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No private action for market abuse or breach of the listing rules

November 2009 - Banking and Finance. Legal Developments by Fountain Court Chambers.

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In Hall v Cable and Wireless Plc [2009] the High Court held that the Financial Services and Markets Act (FSMA) 2000 does not give investors a private action for market abuse or breach of the listing rules.

Facts of cable and wireless

In August 1999 Cable and Wireless Plc (Cable and Wireless) sold its interest in a mobile telephone company to Deutsche Telekom (the buyer). Cable and Wireless gave the buyer an indemnity in respect of the telephone company’s tax liabilities (the tax indemnity). To provide credit support for the tax indemnity, Cable and Wireless agreed that if its debt rating fell below investment grade it would either provide the buyer with a bank guarantee for £1.5bn or pay £1.5bn into escrow (the ratings clause). From March 2000 the market price of Cable and Wireless’ shares fell steadily. On 6 December 2002 its debt rating fell below the relevant level, and Cable and Wireless issued a press release disclosing the ratings clause. Its share price fell further.

In Cable and Wireless four former shareholders in Cable and Wireless claimed damages for market abuse, breach of the listing rules, misrepresentation, and negligence, in respect of Cable and Wireless’ failure to disclose the ratings clause to the market before 6 December 2002. Cable and Wireless applied for summary judgment and to strike out the claims.

REGULATORY FRAMEWORK

Market abuse

Market abuse is defined in s118, FSMA 2000, as behaviour (whether by one person alone or by two or more persons jointly or in concert) that occurs in relation to:

  1. qualifying investments admitted to trading on a prescribed market;
  2. qualifying investments in respect of which a request for admission to trading on such a market has been made; or
  3. in the case of insider trading or disclosure of inside information, investments that are related to such qualifying investments;

and that falls within any one or more of the seven types as set out below.

  1. The first type of behaviour is where an insider deals, or attempts to deal, in a qualifying investment or related investment on the basis of inside information relating to the investment in question.
  2. The second type of behaviour is where an insider discloses inside information to another person outside the proper course of the exercise of their employment, profession or duties.
  3. The third is where the behaviour (not falling within either of the above):
    1. is based on information that is not generally available to those using the market but, if available to a regular user of the market, would be, or would be likely to be, regarded by them as relevant when deciding the terms on which transactions in qualifying investments should be effected; and
    2. is likely to be regarded by a regular user of the market as a failure on the part of the person concerned to observe the standard of behaviour reasonably expected of a person in their position in relation to the market.
  4. The fourth is where the behaviour consists of effecting transactions or orders to trade (otherwise than for legitimate reasons and in conformity with accepted market practices on the relevant market) that:
    1. give, or are likely to give, a false or misleading impression as to the supply of, or demand for, or as to the price of, one or more qualifying investments; or
    2. secure the price of one or more such investments at an abnormal or artificial level.
  5. The fifth is whether the behaviour consists of effecting transactions or orders to trade that employ fictitious devices or any other form of deception or contrivance.
  6. The sixth is the dissemination of information by any means that gives, or is likely to give, a false or misleading impression as to a qualifying investment by a person who knew or could reasonably be expected to have known that the information was false or misleading.
  7. The seventh is where the behaviour (not falling within paragraphs 4), 5) or 6) above):
    1. is likely to give a regular user of the market a false or misleading impression as to the supply of, demand for, or price of or value of, qualifying investments; or
    2. would be, or would be likely to be, regarded by a regular user of the market as behaviour that would distort, or would be likely to distort, the market in such an investment;
  8. and the behaviour is likely to be regarded by a regular user of the market as a failure on the part of the person concerned to observe the standard of behaviour reasonably expected of a person in their position in relation to the market.1

An important aspect of s118 is that a person can commit market abuse without having any intention to abuse the market, or being reckless or negligent as to doing so.

Listing rules

The Financial Services Authority (FSA) is empowered, by s73A of FSMA 2000, to make rules that govern conduct in respect of securities admitted (or seeking admission) to a regulated market. Prior to 2005, the listing rules were made by the FSA under s74(4) of FSMA 2000, as it then stood. Section 73A has replaced s74(4) and the listing rules are now known as the Part 6 rules.

