (to which Section 90, Section 90A or one of the tortious claims described above may apply) is likely to be capable of being brought before the English courts (subject to the existence of a contradictory exclusive jurisdiction clause in the applicable documentation that is of binding effect). However there are a number of important exceptions to this rule whereby, even if the defendant is not domiciled in England and Wales, a claim may nevertheless be brought in the English courts (and that issuers in England and Wales could face claims in the courts of other jurisdictions). The most relevant alternative jurisdiction for a tortious claim is the place where the harmful act occurred, which, pursuant to Article 7(2) of the recast Brussels Regulation, means either: (1) where the damage occurred; or (2) where the events giving rise to the damage occurred. While not free from doubt, the location of (2) is likely to be where the document in question was drafted and distributed. However, for (1), the position is subject to greater uncertainty. The decision of the European Court of Justice (ECJ) in Kolassa55 suggested that in a prospectus claim the alleged damage occurred in the place of the investor’s bank account from which the investment was made. This was a controversial decision given the potential consequence that jurisdiction of prospectus claims may be both unpredictable and have no real link to the matters in dispute. Happily, the position has more recently been clarified by the ECJ in Universal Music,56 which adopted a more narrow approach to the question of where the damage occurred, emphasising that, when the damage is purely financial, the connection will need to be greater than simply the jurisdiction from where the purchase monies were paid. In a securities litigation context, for example, the place where the prospectus was issued or where the securities are sold into is more likely to be the test following Universal Music.
The FCA’s general conduct and supervisory jurisdiction under FSMA extends to all firms undertaking specified regulated activities in the UK. This will be the case whether they do so in accordance with regulatory permissions obtained in the UK, or in accordance with a ‘passporting’ arrangement under one of the EU single market directives or the Treaty of Rome,57 which enable firms regulated in other EU jurisdictions to carry out regulated activities in the UK where they meet certain criteria.
The FCA’s jurisdiction is generally confined to conduct that occurs in the UK, although certain rules have wider territorial scope (most notably the requirement to disclose issues to the regulator). The nature of international securities transactions also means that there may often be a practical difficulty in determining whether it can be said that aspects of the transaction have taken place within the UK. The FCA is also empowered to conduct investigations in support of overseas regulators.58
a admitted to trading on a regulated market or for which a request for admission to trading on such a market has been made;
b which are traded on a multilateral trading facility (MTF), admitted to trading on an MTF or for which a request for admission to trading has been made on an MTF; and
c in respect of financial instruments whose price or value depends on or has an effect on the price or value of a financial instrument referred to at (a) and (b), including, but not limited to, credit default swaps and contracts for difference.59
It is expected that actions carried out within the UK would encompass actions carried out in the jurisdiction in respect of any EEA regulated market that is accessible electronically in the UK. It is not unusual for several EEA regulators to have concurrent jurisdiction in respect of the same conduct.
There are, however, a number of specific statutory exceptions that explicitly extend the territorial scope of certain offences beyond England and Wales. In the context of criminal conduct in relation to securities, the criminal insider dealing and market manipulation offences are the most obvious examples. In an extension of the more recent approach at common law described above, these offences capture both conduct that occurs within or from England and Wales and conduct that occurs abroad where the likely effect is in England and Wales.60
The number of actual and prospective cases in which shareholders are seeking redress in the English courts, under the common law or FSMA, continues to grow steadily and a handful of cases have led to judgments on specific points of interest in relatively untested areas of law.
One of the first Section 90 claims, the RBS Rights Issue litigation, is due to reach trial in mid-2017. The claim was originally brought by various groups of retail and institutional investors against Royal Bank of Scotland and its former directors alleging that the bank misled investors by misrepresenting the financial position of the bank and omitting necessary information in its 2008 rights issue prospectus. However, a number of those groups of claimants have settled with RBS, leaving (at the time of writing) a single group of retail shareholders remaining. It is anticipated that, if it proceeds to judgment, the RBS Rights Issue litigation will lead to important developments in the law in this area, including clarification on a number of the issues identified in this chapter.
