Court keen not to second-guess FCA and LSE in market manipulation dispute
24 June 2020
The High Court recently rejected an application by Burford Capital Limited, an AIM-listed litigation funder, for Norwich Pharmacal relief. Burford sought to compel London Stock Exchange Group plc, AIM’s parent, to disclose confidential trading data in connection with alleged market manipulation. This decision highlights the reluctance of the English court to second-guess the Financial Conduct Authority and the LSE, after both organisations concluded that the trading data did not indicate any unlawful market manipulation: Burford Capital v the LSE  EWHC 1183 (Comm)
Burford’s share price dropped significantly on 6 and 7 August 2019. The dispute with the LSE arose from Burford’s allegation that its rapid loss of market capitalisation was, in part, caused by an unlawful form of market manipulation known as “spoofing” or “layering”. Burford submitted that this practice “involved very large numbers of sell orders for Burford shares being submitted to and advertised via the LSE’s trading platforms, without any genuine intention to trade”. Burford’s allegation of unlawful market manipulation was independently examined by the FCA and the LSE but neither body concluded that there had been unlawful market manipulation.
Nonetheless, Burford brought an ambitious application to compel the LSE to release confidential trading data, including the identity details of every market participant that made a buy or sell order for Burford ordinary shares on 6 or 7 August 2019. This took the form of an application for Norwich Pharmacal relief. Andrew Baker J distilled the requirements for Norwich Pharmacal relief as follows:
- whether there is a good arguable case that the respondent was “mixed up in so as to have facilitated” the alleged wrongdoing against the applicant; and
- “[…] whether justice requires that the defendant provide the assistance that the relief sought would compel him to provide, to further the end of righting a facilitated wrong”.
A good arguable case for wrongdoing?
Burford’s application fell at the first hurdle because it failed to establish a good arguable case that market manipulation had occurred. Mr Justice Baker considered expert evidence on trading relied on by Burford, and concluded that any claim that there was market manipulation was speculative. This was in part because, on the expert’s own testimony, it was “impossible to determine with certainty whether an order is manipulative based on the publicly available data that I have reviewed”, as the required analysis could only be done “by evaluating the de-anonymised evidence” (ie the information that Burford was looking to obtain through the application).
The interests of justice – the Rugby Football Union Test applied
The judgment is perhaps most useful for its analysis of the public policy factors that underpin the second limb of the test – whether it was in the interests of justice to grant the relief.
The court considered the list of factors set out by Lord Kerr in Rugby Football Union v Consolidated Information Ltd1 (Rugby Football Union), including the merits of the case, the public interest in allowing the claimant to vindicate its legal rights, the deterrent effect of granting the application, and the availability of alternative sources for the information sought. Mr Justice Baker also identified two additional factors under the second limb, which are of particular relevance to financial services litigation: (i) whether granting relief at common law would cut across an existing statutory regime; and (ii) the impact of granting relief on public confidence in the UK’s equity capital markets or in the FCA as a regulator.
While the “public interest” is listed as a discrete factor in Rugby Football Union, the court has scope to return to the merits of the case when considering this issue. In the words of Mr Justice Baker, “The stronger the merits (beyond having passed the good arguable case threshold), the weightier that public interest”.
The bulk of the court’s discussion regarding public interest concerned a technical argument about whether Burford could have a private cause of action against the alleged wrongdoers. Ultimately, the court concluded that even if the evidence had established a good arguable case for wrongdoing, Burford still failed to make a good arguable case that it had an actionable civil claim. It was the court’s view that the FCA has the exclusive statutory function of investigating and deciding whether to prosecute market abuse. No private prosecution may be brought. In any case, justice did not require the LSE to disclose confidential information to Burford in order for Burford to bring a private prosecution. If Burford was unhappy with the FCA’s decision not to bring action, its proper remedy was a judicial review.
Mr Justice Baker noted that other Rugby Football Union factors such as the potential deterrent effect on wrongdoers, any fault on the part of the defendant, and a lack of alternative sources for the information in question could weigh in favour of granting relief. However, Burford’s submissions on these points either were not persuasive or did not add material weight in favour of granting relief.
Damage to public confidence
The court was particularly wary of the “risk of damage to public confidence in the FCA as regulator”. The judgment took note of the balancing exercise “between legitimate concern that it is not in the public interest to be (perceived to be) undermining the FCA and proper concern that the court be fearless to act [...]”. Ultimately, granting the application would “interfere in the normal workings of a regulated market”, an undesirable consequence that would need to be adequately counterbalanced by factors such as those discussed above.
Closely related to this point was the potential for collateral damage to innocent third parties, as granting an application would entail a “serious invasion into [their] confidential and commercially sensitive trading activities and strategies”, which could in turn undermine public confidence in the UK’s capital markets.
It should be noted that the court was open to the possibility that “ongoing confidentiality concerns might be satisfactorily minimised and managed”, through the re-anonymisation of data or proceedings being held in private. However, the burden would rest with the applicant to establish the practical workability of these options.
Statute ousting common law relief?
Although it did not make a difference to the outcome, the LSE did not persuade the court that the statutory regime regulating market abuse ousted the common law jurisdiction to grant Norwich Pharmacal relief. The facts of Burford were distinguished from R (Omar) v Secretary of State for Foreign and Commonwealth Affairs2, where the court held that the differences between the statutory scheme in question, concerned with obtaining evidence for use in foreign criminal proceedings, and the common law jurisdiction under Norwich Pharmacal “were so substantial that Parliament was to be taken […] to have created an exclusive procedure, not a parallel one; that, therefore, where the statutory regime was in play, the Norwich Pharmacal remedy did not run”. Mr Justice Baker left the possibility open for future courts to decide, in a case with stronger evidence of market abuse, to grant Norwich Pharmacal relief, notwithstanding the FCA’s decision not to bring proceedings under the Market Abuse Regulation (MAR).
Burford faced some difficult hurdles in this application.
First, it was in something of a Catch-22 situation in that, without the de-anonymised data that it was seeking in the application, it was impossible for Burford to show that there was a good arguable case that there had been wrongdoing on which a Norwich Pharmacal order could be founded.
Second, the context was that the FCA and the LSE had already investigated and concluded that it was not something that merited taking further action. Even though the existence of MAR was not an absolute impediment to the relief sought, it was clear that the court did not want to give a decision that risked undermining confidence in the relevant regulatory bodies, nor was it a promising starting point for Burford persuading the court of the underlying merits of its case.
Finally, these difficulties were compounded by the emphasis placed on the merits of the case throughout the criteria for granting Norwich Pharmacal relief. Unlike an application for freezing or prohibitive injunctions, where the “good arguable case” and “serious issue to be tried” tests are simply an initial threshold that must be cleared, Mr Justice Baker emphasised that the underlying merits would also have an important bearing upon the second limb of the test – whether it was in the interests of justice to grant relief.
Burford therefore serves as a useful reminder of the inherent difficulty facing Norwich Pharmacal applicants from both an evidential and policy standpoint. It is important to remember that a Norwich Pharmacal order is draconian relief in that, at a minimum, it inconveniences innocent third parties, and here would have risked prejudicing the third parties whose data Burford sought. If the merits of the underlying case appear relatively weak, this may well fatally undermine the application from the start.
This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication. If you wish to receive this publication, please contact Amy Edwards, email@example.com.