Clifford Chance

The recent Commercial Court decision in Burford v LSE has highlighted the difficulties faced by listed companies who wish to bring civil claims for manipulation of their own shares.

Short-selling attack and Burford's application for disclosure

Burford is a litigation funder, which, in August 2019, was subject to a short-selling attack by Muddy Waters, a US investment company. Muddy Waters built a short position before publishing a report alleging that Burford was "arguably insolvent" and "a perfect storm for an accounting fiasco". As Burford's share price fell, Muddy Waters exited its position and is likely to have made a substantial profit.

Burford considered that its share price had fallen, in part, because of unlawful spoofing by unknown market participants. In other words, Burford considered that market participants had placed and cancelled offers to sell its shares, without an intention to trade, in order to push the share price down.

Both the Financial Conduct Authority and London Stock Exchange investigated and did not find evidence of market abuse, but Burford sought disclosure of trading data from the LSE through a "Norwich Pharmacal" order which would allow it to identify those who had traded in its shares.

Mr Justice Baker dismissed Burford's claim ([2020] EWHC 1183 (Comm)).

Does a company have a cause of action against a person engaged in market abuse?

In considering Burford's claim against the LSE, the Court considered what civil claims Burford might have if it could identify manipulation. Burford argued that it might have the following civil claims:

1) A tort claim arising directly from an alleged breach of Article 15 of the Market Abuse Regulation similar to that recognised by the Court of Justice of the European Union in Muñoz v Frumar (Case C-253/00).

2) A claim for breach of statutory duty for creating a false or misleading impression in the market.

3) A common law deceit claim founded upon the making of false representations to the market by spoofing.

4) A conspiracy claim asserting that more than one party combined to use unlawful manipulation to cause harm to Burford.

As to the tort claim arising from breach of Article 15, there had been some speculation that the introduction of MAR in July 2016 had created a direct civil cause of action for market abuse, on the basis of an argument that the rights conferred on market participants by MAR could not take full effect without a civil cause of action for breach, following the reasoning in Muñoz v Frumar. Such a cause of action had been unavailable when market abuse was prohibited in domestic legislation, following the decision in Hall v Cable and Wireless PLC [2009] EWHC 1793. See our client briefing here.

But the Court rejected this argument, finding that such a right of action was not necessary in light of the existing remedies under MAR and the role of the national regulators (here the FCA).

As to the other causes of action, a key difficulty identified by the Court was that, such claims, if they arose at all, would belong to shareholders who had suffered loss, not to the company itself.

Burford made various arguments that it too had suffered loss, including that the share price decline had reduced the ability of the company to access the equity markets; had increased Burford’s cost of debt given the trading performance of its bonds since the short attack; had necessitated Burford providing further compensation to employee shareholders who were unhappy with the falling share price; and had caused Burford to incur significant legal and management time costs.

The court questioned whether any of these losses, if they had occurred, were real consequences of the alleged manipulation as opposed to Muddy Waters short-selling generally and found, in any event, that they were not the consequence of an intent to injure Burford (as opposed to its shareholders), which would have been necessary for the conspiracy Burford alleged.

The Court accepted that Burford might have a claim against Muddy Waters for malicious falsehood in respect of the content of its published report. But such a claim did not arise from the alleged spoofing and it was not necessary for Buford to obtain a Norwich Pharmacal order to bring that claim. As the judge put it, Burford could just "get on and sue".

Burford also argued that it could bring a private prosecution under the Fraud Act 2006. On this the Court found that, since the FCA has the exclusive statutory function under FSMA and MAR of investigating and deciding whether to prosecute market abuse and there is no right of private prosecution under FSMA, claimants could not seek to use the Fraud Act to bypass this restriction.

More broadly the Court also commented on the harm that might be caused to the confidence in the LSE and the FCA were the Court to look behind their conclusion that there had been no market abuse.

Conclusion

Short-selling is, of course, not unlawful, but market abuse by short-sellers can result in regulatory and criminal liability. This liability is most likely to arise through short-sellers knowingly publishing false or misleading information.

The judgment highlights the challenges that issuers face in making out civil claims for market abuse in the context of short-selling, despite the significant harm that companies may suffer.

The judgment suggests that if issuers are to bring civil claims in future, they will need to focus on the content of material published by short-sellers.

It is unclear why Burford did not seek to pursue Muddy Waters in respect of the contents of its report and chose instead to focus only on alleged spoofing of its shares. It may be, however, that Burford was concerned to avoid court or regulatory proceedings focused on whether the allegations in the report were true, which might have been thought to play into the hands of short sellers. Other issuers may well feel the same in future when considering civil claims.