A different group of investors have filed a common law claim against Lloyds Banking Group and the former directors of Lloyds TSB for losses they claim to have suffered as a result of their approval of the acquisition of HBOS and participation in the UK government’s recapitalisation scheme in 2008. The investors argue that they were misled into approving the acquisition on the basis that certain information relating to the true financial health of the target bank was omitted from the shareholder circular. They also claim that the directors negligently recommended that shareholders vote in favour of the acquisition on the basis that it was in their best interests. The Lloyds/HBOS litigation is also due to go to trial this year, commencing in October 2017.
No claims have yet reached trial under Section 90A FSMA. However, proceedings have been issued by investors in Tesco plc in relation to its announcement on 22 September 2014 that it had overstated its profit for the half-year in 2014/2015 in an announcement the previous month. It is striking, given the difficulties that we identify above in relation to the means by which a group of claimants can establish reliance under Section 90A, that the Tesco pleadings provide no indication as to how the claimants propose to establish reliance on the allegedly misleading statements in question.
The claimants in the Tesco case have pleaded a number of different loss methodologies to seek to address the difficult issues that arise in identifying the appropriate measure of loss, namely:
a the difference between the price paid and the price they were later sold or value at the relevant date (if not sold);
b the difference between the price paid and their value as at the date the market was apprised of the true position;
c the difference between the price paid and their true value at the date of purchase; or
d the difference between the price paid and the price that would have been paid if the true facts had been known or the misleading statements or omissions had not been made.
Interestingly, in March 2017, Tesco published a compensation scheme, agreed with the FCA, for net purchasers of Tesco shares and certain listed bonds in the period during which it is said that the market was misled by Tesco’s half-year profits. Participation in the compensation scheme would require investors to release Tesco from any claims (including those pursuant to Section 90A) in relation to the alleged overstatement that is the subject of the ongoing securities litigation claim, so will inevitably have an impact on the litigation. The amount of compensation per share or bond was calculated by the FCA by reference to the difference between the price at market close on 19 September 2014 (prior to the corrective statement) and the price at market close on 22 September 2014 (after the corrective statement), adjusted (without any explanation as to how having been made public) to reflect any industry-wide effects on the share price of Tesco (in an attempt to avoid over- or under-compensating investors). However, it is noteworthy that the published methodology does not articulate whether that adjustment seeks to remove the Tesco-specific impact of any market-wide events that day (i.e., the extent to which such events may have impacted the price of Tesco securities more than other issuers) or the impact on Tesco’s share price of any Tesco-specific news or events on 22 September 2014 (both of which it would be expected that a court would seek to adjust for). It is worth noting that the single issue defect, and corrective statement on a single day, may make the necessary quantum calculation more straightforward in Tesco then in other cases.
In addition, there are a number of claimant firms that have widely advertised to investors to bring proceedings in relation to Volkswagen, Quindell (Watchstone) and BT for widely reported alleged corporate failures. One can see the influence of third-party litigation funders, such as Bentham Europe, seeking to identify potential claimants; for example, in relation to BT.
As described above, in March 2017, the FCA for the first time used its powers under Section 384 FSMA to require a listed company to pay compensation for market abuse.61 The listed company, and the subsidiary that had provided it with accounting information, accepted that they had committed market abuse in relation to a trading update that gave a false or misleading impression about the value of publicly traded Tesco shares and bonds. They agreed to pay compensation to investors who purchased shares and bonds on or after the trading update and who still held those securities when the statement was corrected. Each purchaser of shares and listed bonds who makes a claim under the proposed scheme will receive an amount equal to the inflated amount for each share or bond, as established with the assistance of an independent expert engaged by the FCA. The scheme will be administered by an independently appointed administrator. No fine was imposed: the FCA considered the outcome to be in the public interest as the companies had accepted responsibility for market abuse and agreed to remediate the consequences in an appropriate manner that tackled the loss caused by the market abuse, thus avoiding the costs and burden on investors of litigation.62
2016 saw the conclusion of the FCA’s largest and most complex insider dealing investigation, conducted in partnership with the National Crime Agency. Investigators, forensic accountants, lawyers, markets experts, intelligence analysts and digital forensic specialists were involved in the analysis of trading, financial and communications data, documentary evidence from the investment banks and material seized during searches under warrant. Surveillance was also deployed, given the use of unregistered mobile phones, encoded and encrypted records, and transfers of benefit using cash and payments in kind. The case centred on an insider-dealing ring of various individuals employed by financial services firms, three of whom pleaded guilty before trial. The trial of the remaining five ran for four months, resulting in three acquittals and two further convictions. Sentences of four and a half years and three and a half years were imposed, and confiscation proceedings were to follow. Although this might be perceived as a qualified success, the case demonstrates the FCA’s willingness to devote significant time, resources and costs to ensure that ‘persistent, prolonged, deliberate, dishonest behaviour’ is brought to book.
