High Court considers reliance in s.90A FSMA claims in context of split trial application

A recent judgment handed down by the High Court will be of interest to financial institutions following developments in securities class actions: Various Claimants v Serco Group plc [2023] EWHC 119 (Ch).

The decision considers the identity of sample claimants, for the purpose of a split trial order. For those monitoring the risk profile of claims under s.90A of the Financial Services and Markets Act 2000 (FSMA), the most interesting aspects of this judgment are the observations made by the defendant, and the court, on the critical question of reliance, which has become a central battleground in such claims.

The judgment reveals that the shape of the Serco litigation has changed significantly since the first case management conference (CMC) last year. During this period, the court handed down judgment in the first s.90A FSMA case to come to trial in this jurisdiction, in ACL Netherlands BV & Ors v Lynch & Ors [2022] EWHC 1178 (Ch) (otherwise known as the Autonomy litigation; see our banking litigation blog post). In the Autonomy judgment, the court confirmed that reliance must be upon a statement or omission, rather than, in some generalised sense, on a piece of published information (e.g. the annual report for a given year).

The defendant suggested that the Autonomy judgment has had the following impact on the scope of the claims against it in the Serco litigation: (i) cases based on direct reliance are now much more limited; (ii) a material number of claimants have dropped out; and (iii) those claiming on the basis of indirect reliance have great difficulties because of the clarification of reliance in Autonomy. These are interesting (although not unexpected) developments, given that the requirement for a claimant to show what it relied upon will make it more difficult to bring a successful s.90A claim.

The present judgment also confirms that the claimants in the Serco litigation are now relying on two categories of indirect reliance as follows:

• Market reliance: i.e. a decision, including an automated decision to acquire, continue to hold or dispose of shares in the market at the (inflated) price at which they were in fact acquired and held.
• Price reliance: i.e. market reliance in circumstances in which the claimant was also aware of the price of the shares, and believed the published information to be true, complete and accurate.

The court accepted that (in some respects) the developments which have occurred since the first CMC have been significant, and the fact that no claimant seeks to advance a direct reliance case based on specific statements in the defendant's published information is "material". However, in the context of the application relating to the identity of sample claimants, the court was not persuaded to move away from the sampling approach ordered at the first CMC, and it rejected the defendant's move to include all of the indirect reliance cases in the second trial.

Background

The decision relates to a claim for losses suffered by certain institutional investors, in relation to shares held in a listed company, Serco Group plc (Serco), between 2006 and 2013, based on s.90A and Schedule 10A FSMA.

The key question before the court in the present judgment related to an order for a split trial, which was made following the first CMC in this case. The court directed that there would be a split trial, as follows:

• A first trial covering the standing of the claimants and so-called common issues relating to Serco (whether there was fraud; the content of or omissions from published information; whether there had been dishonest delay; who were persons discharging managerial responsibility (PDMR); and whether any PDMR had the requisite knowledge).
• A second trial covering so-called individual issues related to the claimants, namely, reliance, causation, loss and quantum, and limitation. The issues at the second trial were to be determined in respect of a sample of the claimants or sample funds only.

Since the CMC, the parties had made some progress in agreeing on the number and identity of the sample claimants, but two significant issues remained outstanding, which in large part related to questions of reliance.

Decision

By the time of the hearing, the following important points on the claimants' reliance case were clear:

• The reliance placed by the claimants on the defendant's published information can be categorised as either: (1) direct reliance; or (2) two forms of indirect reliance: market reliance and price reliance.
• The claimants described what they meant by the two categories of indirect reliance as follows:
  • Market reliance is "[a] decision, including an automated decision to acquire, continue to hold or dispose of shares in the market at the (inflated) price at which they were in fact acquired and held."
  • Price reliance is market reliance in circumstances in which the claimant was also aware of "(a) the price of the shares and (b) the published information being true, complete and accurate."
• Where direct reliance is alleged, it is limited to reliance on the defendant's published information as a whole, not on individual statements within the published information.

The defendant submitted that it would be proportionate for all of the non-direct reliance cases to be tried at the second trial, because such claimants were likely to have great difficulties in light of the Autonomy decision, and it would achieve certainty if they could be disposed of. However, the claimants said that this approach would move away from the sampling approach and be wrong in principle.

The court accepted that, in some respects, the developments since the first CMC had been significant (in particular, it was material that no claimant sought to advance a direct reliance case based on specific statements). However, in the court's view, the developments did not justify an inclusion of all the indirect reliance cases to the existing cohort of sample claimants. The court justified this decision based on the following factors and conclusions:

• Appropriate weight must be given to the fact that the parties have proceeded for the past year on the course set by first CMC order.
• The addition of 27 master claimants at trial two would detract from a just and effective resolution of the dispute, and from costs efficiency.
• The defendant had underestimated the evidence required from the claimants to make good the price reliance claims, which may not be straightforward and may well be challenged.
• The defendant had underestimated the extent of the evidence and disclosure required from each individual claimant to prove that facts relevant to their cause of action under s.90A FSMA had been deliberately concealed from them by the defendant (thereby discharging the burden under s.32 of the Limitation Act 1980).
• The same point could be made about the expert evidence required for quantification.
• Each of the new master claimants would have to be treated as a separate claim and the additional burden imposed by their inclusion did not justify the limited benefit of a final resolution of those claims.

Accordingly, the court concluded that a sampling approach for both indirect and direct claims remained the right way forward.

A sampling approach has been adopted in earlier claims under s.90A FSMA, against RSA Insurance and G4S, and the court explained that its purpose is to try to ensure that decisions on individual issues provide as much guidance as possible, while recognising that the court's decision will not be binding in respect of individual issues of other claimants. The court stated in this case that sampling requires:

"A balance to be struck between ensuring that appropriate similarities are identified in order to maximise the number of cases which will in practice be resolved, while not at the same time having so many sample cases that the exercise becomes unwieldy and fails to achieve the purpose for which it was imposed".

The court also rejected an alternative proposal by the defendant: that the existing body of sample claimants should be expanded to add certain specified claimants with market reliance and price reliance claims, because there were no other claims in the sample with the same form of reliance, and/or because it was desirable for larger claims to be resolved at trial two if at all possible.

The court did not agree that it should automatically direct large claims to be included within the sample group, if there was no other justification for doing so. Stepping back and looking at the group of sample claimants as a whole, the court said it must always recognise that not every difference between the position of individual claimants and funds can be captured by a sample, and no answer is perfect. The key is to try to pick those cases which appropriately represent a wider body of claimants and common issues without overcomplication, recognising that not every fine detail can be captured.

The court therefore approved the group of sample claimants agreed by the claimants.

Note: The High Court trial has been listed for 4 June 2024.

In June 2024, the parties settled the case.