Burford Capital, one of the largest litigation funders, has been in the press regularly since the publication of a series of tweets and opinion pieces by Muddy Waters (the US investment firm) which also short-sold Burford shares. These events triggered a period of weakness in Burford’s share price. Burford contended that its share price fell not only as a result of the legitimate short-selling activity, but also that Muddy Waters was implicated in an alleged conspiracy to manipulate the market unlawfully, through “spoofing” or “layering” activity.

A recent judgment in the context of Burford’s high profile campaign to identify the culprits of such trading activity has addressed some novel questions regarding the direct actionability of the Market Abuse Regulation (MAR) by the issuer: Burford v London Stock Exchange [2020] EWHC 1183 (Comm). In doing so, the court has emphasised the role of regulators, rather than private parties, in enforcing the rules around market abuse. The judgment also contains some other snippets of interest for those who follow developments in securities litigation in the UK.

Basis of Burford’s application

To identify those involved in the alleged unlawful market manipulation (and to help support litigation and/or a complaint to the regulators against them), Burford brought an application for Norwich Pharmacal relief against the London Stock Exchange (LSE). The terms of the application sought disclosure of the identity of all parties trading in its shares in the relevant period, with a view to bringing claims against market manipulators for breach of MAR.

In determining whether to grant Norwich Pharmacal relief, the court had to carefully weigh a number of factors, including:

  • the strength of Burford’s case against the market manipulators;
  • the extent to which the order sought would cut across, or would not be required because of, a regulatory regime for investigating and taking action in relation to suspected market manipulation; and
  • the possible impact on the UK as an equity trading venue of the court intervening under the Norwich Pharmacal jurisdiction.

The application was resoundingly dismissed on the basis that Burford was unable to provide any sound evidence to support the suggestion that there had been any inappropriate trading activity. Evidence produced by its expert, which was based on anonymised trading data which was publically available, was comprehensively rejected. The court was entirely persuaded by the evidence from the LSE to the effect that the regulators had analysed the non-public data and found that there was nothing to suggest that the trading activity illustrated any spoofing or layering techniques.

Euro-tort claim

Notwithstanding that the court dismissed the application at the first stage of the analysis, the court went on to analyse whether Burford could have a claim in tort against the alleged market manipulators.

In particular, it considered whether the type of market manipulation alleged by Burford, and prohibited by MAR, would be actionable by Burford as a euro-tort, in the manner recognised in Muñoz (Case C-253/00), concluding that it would not be.

In reaching its conclusion, the court considered Hall v Cable and Wireless plc [2009] EWHC 1793 (Comm). In that case, Teare J held that no personal right of action in tort arose for breach of statutory duty under the sections of the Financial Services and Markets Act 2000 (FSMA) that implemented the provisions of the Market Abuse Directive. As the Market Abuse Directive was enacted through FSMA, Teare J applied English law in reaching his conclusion, rather than Muñoz.

The FSMA provisions which were considered by Teare J in Hall were replaced by the directly applicable provisions of MAR which were relied upon by Burford. The court did not however consider there to be “any material difference” between the legislative language in FSMA which implemented the Directive and MAR, nor any real reason to think that Muñoz would give a different answer to that given by English law.

The collateral damage arising from making trading data available

There was an interesting discussion in the judgment regarding the collateral damage which might arise if the LSE was required to provide Burford with the trading data which it sought.

The LSE relied upon evidence to the effect that the provision of this information would:

  1. be unprecedented in the context of a UK and European exchange;
  2. result in one market participant having access to information on UK trading data contrary to the principles and protections provided in the legal and regulatory regime; and
  3. serve as a disruption to the UK financial markets and have a detrimental impact on trading securities in the UK, rendering UK markets less favourable when compared to other European and developed country markets who maintain their participants’ confidentiality according to the legal and regulatory regime.

The court found that, in principle, such concerns would not prohibit the court from making an order such as that sought by Burford. The court considered that the concerns expressed by the LSE were only realistic where the markets considered the court to be “trigger-happy to intervene”, whereas, if the court were seen to be willing in principle to intervene, but only where it was “tolerably clear that a powerful claim of wrongdoing had slipped through the regulatory cracks”, then intervention by the court might in fact provide added reassurance about the robustness of UK markets as attractive venues for lawful activity.

Promoters of securities litigation

The judgment also highlights the level of activity of certain participants, which we commonly see seeking to identify, and raise complaints about, potential misconduct in public capital markets.

The court made reference to a letter sent by the UK Shareholders’ Association and Sharesoc to Burford which it had sent in support of Burford’s concerns that the share price had been impacted by inappropriate trading activity. These organisations, formed of individual shareholders, are often vocal in their campaigns about listed shares (especially those on the junior market, AIM) held by their members which have lost value as a result of some allegedly wrongful activities and have been known to agitate for claims to be brought.

The letter asserted that there is “a widespread belief among investors that there is little appetite by regulators to investigate allegations of wrongdoing on the AIM market”. However, the court dismissed this argument and criticised the letter in strident terms, stating that:

The UKSA/ShareSoc letter was transparently partisan and built up to an unwelcome in terrorem conclusion that, unless Burford’s claim succeeded, “the perception of private investors is likely to be that the preference of the authorities is to ignore, rather than investigate, market manipulation”. The thought that the court could and should be trusted to assess the case for itself, independently and impartially, appears not to have occurred to the authors”.

Harry Edwards
Harry Edwards
+61 448 072 588
Sarah Penfold
Sarah Penfold
+44 20 7466 2619