The FCA also pursued a number of smaller criminal prosecutions, securing a guilty plea from Mark Lyttleton, a former equity portfolio manager employed by an asset manager, on two counts of insider dealing. He had received inside information either by working on deals concerning the stocks or being party to conversations conducted by colleagues, and had instructed the asset manager of a Panamanian registered company, established with beneficial ownership in his wife’s maiden name, to trade on the basis of that information. He was sentenced to 12 months’ imprisonment on two counts of insider dealing (representing a 30 per cent reduction in respect of the plea), and was ordered to pay the FCA’s costs and a confiscation order.
Damian Clarke, a former equities trader employed by another asset manager, was sentenced to two years’ imprisonment having pleaded guilty to nine insider-dealing offences committed while employed initially as an assistant fund manager and, from 2006, as an equities trader. In those roles, he received inside information about significant corporate events, mainly anticipated public announcements of mergers and acquisitions. He used this information to place trades using accounts in his own name and that of close family members, in respect of which he had been provided with the account numbers and passwords. The offences were committed over a nine-year period.
Manjeet Mohal, a former employee of Logica plc, was sentenced to 10 months’ imprisonment suspended for two years in respect of two counts of improper disclosure of inside information (insider dealing), having entered a guilty plea on the third day of the trial, alongside his neighbour, who was sentenced to 16 months’ imprisonment suspended for two years in respect of one count of insider dealing. Both were also ordered to undertake community work. The FCA commented that Mr Mohal had abused his position as a trusted employee.
In civil cases, the FCA also maintained a focus on the conduct of market professionals, taking action against a resident of Jersey, Mr Breeze, who attempted to sell his entire 8 per cent shareholding in MoPowered plc while in possession of inside information. Had he succeeded in doing so, he could have avoided a loss of up to £242,000. He also passed the inside information onto another shareholder. In addition to the fine and censure, the FCA ordered Mr Breeze to pay restitution amounting to £1,850 plus interest of £259 to those individuals who suffered financial losses through having bought at a higher price than they would have done had the information known to Mr Breeze been public.
The FCA fined Niall O’Kelly and Lukhvir Thind for having disseminated information that gave a false or misleading impression to the market. In respect of the flotation of the group holding company on AIM, Mr O’Kelly had been involved in drafting and approving documentation that contained materially misleading information, and omitted key information that investors would have needed to make an informed decision about the company. He had also helped to manage an undisclosed ‘internal hedging’ strategy using fake client trading accounts and the unauthorised use of client trading accounts, which had the effect of artificially inflating assets on the holding company’s balance sheet. Finally, in annual accounts for 2010 and 2011, both men knowingly falsified critical financial information concerning the client liabilities and cash position of a subsidiary, which was passed to the company’s auditors, and effectively resulted in the concealment of material shortfalls in the subsidiary’s client money. By 31 March 2011, those misstatements amounted to £15.9 million. The subsidiary was unable to meet its client money liabilities and this ultimately led to its collapse in 2012. The FCA had considered pursuing criminal charges, but decided, in light of the available evidence, to pursue the case under the civil market abuse regime. Both agreed to early settlement and qualified for a 30 per cent discount on penalty, and Mr O’Kelly also provided evidence of serious financial hardship. Both were permanently banned from performing any function related to a regulated activity.
