Court strikes out passive investors’ S90A claims
In a highly significant development for securities litigation in the UK, the High Court handed down a judgment on 25 October 2024 in favour of the Defendant in the dark pools litigation: Allianz v Barclays Plc [2024] EWHC 2710 (Ch). Mr Justice Leech signalled the court’s intention to strike out claims brought on behalf of “passive” institutional investors, applying a common law test of reliance to claims brought under section 90A and schedule 10A of the Financial Services and Markets Act 2000. The 241 passive investors make up over 60% of the claimants in the litigation by value totalling c.£330m, leaving 219 remaining claimants with a claim value of c.£210m. The strike out application will be disposed of following a consequential hearing listing in a window commencing 25 November 2024, with time extended for permission to appeal by 21 days following the hearing.
Background
Dark pools are private and largely opaque trading venues where institutional investors can buy and sell large blocks of securities anonymously. Unlike public stock exchanges, where trade orders are visible and can influence market prices, dark pools operate without disclosing the size or identity of the orders until after trades are executed. This anonymity is designed to minimise market impact, protecting investors from price movements that could disadvantage them if their large trades were known in advance. However, this lack of transparency also introduces significant risks, such as potential conflicts of interest by platform operators and the threat of predatory practices by high-frequency traders.
The New York AG filed a complaint against Barclays in June 2014, alleging a “systemic pattern of fraud and deceit” in relation to the Barclays LX trading platform. Barclays’ share price fell substantially the following day. In January 2016, Barclays admitted to making misrepresentations and paid a USD 70m fine. A securities fraud class action claim was launched in the US. A settlement in the class action was reported in January 2019, with Barclays paying out USD 27m to investors who held shares over the relevant period. Securities litigation proceedings along comparable lines were issued against Barclays in the UK in November 2020, under sections 90 and 90A of FSMA. Although securities litigation is well-established in the US, the regime is at a comparatively early stage in the UK, meaning that judgments such as Allianz v Barclays can have a far-reaching impact on the evolving landscape of this growing area of litigation.
Reliance
Based on first principles, the tort measure of damages is the actual loss directly flowing from a claimant's reliance on a false statement, less any gains made by the claimant. If there is no reliance on the false statement, there is also no causative link between the tort and the loss suffered and the claim would fail.
Proving reliance is required in order to make good any claim under section 90A FSMA. The statute states that securities issuers are liable to pay compensation to persons who have suffered loss as a result of a misleading statement or dishonest omission in relation to published information about the securities. The person who “acquires, continues to hold or disposes of the securities in reliance on published information” may claim compensation. This is to be contrasted with claims under section 90 FSMA. These claims are based on misleading statements or omissions in listing particulars or a prospectus for which there is no reliance requirement, rather than the broader “published information” category of section 90A.
Until the Allianz v Barclays judgment, the practical application of the principle of reliance to claims in a section 90A FSMA context was an open question. There was little in the way of guidance from previous authorities as to how to any test for reliance should be applied in a section 90A context. The judgment in ACL Netherlands BV v Lynch [2022] EWHC 1178 (Ch) (Autonomy) was the only authority referred to the court during the hearing on the point. This was a highly fact-specific decision at first-instance level, which we discussed in a previous blog. Although not determinative, Mr Justice Leech agreed with the Autonomy judgment, which stated at [505] that: “the requirement for reliance cannot be satisfied in respect of a piece of published information which the acquirer did not consider at all.”
Reliance was a critical issue in Allianz v Barclays due to the “passive” nature of the claimants subject to the strike out application. The term “passive” is used in this context as a catch-all for index or tracker fund, which took investment decisions based on the assumptions that any published information by Barclays would be correct, timely, true and fair. Consequently, in an efficient market, Barclays’ share price should have reflected the contents of all published information (including negative information). Rather than seeking to establish reliance through reading the relevant publications or having been advised by those that had, these claimants therefore based their claims in reliance on the market price of the shares.
Decision
In the judgment, Mr Justice Leech determined that the common law test of reliance from the tort of deceit should apply. Claimants with claims based on price/market reliance were to be struck out.
Despite the finding on the reliance test, the judgment left the door open for affected claimants to prove that Barclays’ published information was in fact taken into account in their investment decisions despite their “passive” nature. This could be through the exercise of discretion by human decision makers, their advisers or even AI or computer assessment processes. That said, no such evidence was adduced during the hearing.
Comment
The judgment has drawn a mixed reaction from commentators and practitioners. It was on one view expected: it follows the decision in Autonomy which did not have issues pertaining to reliance at the heart of the case, but did consider – for the first time – the operation of the concept of reliance in the context of section 90A FSMA. Further, the conclusions reached by the court are consistent with the operation of reliance in other causes of action. There is no express statutory wording that indicates that reliance should be treated differently under section 90A FSMA.
In contrast, it is a decision that is difficult to reconcile with both the practical reality over which section 90A operates, and the mischief that its purpose was to discourage. It is a foundational principle that markets trade on open and accurate information. If parties are not entitled to rely on the market price of shares as reflecting that information, it would represent a significant disconnect that would result in the potential for unchecked market abuse. Further, a very significant proportion of the investment market could find themselves without recourse for misleading statements or omissions in published information based on their investment practices; some have estimated passive investors to represent over 30% of capital invested in UK markets.
The decision on reliance is ripe for consideration by the appellate courts. The judgment recognises the high prospect of an appeal by the claimants and the consideration of these issues by senior courts would likely have wide reaching implications for the continued development of securities litigation in the UK.