High Court determines that reliance issues in context of a s.90A FSMA claim should be heard at first trial

At a recent case management conference where a split trial was proposed by the parties in relation to a section 90A Financial Services and Markets Act 2000 (FSMA) claim, the High Court has held that reliance issues should be heard at the first trial rather than held over to the second trial: Allianz Global Investors GmbH & 76 Ors v RSA Insurance Group plc [2021] EWHC 570 (Ch).

Trial structure tends to be a key case management battleground in securities class actions. For strategic and practical reasons, claimants often seek to postpone issues involving reliance, causation and quantum (i.e. issues which concern the conduct of the claimants) to the second trial and render issues surrounding the issuer’s alleged liability the sole focus of the first trial (see our banking litigation blog post on The Tesco Litigation: lessons learned from split trial orders in the context of securities class actions for further details).

The judgment therefore provides noteworthy and helpful guidance to issuers faced with securities claims in advocating for a trial structure with a fairer allocation of the burden of preparing for trial. The court referred to various factors which influenced its decision that reliance issues should be heard at the first trial. In summary, the court was of the view that an early determination on reliance may increase the chance of a settlement, and that since questions concerning reliance are primarily factual, these should be determined as early as possible during the trial process, particularly where the claimants had issued proceedings deep into the limitation period.

There are two particular points of note from the judgment:

1. the court acknowledged the claimants’ argument that the inclusion of reliance issues could lead to a longer first trial; however, the court found that this was not a telling factor in a claim of this size and significance, and that the claimants who had brought the claim “must be ready to take part in it fully” especially as litigation funding had been arranged; and
2. the allocation of the litigation burden between the parties was one of the factors which had a bearing on the court’s decision. The court noted that the claimants who brought the claim “should be prepared to undertake substantial work in ensuring the expeditious progress of the proceedings to resolution”.

The additional implication of these points is that further securities class actions may be more costly or practically burdensome for claimants to pursue, as they may need to invest more time and costs in anticipation of being required to participate more fully throughout the proceedings from the outset.

We consider the court’s decision in more detail below.

Background

In late 2013, RSA Insurance Group plc (RSA) made public announcements in respect of certain misconduct and accounting irregularities which had occurred in its Irish subsidiary (RSA Ireland) during the period of 2009-2013. Following the 2013 market announcements, a reduction was observed in RSA’s share price.

A claimant group of institutional investors subsequently brought proceedings under section 90A and Schedule 10A FSMA against RSA on the basis that:

• the misconduct within RSA Ireland meant RSA’s published information during 2009-2013 contained alleged false/misleading statements and/or omissions, and/or RSA had dishonestly delayed the publication of relevant information; and
• they had suffered loss as a result of acquiring/continuing to hold RSA shares during 2009-2013 in reasonable reliance on the alleged false/misleading statements and/or omissions and/or dishonest delay of relevant information.

RSA denies the allegations and is robustly defending the s.90A FSMA claim being brought against it.

One of the main issues the parties asked the court to consider during the case’s first CMC was how the trial should be structured. It was common ground that there should be a split trial; however, the parties disagreed as to where that spilt should lie.

The parties framed the debate by reference to an agreed list of issues. It was agreed between the parties that issues relating to whether RSA is liable under section 90A FSMA (the RSA Issues) and issues relating to quantum should be heard in the first and second trial respectively. The dispute arose in relation to issues relating to reliance and causation which are issues which concern the actions of the claimants (the Claimant Issues) and in which trial such issues should be heard.

The claimants submitted that the first trial should deal solely with the RSA Issues only, leaving the reliance and causation issues to the second trial; whereas RSA submitted that in addition to the RSA Issues, the court should also determine issues of reliance in the first trial, and that as an alternative fall-back position, the court might also determine causation issues in the first trial.

Decision

The court found in favour of RSA and held that it was appropriate that issues of reliance should be included in the first trial for the reasons set out below:

1. Settlement – The court noted that it was preferable, on balance, for more issues rather than fewer to be tried at the first trial, and that a determination on both the RSA Issues as well as the reliance issues at that juncture was more likely to bring about a settlement of the remaining issues.
2. Timing for the determination of the reliance issues – The court was of the view that the timeline produced by RSA's proposed split would lead to a faster determination of the factual issues concerning reliance. The potential difference between the parties’ suggested timelines amounted to approximately a year. The court was not persuaded by the claimants’ submission that such a difference was marginal and that a year or so of delay should be avoided if possible. The court agreed with RSA that the claimants had chosen to bring the claim late in the limitation period, and the more time which passed, the more difficult it would be for the parties and the court to establish what had happened on a true factual basis.
3. First trial length – The court noted that there was some force in the claimants' argument that their proposed spilt would lead to a shorter first trial. However, the court commented that in a case of this scale and importance, this ought not to be a particularly telling factor. The claimants who brought this claim “must be ready to take part in it fully”, even if it resulted in a longer first trial. The court further noted that it did not think a trial of 25-30 court days to be excessively onerous for parties who were as well funded as the claimants (who had secured litigation funding).
4. Overlap between causation and reliance – Whilst the court recognised that there was some force in the claimants' argument concerning the potential overlap between reliance and causation issues, and noted that in an ideal world it would be preferable to have a spilt trial structure which cleanly separated the Claimant Issues from the RSA Issues; however, the court did not deem such a division to be pragmatic in the present case. It further noted that it did not consider it likely for the potential overlap in reliance and causation evidence to lead to a serious risk of inconsistencies in the evidence or the court’s findings. The court acknowledged it may be unsatisfactory for the same witness to be called to provide evidence twice (once in the first trial for reliance, and another time in the second trial for causation); however, it was of the view that the process of taking causation evidence should be fairly short and self-contained in the second trial.
5. Expert evidence – The court agreed with RSA that it was possible that no expert evidence would be required for issues of reliance. The proposition advanced by the claimants was that the price of securities on the London Stock Exchange was influenced by published information. The court’s initial view was that such an argument was self-evident and required no expert evidence. Nonetheless, the court noted that should expert evidence be required, it did not expect the process to be a long one.
6. Possibility of appeals – Overall, the court noted that there was some force in RSA’s argument that if there were to be appeals following the first trial, it would be better for the appellate court to hear as many issues as possible at the same time. The court also regarded there to be a real risk that the determination of reliance issues could be further postponed, in the scenario where such issues are put off to the second trial and an appeal occurs after the first trial. As per the reasons above, the court deemed this to be unsatisfactory since reliance questions are essentially factual and should be dealt with sooner rather than later.
7. Litigation burden – On the allocation of the litigation burden between the parties, the court agreed with RSA that the claimants’ proposed split effectively meant that the claimants’ burden would be postponed to the second trial and almost all the work for the first trial would rest solely with RSA. The court noted that both parties should be entitled to scrutinise each other's case, and that there may be times where the litigation burden between the parties is lopsided by the nature of the litigation; however, that was not the case here – as such an imbalance would be created by the claimants’ proposals for a split trial. In its consideration, the court also underlined that the claimants, having brought the claim, “should be prepared to undertake substantial work in ensuring the expeditious progress of the proceedings to resolution”. This includes providing disclosure, preparing witness statements and being prepared to provide evidence at trial. The court was of the view that RSA’s proposal represented a fairer allocation of the litigation burden between the parties, which although not a determining factor by itself did however have some bearing.

Herbert Smith Freehills LLP acts for the defendant, RSA, in this matter.