April has been an interesting month for business lawyers because the American Supreme Court gave judgment in a securities fraud case, Dura Pharmaceuticals v. Broudo. Although securities fraud litigation takes place under a statutory regime, originally introduced in the aftermath of the Great Depression, it is close enough to the law of deceit to make it interesting for English common lawyers. If a pharmaceutical company announces it expects regulatory approval for new product knowing that that is not true, and the public buy shares in that company in reliance on that announcement then shareholders who lose money when the falsity of the claim becomes known must have an action in deceit. A key difficulty for shareholders who wish to bring a class action is that at common law, each shareholder must prove reliance on the false statement. The statutory regime, founded on the Securities Exchange Act 1934, creates a presumption of reliance.

Since the Act was introduced, both the legislature and the courts have introduced a number of measures to curb unmeritorious claims. In principle theses are all too easy in the American system, where it is unusual for a successful defendant to recover costs, and where it is possible to plead a speculative plea of deceit in order trigger the discovery process, in the hope of fleshing out a claim.

In Dura Pharmaceuticals the Supreme Court has in effect insisted that causation must be properly pleaded and proved. The allegation – and the present decision is on a preliminary issue, so it remains just an allegation – is that the pharmaceutical company claimed it was going to get regulatory approval for a new spray for treating asthma. Share price went up. Plaintiffs bought shares. Regulatory approval turned out to be further off than shareholders had hoped. Share price declines sharply. Can the new shareholders recover their losses? The Supreme Court decision, unanimously reversing the judgment of the 9th circuit appeals court, in a nutshell, said that the causation of the loss had to be proved. This seems to mean in practice that the Plaintiffs must prove that the loss of share value was caused by the fact that the press release concerning the new asthma spray turned out to be untrue. Or you can turn the argument around (and this is the way it was put in Dura Pharmaceuticals) and say that the share price reverted to its true value, and that the loss was caused by the artificially, and fraudulently, inflated price at which the plaintiffs bought.

In the words of Justice Breyer, giving the opinion for the unanimous court,
Given the tangle of factors affecting price, the most logic alone permits us to say is that the higher purchase price will sometimes play a role in bringing about a future loss. It may prove to be a necessary condition of any such loss, and in that sense one might say that the inflated purchase price suggests that the misrepresentation (using language the Ninth Circuit used) “touches upon” a later economic loss. Ibid. But, even if that is so, it is insufficient. To “touch upon” a loss is not to cause a loss, and it is the latter that the law requires. 15 U.S.C. § 78u—4(b)(4).

English lawyers will of course think of Smith New Court Securities v Scrimgeour Vickers [1996] UKHL 3. The approach which that case illustrates is in a way much more generous to the plaintiff. The formulation there, following Doyle v. Olby (Ironmongers) Ltd. [1969] 2 Q.B. 158, is that the defendant must make good all the plaintiff’s losses flowing from entering the transaction. Thus, if a lie induces someone to buy shares then the impact of that lie on the share price is neither here nor there – what matters is simply whether the lie induced the buyer to enter a loss-making transaction.

To be fair, the contrast and comparison between American securities fraud law and English (or American) law of deceit is more subtle than that. The comparison is thought provoking. Notwithstanding this defendant-friendly decision of the Supreme Court, it remains true that if you buy shares in an American company, your chances of recovering losses caused by wrongful manipulation of the share price are far better than if you buy shares in a British company and suffer in the same way. On the basis that it offers better investor protection, and a more uncomfortable ride for disreputable management, the United States deserves the large inflows of capital on which its economy thrives.

Now that the present Labour government have had several years to bed in, the deeply anti-liberal tendencies which cold war warriors used to warn us were part and parcel of socialism are biting hard. The British union movement was born in protest. It now funds the party which in government has smuggled past parliament draconian powers to suppress protest. For example, the public order provisions in the Serious Crime and Police Act 2005 part 4, in particular the criminalizing of attempts to deter lawful activity (in the amendment made by ss.125 to the Protection from Harassment Act 1997), are clearly designed to criminalize a wide range of peaceful protest. The extraordinary extension of police powers in part 3 of the Serious Crime and Police Act 2005 are also available against peaceful protesters and indeed any one else who irritates the police, since they give the police powers which seem likely to permit them to justify arresting almost anyone anywhere. It is unfortunately consistent with human nature that the union movement chooses to fund a party astute to close the door on just that kind of protest through which it fought its own way into the political establishment.