The outlook for private securities actions will be dominated by the progress in the cases referred to in Section V, above, and practitioners will be keenly observing any significant developments in those cases, particularly in relation to the untested points described in Section II, above. We expect to continue seeing growth in the activities of boutique claimant firms in seeking out potential claimants to build groups when issuers make corrections to previous announcements, or in other instances of large-scale corporate failings. The additional technology and experience from other jurisdictions, including through the involvement of litigation funders, is only likely to increase the risk of issuer-based liability claims in the future. The outcome of all of these cases (to the extent they are not settled) will largely determine whether we see a wave of substantial stand-alone securities claims in that area.
In terms of public enforcement, the FCA is committed to strong enforcement action and the pursuit of criminal prosecutions in market abuse cases. Mark Steward, the FCA’s director of enforcement and market oversight, stressed the regulator’s determination ‘to do whatever is required to curb insider dealing and other market abuse to protect both the investing public and market integrity and [to] continue to prosecute cases and hold wrongdoers accountable where there is sufficient cause’. There has been an increase in the number of market inquiries and investigations since the completion of the LIBOR and FX cases, and of the Operation Tabernula trial. The FCA stated that as at 23 August 2016, there were 54 open individual criminal investigations for insider dealing.63
The FCA remains focused on individual accountability, as the Senior Managers Regime is set to be extended beyond deposit-taking banks and investment firms regulated by the Prudential Regulation Authority in the United Kingdom to all regulated financial services firms from 2018. The increased requirements for relevant firms to map the allocation of responsibilities across their individual senior managers have the potential to provide a catalyst for an increase in enforcement action against senior individuals where weaknesses in systems and controls enable, or fail to detect, market abuse. In 2016, the Upper Tribunal upheld the FCA’s decision to ban an investment and fund manager following a finding that he had failed to act with due skill, care and diligence in failing to escalate the risk that his client might have been intending to engage in market manipulation. The Tribunal characterised the failure to spot the warning signs of market abuse as ‘basic, fundamental and serious’.64 However, as at 26 August 2016 the FCA had not opened any investigations into individuals who are designated as Senior Managers or Certified Persons under the Senior Managers Regime.65
In reporting on its Market Maker Review into market abuse systems and controls at a sample of registered market makers in small and mid-cap equities, the FCA also scrutinised awareness of market abuse risks, information barriers, wall-crossing procedures and insider lists, and market abuse monitoring and surveillance. Significantly, the report noted that levels of awareness of market abuse risk at senior management level were inconsistent and generally below regulatory expectations, and that situating senior managers (often classed as ‘permanent insiders’) in close proximity to the market-making desk, with access to market makers’ trading book positions, may give rise to potential conflicts of interest. The FCA is considering proactive (firm-specific) deep dives and broader thematic studies of groups of firms or sectors.
Firms continue to assimilate significant regulatory change following the advent of MAR. The increased procedural and record-keeping requirements of MAR are designed to make enforcement action easier for the regulators. These records, together with transaction reports under MiFID and EMIR,66 make significant additional data available and this will be even more the case once pre- and post-trade transparency requirements come into application under MiFID II. The FCA’s report of its thematic review into dark pools notes that the market is well aware of the potential significance of the structural changes proposed and the need for system upgrades to meet evolving reporting obligations. Like other regulators, the FCA is developing new tools, to bring together trading and other data, including a surveillance tool for detecting anomalous LIBOR submissions. There is also the potential for ESMA to take on a coordination role in investigations.
Regulated firms can expect ongoing regulatory scrutiny of compliance with suspicious transaction and order reporting (including record-keeping of ‘near misses’ where reports are not made), of market-sounding records, and of the adequacy and effectiveness of their surveillance systems. Issuers are likely to find the regulator examining their notifications of delays in the announcement of inside information after its release, and the insider lists that they, and persons working for them, must maintain. Breaches of any of these requirements may themselves lead to enforcement action, as in the W H Ireland case.67 The delayed release of inside information potentially also creates additional litigation exposure.
The Treasury Select Committee has asked the FCA to look into recent press reports68 suggesting that Office for National Statistics statistics may be being leaked prior to their official release, and that this information is being used for inappropriate gain in financial markets. Former Bank of England Deputy Governor for Monetary Policy Professor Sir Charles Bean’s March 2016 independent review of UK economic statistics had been critical of pre-release access to economic statistics, warning that ‘[m]any economic statistics are highly market-sensitive and advance knowledge of them can be exploited for private gain.’