In Cable and Wireless the claimants relied, in particular, on the following listing rules (which were in force over the period 2000/02):

1) Listing rule 9.1

A company must notify the Company Announcement Office without delay of any major new developments in its sphere of activity that is not public knowledge and that may:

  1. by virtue of the effect of those developments on its assets and liabilities or financial position or on the general course of its business, lead to a substantial movement in the price of its listed securities; or
  2. in the case of a company with debt securities listed, by virtue of the effect of those developments on its assets and liabilities of financial position or on the general course of its business, lead to a substantial movement in the price of its listed securities, or significantly affect its ability to meet its commitments.
2) Listing rule 9.3A

A company must take all reasonable care to ensure that any statement or forecast or any other information it notifies to the Company Announcements Office or makes available through the UK Listing Authority is not deceptive and does not omit anything likely to affect the import of such statement, forecast or other information.

3) Listing rule 9.10

A company must notify the Company Announcements Office without delay (unless otherwise indicated) of the following information relating to its capital: new issues of debt securities (b) where a company has listed debt securities, and any new issues of debt securities, and in particular any guarantee or security in respect thereof.

ENFORCEMENT MECHANISMS

FSMA 2000 includes a variety of mechanisms by which its provisions can be enforced. In respect of market abuse and the Part 6 rules, it provides the following means:

  1. Section 91 gives the FSA the power to impose a penalty on, or to censure, various persons where it considers there has been a contravention of the Part 6 rules.
  2. Section 123(1) gives the FSA the power to impose a penalty on a person whom it is satisfied has engaged in market abuse or has required or encouraged another to do so, although the imposition of such a penalty does not make any transaction void or unenforceable (s131).
  3. Section 123(3) provides that where the FSA is entitled to impose a penalty on a person it may, instead of imposing a penalty, publish a statement to the effect that they have engaged in market abuse.
  4. Section 381 gives the FSA the ability to apply to the court for an injunction restraining market abuse and/or an order requiring a person to take steps to remedy it.
  5. Section 382 gives the FSA the ability to seek a restitution order from the court in respect of contravention of a relevant requirement imposed by or under FSMA 2000 (which would include the Part 6 rules) where profits have accrued to a person or where others have suffered loss as a result of a contravention. A restitution order requires the person guilty of the contravention to make a payment to the FSA of such amount as appears just having regard to the profits accrued and/or the losses suffered, for the FSA to distribute as the court orders.
  6. Section 383 gives the FSA the ability to apply to the court for a restitution order against a person who has engaged in market abuse or required or encouraged others to do so.
  7. Section 384 gives the FSA the power to require an authorised person whom it is satisfied has contravened a relevant requirement imposed by or under FSMA 2000, or has engaged in market abuse and has accrued a profit or another person to suffer a loss or otherwise be adversely affected as a consequence, to make restitution, in an amount determined as just by the FSA.
  8. Section 150 provides for a private right of action against authorised persons in respect of loss caused by breach of rules made by the FSA, except for the Part 6 rules.

It is a well-established principle of statutory construction that:

‘Where an Act creates an obligation, and enforces the performance in a specified manner, we take it to be a general rule that performance cannot be enforced in any other manner.’ (Lord Tenterden CJDoe d, Murray v Bridges [1831] 1B, Ad 847, 859.)

FSMA 2000 does provide a private cause of action for losses caused by breach of certain rules. For example:

  1. Section 71 provides a private right of action in respect of losses caused by the failure of an authorised person to take reasonable care that no regulated activity is carried on by a prohibited person or that no person carries on a controlled function without the FSA’s approval.
  2. Section 90 provides for a private right of action in respect of loss caused by false or misleading statements in listing particulars and prospectuses, and from the omission of particulars required to be included by ss80, 81, 87A or 87G.
  3. Section 150 provides for a private person to have a right of action against authorised persons in respect of losses caused by breach of rules made by the FSA, but expressly excludes the Part 6 rules.