One reason these changes take place without much public outcry is that we who are legally literate, so long as we are politically moderate, tend to assume that we are unlikely to be at the sharp end of some these law and order measures. Most of the time that is true. We are rarely targets. However, anyone can suffer from an unjust law as a result of a mix-up.

For example, one of the numerous draconian rules introduced by Labour can land you with a frozen bank account, and no explanation why it is frozen. Some months ago, my current account was frozen. Endless expensive calls on my mobile phone, day after day, yielded a series of polite, but improbable and inconsistent ‘explanations’ from the bank, which usually amounted to advice to call back tomorrow to speak to X, the only person who knew anything about it. X referred me to Y as the only person who really knew. Y would call tomorrow. Tomorrow, Y was off sick. etc. etc. It was no good saying that I had several children crying with hunger, no money to pay urgent bills, and no money to put petrol in the Bentley. It was simply impossible to get any sense out of the bank. One day the account was unfrozen as suddenly as it had been frozen. I assumed, rightly as it transpired, that some woodentop in a back office in Barnsley or Bangalore had decided that I must be suspect because some suspect character had used my address. The most cursory inspection of the modest and regular movements in the bank statements would have demonstrated that there was no real ground for suspicion. However, the bank had stupidly formed a suspicion.

I assumed that if I really did have starving children I would have been able to apply to the court to unfreeze the account. However, a Chancery Division judgment this week shows that in fact the customer with the kind of problem I faced has no remedy in court. Mr Justice Laddie, in Squirrell Ltd. v. National Westminster Bank (Customs and Excise Intervening) [2005] EWHC 664 (Ch) (here summarised from Butterworths All England Direct, an online subscription service) gave no hope to the hungry children or anyone else who depends on day to day to access to a current account. The reference to hungry children is not facetious – for many persons of modest means, having a current account frozen without being offered any, or any credible, explanation, and without even being questioned about it, can be very distressing materially as well as psychologically. If you don’t have credit cards you can find yourself dependent on having friends or family at hand to provide some cash for groceries and travel and so on. Serious physical hardship and actual hunger is a real possibility, as I know from experience.

However, what Laddie J did was to interpret the Proceeds of Crime Act 2002 s.328(1) as meaning just what it says. The section reads as follows:
‘A person commits an offence if he enters into or becomes concerned in an arrangement which he knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person.’
In other words, the bank commits an offence, if it lets a customer use an account once it has formed a suspicion about the account. It does not seem to matter that the suspicion is a small one. It does not seem to matter if the suspicion would be transparently foolish to any person of moderate intelligence. The account must be suspended. The bank will not commit an offence if it notifies an appropriate authority, and then unfreezes the account seven days later. This is provided by a complex set of reporting (or if you like, snitching) rules, and the seven-day time limit is in s. 335. However, note that the seven days do not start to run when the account is suspended, but when the bank has reported its suspicions. In my case it happens my account was suspended for exactly seven days, although each day I was promised some solution or explanation on the following day. If, having reported, the bank is asked to keep the account suspended, the time limit is 31 days.

In Squirrell the suspicion seems to have arisen, although this is not entirely clear, because of a Customs and Excise investigation, which caused the bank to suspend the account. The Act requires it to do so temporarily without the protections for the account holder which go with a freezing order. Under a freezing order one would be allowed at least funds to eat. The Proceeds of Crime Act permits the bank or, in effect, an official investigation, to deprive the bank customer of access even to enough money to buy a loaf of bread, as I know from experience. In order to do so the suspicion need not be strong or well founded. It just has to be a suspicion, any suspicion.

It is to be hoped that the courts will ‘read down’ this harsh rule in an appropriate case. In the meanwhile, practitioners may consider advising any client who depends on access to a current account to keep a float of cash, particularly if that client’s address is in a building where there are other flats or offices, thus increasing the risk that the bank will get in a muddle and form a suspicion concerning the account based on the address alone, as happened to me. I used to smile and shake my head at old people who insisted that the only safe place for one’s money was under the mattress, but the protections of the citizen have been so cut down under Labour, in this as well as in other ways, that those old people’s instincts have proved right.

Dr John Birchall - Professional English, Legal English, and Common Law Training