Finally, greater uncertainty regarding all aspects of securities law governed by EU legislation has, of course, been created by the prospect of a UK exit from the EU. While the terms of that exit remain to be negotiated, legislation will be required to recreate a domestic market abuse regime (that MAR replaced), under which the FCA might recover more freedom to provide guidance to market participants.
5 When MAR came into force in July 2016, the bulk of the FCA’s guidance in the Market Conduct Sourcebook and the Disclosure Rules was deleted and replaced by European technical standards, and guidance from the European Securities and Markets Authority (ESMA). Some FCA guidance deemed compatible with MAR has been retained. If additional clarification is required going forward, this will mainly be provided by ESMA, although the FCA retains powers to provide clarification on MAR where necessary.
12 There is a potential question over whether or not the Schedule 10 defences are available to the issuer in addition to natural persons. However, the better view is that they are not restricted to natural persons.
13 For example, see the discussion of ‘fraud on the market’ theory in the US chapter of this book.
14 Misrepresentation Act 1967, Section 2(1).
15 [2015] EWHC 871 (Comm).
16 Taberna Europe CDO II plc v. Selskabet AF1 [2016] EWCA Civ 1262.
17 Caparo Industries plc v. Dickman [1990] 2 AC 605.
18 Re Smith of Smithfields (2003) BCC 769. See also Rule 23.1 of the Takeover Code.
19 Derry v. Peek [1889] UKHL 1.
20 FSMA, Sections 26, 27 and 30.
21 Defined in the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2000, Regulation 3 and broadly any individual who is not carrying out a regulated activity, and some corporate entities that are not acting in the course of business, when suffering the loss. See Titan Steel Wheels v. RBS [2010] EWHC 211 (Comm) for the courts’ restrictive approach to the meaning of ‘private persons’ for the purposes of standing to bring a claim under what is now Section 138D FSMA.
22 Obligations placed on authorised persons by FSMA or the FCA Rules will be eligible provisions for this purpose unless there is a further provision stating that a breach does not give rise to a claim of this type.
23 Hall v. Cable & Wireless Plc [2009] EWHC 1793 (Comm).
24 See Case C-403/98 Azienda Agricola Monte Arcosu v. Regione Autonoma della Sardegna [2001] ECR I-103 in which the Court considered the provisions of a regulation not to be sufficiently precise, and left Member States a residual discretion, and therefore concluded that the provisions could not be directly relied upon.
25 See the Opinion of Advocate General Geelhoed delivered on 13 December 2001 in Case C-254/00 Muñoz v. Frumar Ltd [2002] ECR I-7289, and also R (on the application of United Road Transport Union) v. Secretary of State for Transport [2013] EWCA Civ 962, in which the Court of Appeal held that the availability of civil proceedings in private law to uphold rights against a competitor did not mean that, in other contexts, and under different regulatory schemes, enforcement may not properly be limited to other means outside the private law. Significantly in that case, the complainant would not himself have suffered any recoverable financial loss, and in the event of unjustifiable inaction on the part of the relevant agency, could have sought judicial review.
26 Following the judgment of the European Court of Justice in Markus Geltl v. Daimler AG [C-19/11], the litigation brought by Mr Geltl and others against Daimler in the Stuttgart Regional Higher Court in respect of loss suffered as a result of delay in announcing inside information about the CEO’s early retirement was resolved through an out-of-court settlement..
27 See, e.g., FCA Final Notice of 28 March 2017 in respect of Tesco plc and Tesco Stores Limited (Tesco).
28 Civil Procedure Rules, Rule 1.1.
29 If a defendant fails to defend a claim within the applicable time limit following valid service, the claimant will be able to apply to court for a default judgment, allowing it to begin the enforcement process.
30 Civil Procedure Rules, Part 36.
31 The FCA also has power, on an application to the court for an injunction or restitution, to ask the court to impose a penalty in cases of market abuse under Section 129 FSMA – see FCA v. Alexander, FSA/PN/053/2011; FCA v. Da Vinci & Ors [2015] EWHC 2401 (Ch).
