Class Action securities litigation – investor reliance tested in High Court

For just over four years now it has been possible, under the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018, for multiple people or organisations with the same, similar or related claims to bring a single action in the Court of Session. Such an action is referred to as "Group Proceedings" and are broadly analogous to the concept of a "Class Action" which members of the public may be familiar with.

Having only been formally available to prospective claimants since July 2020, the Scottish system remains very much in its infancy. As it develops, and the Court of Session grapples with issues for the first time, it will likely be necessary to consider the approach taken in other jurisdictions which have a more firmly embedded class action procedure. It will be useful to do so both from the perspective of how a court can go about managing group litigation procedure, but also from the approach taken to discrete legal issues which arise in the context of a piece of group litigation.

We have previously written on the differences between Scotland and England in their approaches to group litigation. However, there is no doubt that – where appropriate – the English authorities will be the first port of call for those with an interest in the sorts of issues that might arise in future Scottish Group Proceedings, and in how the Scottish courts might (or might not) choose to address them. In that regard, the recent decision of Mr Justice Leech in Allianz Funds Multi-Strategy Trust & Ors v Barclays Bank Plc [2024] EWCH 2710 (Ch) will be of particular interest to those considering potential securities litigation, which is the largest niche of class actions raised in many jurisdictions furth of the UK.

The claimants were investors in the Defendants, Barclays Bank, and brought their action in terms of s90A and sch.10A of the Financial Services and Markets Act 2000. Their claims were based on various alleged misrepresentations and omissions in information and prospectuses issued by Barclays, arising out of a complaint against the Bank by the Attorney General for New York in 2014. The Bank was ultimately fined $70,000,000 by the US Securities and Exchange Commission. The case came before the High Court in England on an application by the Bank to strike out a large proportion of the cases against it, on the basis that those claimants could not show that they made their investment "in reliance on" the information published by Barclays (sch.10A 3(1) and 3(4)). These claimants were so-called "passive" index fund investors who had made professionally managed investments. Crucially for the question of reliance, they had not actually read or considered any of the published information which contained the alleged misrepresentations and omissions. Mr Justice Leech held that this was fatal to their claim, and accepted the arguments made by Barclays that an investor required to show that they, or a third party on whose advice they relied, had conscious knowledge of the false statement which had in turn 'induced' them to make the investment. Similarly, an investor who claimed there was an omission in the published information would require to show that he or a third party had read that document and would have invested on different terms than he did, had it included the omitted information.

The High Court's approach sets a high bar for prospective investors looking to bring a claim against issuers, and will exclude a significant proportion of passive UK investors who will not be able to satisfy the stringent test for reliance set out here. This would be the case even if those investors could otherwise prove that the issuer had published misleading information to the market. In the United States, where securities litigation is far more prevalent than in the UK, the courts are willing to accept more broadly-drawn claims on the basis that there has been "a fraud on the market". Such an approach is more investor-friendly and creates greater scope for group litigation in the securities space.

We have previously written on the possibility for a rise in securities litigation in Scotland in the context of group proceedings, and it will be extremely interesting to see how a Scottish Court would approach this issue. On the one hand, FSMA is a piece of UK legislation, and one would expect that it receives the same interpretation across the UK. On the other hand, this decision is one of the English High Court which would not be formally binding on a Scottish Court. It would be open to a judge of the Court of Session to depart from the strict approach on the meaning of 'reliance' taken by Mr Justice Leech and opt for a less-demanding standard. 

It will be interesting to see what approach the Scottish Courts will take if a FSMA s90A claim is ever brought before it. Indeed, the decision of Mr Justice Leech may not be the last word on the matter even in England, if appealed. For now, this area remains one to watch.