Muddying the Waters of Market Manipulation in the EU
Since July 2016 it has been an open question whether the Market Abuse Regulation No. 596/2014 (MAR) creates horizontal direct effect such that market participants have a private right of action for market abuse in the UK. Whether an issuer has a private right of action for alleged share price manipulation under the MAR was recently considered by Mr Justice Andrew Baker in the seminal case of Burford Capital Limited v LSE Group plc.
Burford is a litigation funder with shares listed on the Alternative Investment Market in London. In August 2019, Burford’s share price spiralled downwards within a two-day window as a result of a short-selling attack by US investment fund Muddy Waters. For the purposes of the claim, Burford did not challenge the legality of the negative statements authored by Muddy Waters. Rather, it argued that publicly unknown traders had engaged in ‘spoofing’ or ‘layering’ in respect of its shares, which are forms of market manipulation prohibited by Article 15 of the MAR. Briefly stated, spoofing and layering involve traders using visible, non- bona fide orders to send false signals to other traders as to the true levels of supply or demand in the market. Orders made by manipulators are then cancelled, or amended, prior to execution, which has the effect of altering the share price and facilitating the execution of orders at a more favourable position. Following an examination of anonymised trading data by an independent expert, Burford complained to the London Stock Exchange (LSE) and the Financial Conduct Authority (FCA). By reference to the full range of unredacted information (which was more extensive than the material available to Burford), both the LSE and the FCA concluded that Burford’s evidence did not support a claim that spoofing or layering had occurred. Intent on pursuing private claims against those responsible for what it viewed as unlawful behaviour, Burford sought a Norwich Pharmacal order, a court order against a third party for the disclosure of documents or information, to compel the LSE to disclose the traders’ identities over the relevant period. The Court held that the evidence provided by Burford did not amount to a ‘good arguable case’ as required for granting Norwich Pharmacal relief, and, even if it had, consistent with the pre- July 2016 position vis-à-vis the Market Abuse Directive 2003/6/EC and Financial Services and Markets Act 2000 regime, issuers have no private right of action for share price manipulation in the UK under the MAR (at , ).
Absent a preliminary reference to the CJEU on the point of whether Article 15 creates horizontal direct effect (such that private parties are vested with an EU-level right of action against those alleged to have acted unlawfully), Mr Justice Baker’s view is, with respect, bizarre and plainly erroneous, even on the fairest of readings. As an integral component aimed at realising a uniform Capital Markets Union, the MAR is designed to, inter alia, increase market integrity and the attractiveness of EU securities markets for raising capital. Being directly applicable throughout the EU, the MAR is subject to the autonomous interpretation of the CJEU. There is strong reason to think that Article 15 does create horizontal direct effect, not least because other member states recognise a private right of action, and the CJEU has taken precisely the opposite view that a private right does exist in other contexts analogous to the present case (see, eg, Muñoz).
Taking for granted that (had the Court properly made a preliminary reference) the CJEU would have held that Article 15 does create horizontal direct effect, the question of interest here is whether claiming Norwich Pharmacal relief effectively positions issuers (and potentially investors) to exercise that EU-level private right of action. Assuming that the doctrine (as the national legal instrument giving effect to Article 15 for the purposes of Burford’s claim) complies with the EU principle of effectiveness, it is argued that the way Mr Justice Baker applied it was inconsistent with his role qua domestic decision-maker exercising judicial powers stemming purely from EU law.
This is because, to gain Norwich Pharmacal relief, a third party holding relevant information is not required to lend their aid in respect of an alleged wrongdoing by others unless, among other things, a good arguable case can first be made (for a useful summary of the full test see, eg, Mitsui & Co Ltd v Nexen Petroleum UK Ltd at ). After examining Burford’s expert evidence (which can be viewed here and here), Mr Justice Baker surmised that the data analysis did not provide any real support for the conclusion that market manipulation had taken place (at -). However, this conclusion was generally founded upon the way in which the Court considered Burford’s data analysis. Namely, it was held that finding a pattern of orders that look like spoofing or layering is not enough, ‘because the question remains one of [subjective] intention to trade’ (at ). In other words, short of a court order for the de-anonymised data coupled with evidence of intent (such as the account of a whistleblower), no issuer could ever meet the ‘good arguable case’ threshold for market manipulation by reference to trading data alone. Consequently, Mr Justice Baker concluded that Burford’s data analysis did not sufficiently call into question the genuine intent of the traders, and, therefore, it was simply speculative (at ).
This is a very curious, and arguably wrong, pronouncement for a domestic judge to make without a preliminary reference, given that the MAR is silent with respect to subjective intent and only the CJEU can authoritatively comment. Indeed, another issue with this decision is that it contradicts, without justification, (pre-MAR) UK case law that dealt with market abuse on the basis of the objective consequence of the behaviour under review (see, eg, FCA v Da Vinci Invest Ltd, at ; Winterflood Securities v FSA, at ). In truth, Burford’s data analysis followed the approach taken in previous expert witness reports that eventually led to criminal conviction and was able to spot similar patterns of trading behaviour. It begs the question why a data analysis of this nature would, prima facie, be suitable for bringing criminal proceedings under a far higher standard of proof but not for the purposes of making a ‘case which is more than barely capable of serious argument and yet not necessarily one which the Judge believes to have a better than 50 per cent chance of success’ under the good arguable case evidential threshold (Ramilos Trading Ltd v Buyanovsky, at ). The practical effect of the Court’s unprincipled addition of a subjective element to the test is that no issuer with anonymous trading data could ever adduce expert evidence sufficient to make a good arguable case under this heightened requirement that would compel the LSE or the FCA to make the un-redacted data available for the purposes of bringing private civil proceedings. Thus, the private right of action under Article 15 is essentially eliminated, which violates the EU principle of effectiveness—the application of national law must not make it impossible or excessively difficult to enforce rights derived from EU law.
The Court then went on to opine that justice would never require disclosure of the necessary information to an issuer because the FCA would protect issuers’ rights exclusively through regulatory investigation and discretionary remedial action (at -). Leaving to one side that it is not obvious what regulatory protection the FCA directly provides to issuers that incur loss of the type (allegedly) suffered by Burford, one troubling implication is that there is now no way for issuers to challenge the LSE’s and FCA’s claims about whether market manipulation has occurred. In the age of high frequency and algorithmic trading, this is clearly unsatisfactory and creates undesirable incentives on both sides of the regulatory fault line. On the one hand, the LSE, as the organisation responsible for detecting and preventing market manipulation in the first instance, has a commercial interest not to deter traders because it negatively affects its income generation. The outcome of the present case allows the LSE to say it has conducted a full and proper analysis but without having to put forward evidence to enable issuers and experts, or the courts, to test that proposition. Moreover, it is no secret that the FCA prefers a ‘light touch’ approach that prioritises giving the (perhaps false) impression that the UK is an attractive and safe equity trading venue, over actually holding wrongdoers to account. On the other hand, Mr Justice Baker’s holding could embolden market manipulators because issuers will never be able to secure the necessary information to bring legal proceedings. Ironically, barring a UK preliminary reference before the end of 2020 that overturns Burford, in the rare instances that the FCA does consider future proceedings, the new requirement to show subjective intent may even furnish would-be market manipulators with ammunition for a successful defence.
Anna Christie is a PhD Candidate in Law at Trinity College, Cambridge, and a Senior Member at Newnham College, Cambridge.
J S Liptrap is a research associate at the Centre for Business Research at the Judge Business School, University of Cambridge.
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