On 6 and 7 August 2019, AIM-listed company Burford Capital (‘Burford’) found itself the subject of a short selling attack, or ‘bear raid’, launched by US investment fund Muddy Waters. The result for Burford was a 56% tumble in its share price, wiping approximately £1.7 billion off its total market value. Muddy Waters meanwhile raked in a multi-million profit.
Burford was understandably furious. It commenced an investigation and retained Professor Joshua Mitt, an expert in short selling statistical analysis, who conducted an analysis of the available order book data. However, the data did not contain the identities of those involved in the buying and selling of Burford shares during the two day attack.
Layering and Spoofing
Professor Mitt’s analysis identified patterns of trading consistent with illegal market manipulation, layering and spoofing. If Burford was right, then the alleged spoofers would have committed offences under Part 7 Financial Services Act 2012  (FSA) and/ or Article 15 EU Market Abuse Regime  (‘MAR’). Burford reported the professor’s findings to the London Stock Exchange (‘LSE’) which maintains and operates AIM, and the FCA, and lobbied both for an investigation.
Both the LSE and the FCA had not been slow off the mark in investigating the bear raid. Prior to receipt of Burford’s dossier both had already commenced their own investigations. However, despite their efforts, and Burford’s dossier, both authorities concluded that the evidence did not establish that anyone had engaged in spoofing. They held that Muddy Waters had orchestrated market manipulation but it was legitimate and that spoofing had not caused the collapse in Burford’s share price. Accordingly it announced that no enforcement action would be taken.
Burford remained resolute. It initiated a High Court application in Burford v London Stock Exchange  for a Norwich Pharmacal order which would compel the LSE to disclose the data to it.
In order for its application to succeed Burford had to establish:
- There was a good arguable case that illegality, in this case spoofing or layering, had occurred
- Burford was entitled to have its allegations tested by litigation in court and that there was a strong public interest that its putative litigation should not be stifled by the LSE’s refusal to disclose
- The LSE were (a) mixed up in the wrongdoing so as to have facilitated it and (b) able or likely to be able to provide the information necessary to enable the ultimate wrongdoer to be sued.
The LSE put up a spirited defence supported by the FCA. Firstly it reminded the Court that it had carried out a review of the full data set, with the identities of all of the market participants available to them, and could find no evidence of wrongdoing. Furthermore, LSE contended that Professor Mitt’s expert report was not probative of Burford’s core allegation of spoofing and his conclusion that his research was probative of it was mistaken – that there is a world of difference between data being consistent with spoofing and it being probative of spoofing. Thirdly, it adduced its own expert evidence which doubted that there was consistency. And finally, that it would defeat an orderly market and harm the reputation of AIM if an unhappy market participant like Burford could obtain such confidential data in order to ventilate its grievance.
Burford remained undeterred and there was a three-day remote hearing in April 2020 with judgment handed down on 15 May. Baker J dismissed Burford’s application for Norwich Pharmacal relief. The Judge found, after conducting a detailed review of the evidence, that the Professor’s reported findings did not in fact provide proof of market manipulation. Whilst there were examples of patterns in the order data that sellers could have created if they had been behaving manipulatively whether the sellers involved were behaving manipulatively was a matter of speculation on the anonymised data. As such, Burford had not satisfied the first of the three conditions for relief; it had not established a good arguable case.
However, matters did not finish there. Despite finding against Burford, the Judge moved onto consider whether even if he had been satisfied that Burford had fulfilled all three conditions, he would have then held that it was in the interests of justice to make a Norwich Pharmacal order against the LSE.
In dealing with this, Baker J made a number of interesting and important points related to Burford’s claim that it was essential that the data be provided so as to allow it to:
- Pursue claims against the wrongdoers in tort;
- Bring a private prosecution for financial crimes;
- Persuade the FCA and/or CPS to bring a prosecution; or
- Persuade the FCA to re-consider the conclusion it had reached as market regulator that there was no real basis to suppose that market abuse occurred.
Baker J queried whether Burford did actually have any cause of action under either the civil or criminal regimes. He doubted whether a civil claim was actionable at the suit of Burford, as opposed to by its shareholders. Furthermore he held that:
(a) The FCA is the only body able to take action in England & Wales for market abuse committed in contravention of the Market Abuse Regime; and
(b) There is a restricted list of those who can prosecute criminal offences related to misleading the market such as those offences found in Section 389 Financial Services and Markets Act 2000  and Part 7 FSA 2012 .
These limitations would clearly cause difficulties to any person who wished to pursue their own civil action in respect of alleged market abuse.
Furthermore, in respect of Burford’s suggestion at (3) and (4), that they might persuade or “stimulate” the FCA into reconsidering its position, the learned judge made it clear that the correct route to have followed seeking such a consequence would have been a judicial review of the FCA’s decision not to commence an Enforcement probe. In addition, the FCA already held in its possession all of the information that Burford sought from the LSE as Baker J noted, “If Burford were to pursue a judicial review the court sitting in that jurisdiction would have had ample power to deal with any information asymmetry”.
Finally the Judge concluded that if the order had been made it could have damaged public confidence in the FCA as a regulator and possibly encouraged potential wrongdoers:
“If this court were to state that there was a good arguable case of unlawful market manipulation in a case where both the stock exchange and the FCA had each independently found that there was no arguable case at all, this could in fact be perceived as a finding that the system is in place for detecting and or acting upon possible market abuse are weak. This might be said to be an encouragement not a deterrent to those who might be minded to engage in unlawful market manipulation.”
Although private prosecutions and civil actions are becoming increasingly popular where a public prosecutor or regulator cannot or will not take action against an alleged wrongdoer, ultimately the pursuer will always be hamstrung if key evidence remains out of reach. Furthermore, in some instances courts and legislators have put in safeguards to prevent a free-for-all with respect to both private civil and criminal actions. Whilst this was a bold and innovative move by Burford, the High Court concluded that the granting of a Norwich Pharmacal order would likely have been the first step to circumventing those safeguards.
  EWHC 1183 (Comm)