32 Criminal Justice Act 1993, Part V.
33 Financial Services Act 2012, Section 89.
34 Financial Services Act 2012, Section 90.
35 Financial Services Act 2012, Section 91.
36 The FCA and the Crown Office have agreed arrangements for the prosecution of offences in Scotland arising out of FCA investigations.
37 In addition, Section 166 FSMA gives the FCA the power to appoint a skilled person to produce a report, on which enforcement action is commonly based.
38 Sections 122A–122F in respect of breaches of MAR, and Sections 170–176A FSMA generally.
39 Defined as ‘protected items’ as described in Section 413 FSMA.
40 Section 122D (for market abuse) and Section 176 FSMA.
41 Section 174 FSMA.
42 Section 67(1)–(3) FSMA.
43 Section 67(4)–(6) FSMA.
44 Section 67(7) FSMA.
45 But see the Court of Appeal decision in R (Wilford) v. Financial Services Authority [2013] EWCA Civ 677.
46 It is now also possible to enter into a focused resolution agreement and in this way partly contest a proposed action (see DEPP 5.1.8AG to DEPP 5.1.8DG). A discount is also available in respect of partly contested cases – DEPP 6.7.3A.
47 See, for example, R v. Innospec Ltd [2010] EW Misc 7 (EWCC) (18 March 2010).
48 Crime and Courts Act 2013, Section 45 and Schedule 17. Although other prosecutors can be designated, this has not as yet occurred.
49 The SFO’s first application for a DPA was granted judicial approval on 30 November 2015 in the case of SFO v. ICBC Standard Bank plc, a case involving offences under the Bribery Act 2010, not securities litigation.
50 Decision Procedure and Penalties manual (DEPP) 5.6, DEPP 5.6A-C. The FCA is to consult on revising its penalty process in 2017/18.
51 DEPP 6.5.
52 Section 123A FSMA.
53 Sections 122G and 122F FSMA.
54 HM Treasury consultation on Transposition of the Markets in Financial Instruments Directive II, March 2015.
55 Kolassa v. Barclays Bank plc (Case C-375/13).
56 Universal Music International Holding BV v. Schilling (CC-12/15).
57 Otherwise known as the Treaty on the Functioning of the European Union.
58 Section 169 FSMA.
59 Conduct relating to financial instruments traded on organised trading facilities will also fall within the FCA’s adminstrative market abuse jurisdiction from the date that the recast Markets in Financial Instruments Directive (2014/65/EU, commonly referred to as MiFID II) comes into application on 3 January 2018.
60 The UK has opted out of the Criminal Sanctions (Market Abuse) Directive 2014/57/EU, Article 10 of which requires Member States to establish jurisdiction (at least) in respect of criminal market abuse offences committed in whole or in part in their territory, or by one of their nationals where the act is an offence where it is committed.
61 See footnote 25, supra.
62 The subsidiary, Tesco Stores Limited, also entered into a DPA with the SFO relating to false accounting, pursuant to which it would pay a fine of £128,992,500. The FCA’s decision not to impose any additional sanction for market abuse was made in the light of the conduct of Tesco plc and Tesco Stores Limited in accepting responsibility for market abuse, in agreeing to the compensation order under Section 384 and, in the case of Tesco Stores Limited, for accepting responsibility for false accounting. The DPA concerns only the potential criminal liability of Tesco Stores Limited and does not address whether liability of any sort attaches to Tesco plc or any employee or agent of Tesco plc or Tesco Stores Limited.
63 FCA response to Freedom of Information request FOI4649 dated 23 August 2016 (each subject is treated as a separate investigation for these purposes).
64 Tariq Carrimjee v. the Financial Conduct Authority [2016] UKUT 0447 (TCC).
65 FCA response to Freedom of Information request FOI4689 dated 15 September 2016.
66 The Markets in Financial Instruments Directive (2004/39/EC) and the European Market Infrastructure Regulation (648/2012/EU).
67 FCA/PN/13/2016, 23 February 2016.
68 The Wall Street Journal published an analysis on 13 March 2017 that found that UK government-bond futures often move sharply in the 24 hours prior to the release of sensitive economic data such as GDP and unemployment rates.