HIGH COURT’S DECISION

The High Court held that the variety of enforcement provisions in FSMA 2000 indicate that Parliament expressly considered which of the duties or obligations imposed by the statute would give rise to a cause of action at the suit of a private person. Parliament did not provide that market abuse or a breach of the listing rules (as they then were) would give rise to a cause of action at the suit of a shareholder. FSMA 2000 ss91, 123, 382, 383, and 384 provide for other remedies and penalties. Teare J observed that this was a clear indication that Parliament did not intend that market abuse or a breach of the listing rules would give rise to a cause of action at the suit of a private person. To hold otherwise would interfere with the scheme and modes of enforcement provided by FSMA 2000. Teare J therefore concluded that the former shareholders did not have a cause of action for breach of statutory duty.

The High Court also rejected the claims under the Misrepresentation Act 1967 (the 1967 Act). If the former shareholders had suffered loss, it was as a result of entering into a contract of purchase for the shares, not as a result of entering into a contract with Cable and Wireless, as required by s2(1) of the 1967 Act.

However, the High Court allowed the negligence claim to proceed. It considered it arguable that a duty of care arose when Cable and Wireless issued its accounts, by reason of its failure to disclose the ratings clause in 1999. Teare J acknowledged this might enable the claimant shareholders to circumvent the principle in Caparo Industries pIc v Dickman & ors [1990] (at paragraphs 662 and 631-32) that statutory accounts are not provided for any parties, members or otherwise, to make personal business decisions as to whether to buy or sell shares.

WHAT ARE THE CONSEQUENCES FOR INVESTORS?

The non-actionability of s118 and the Part 6 rules is in contrast to equivalent legislation in the US, where private suits for losses caused by short-selling shares or disseminating deceptive information are common.

In the wake of Cable and Wireless, shareholders or former shareholders who consider they have suffered loss as a consequence of market abuse or breach of the Part 6 rules will either have to find an alternative cause of action to breach of statutory duty, or rely on the FSA to make or apply for a restitution order, if they are to obtain any compensation. The difficulty with the former is that currently there is no obvious action for damages caused by market abuse or a breach of the Part 6 rules in English law. Unless an investor traded directly with the person alleged to have abused the market or breached Part 6 rules (for instance, in a rights issue), they will lack the contractual nexus necessary for a claim for breach of contract or misrepresentation under the 1967 Act. In that situation, the shareholder is also likely to struggle to establish the duty of care or special relationship necessary to bring a claim for negligence or negligent misstatement. However, if an investor can show that a statement was addressed to them or a section of the public to which they belong, and the defendant knowingly or recklessly made a false statement intending to induce them to act, they may have a cause of action in deceit.

It is notable that claims both in negligence and deceit will require the investor to show reliance. Although not directly considered in Cable and Wireless (because reliance is a question of fact, unsuitable for summary judgment) establishing such reliance, particularly as a private investor, is likely to be a difficult obstacle to overcome.

Comment

In conclusion, Teare J’s decision has made it clear that many investors (both large and small) will have to rely on the FSA to act, if they are to be compensated for the effects of market abuse or a breach of the Part 6 rules. In recent months the FSA has emphasised its tougher approach towards regulation of the financial services industries in general and market abuse in particular. However, unless the FSA is willing to make, or seek, restitution orders (as opposed to simply issuing warnings or fines) then investors will struggle to obtain practical redress. Unfortunately for investors, the FSA’s own Enforcement Guide (paragraph 11.1) indicates that it will exercise its formal restitution powers ‘on rare occasions only’.

By Harriet Jones-Fenleigh, barrister, Fountain Court Chambers.

E-mail: hjf@fountaincourt.co.uk.

Caparo Industries pIc v Dickman & ors[1990] UKHL 2

CJ Doe d, Murray v Bridges [1831] 1B, Ad 847, 859

Hall v Cable and Wireless Plc [2009] EWHC 1793 (Comm)

note1From 31 December 2009, s118 will no longer include the behaviour set out at 3) and 7), pursuant to SI 2008/1439.