The burden of proof in market abuse cases

Author:Andrew Haynes
Position:Department of Law and Social Sciences, University of Wolverhampton, Wolverhampton, UK
SUMMARY

Purpose – The purpose of this article is to determine the burden of proof that is applicable in the range of activities covered by the civil offence of market abuse. It also considers the approach adopted in the USA and discusses the extent to which that approach may be worth applying in this country. Design/methodology/approach – The methodology adopted is a mixture of black letter ... (see full summary)

 
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Introduction

It is commonly known that the burden of proof required in criminal cases operates at a standard “beyond all reasonable doubt” and that in civil cases it rests “on a balance of probabilities”. In the latter instance if the evidence suggests to the court that it can say if “we think it more probable than not the burden is discharged, but, if the probabilities are equal, it is not”1. There is the additional principle that “everyone charged with a criminal offence shall be presumed innocent until proved guilty”2, though there are areas where there are limits on this3; and in addition the same principle applies in civil cases where the party bringing the action is the one who must prove it. This article considers this and how the burden of proof operates in the context of market abuse. It also briefly considers whether the alternative US approach of an “an alternative burden of proof”4 offers any solutions.

Dennis (2007, p. 438) made a classic definition of the issue where he stated:

The term “burden of proof”, also known as the “onus of proof”, refers to the legal obligation on a party to satisfy the fact finder, to a specified standard of proof, that certain facts are true […]. The term “standard of proof”, also known as the “quantum of proof”, refers to the degree of probability to which facts must be proved to be true.

He continued Dennis (2007, pp. 439-450) “there is more than one type of burden known to the law” Denning (1945) but the case law seems opaque on what precisely this is. A useful starting point from which to analyse the current law on this point is the 1951 case of Bater v. Bater. Here, Lord Denning said5:

A civil court, when considering a charge of fraud, will naturally require a higher degree of probability than that which it would require if considering whether negligence were established. It does not adopt so high a degree as a criminal court, even when it is considering a charge of a criminal nature, but still it does require a degree of probability which is commensurate with the occasion.

In a later case6 he added:

The case, like any civil case, may be proved by a preponderance of probability, but the degree of probability depends on the subject-matter. In proportion as the offence is grave, so ought the proof be clear.

This ties in with Ungoed-Thomas J's remark in Re Dellow's Will Trusts7 that “The more serious the allegation the more cogent is the evidence required to overcome the unlikelihood of what is alleged and thus to prove it”.

An alternative approach can be traced back to Hornal v. Neuberger Products8 where Morris LJ said:

Though no court and no jury would give less attention to issues lacking gravity than to those marked by it, the very elements of gravity become a part of the whole range of circumstances which have to be weighed in the scale when deciding as to the balance of probabilities.

Unfortunately, this does not provide a full explanation and nor does the later case of Thomas Bates and Son v. Wyndhams (Lingerie) Ltd9 where Buckley LJ remarked that:

[…] in civil proceedings a fact must be proved with that degree of certainty which justice requires in the circumstances of the particular case. In every case the balance of probability must be discharged, but in some cases the balance may be tipped more easily than others”.

However, is this distinction one that the judiciary are agreed on? As Lord Carswell pointed out, it is apparent from Morris LJ's analysis in Hornal v. Neuberger Products Ltd10 that he did not regard it as laying down a more exacting standard than the balance of probabilities. He said8:

Though no court and no jury would give less careful attention to issues lacking gravity than to those marked by it, the very elements of gravity become a part of the whole range of circumstances which have to be weighed in the scale when deciding as to the balance of probabilities.

There is the possibility that although later cases (see below) have interpreted this as being a distinct line of reasoning from earlier cases such as Bater v. Bater8 it may not be the case. Is a “higher degree of probability” a different legal concept than “the balance (being) tipped more easily”9 or are they just different ways of conceptualising something that has the same effect? What is clear is that in a run of cases the logic started to take on a slightly different direction. This approach, which provides an alternative way of analysing the situation seems currently to be in the ascendancy, though it is not one that is universally accepted by later courts ( Pattenden, 1988 ; McBride, 1999 ; Alcock, 2007 ; Mirfield, 2009 ). The logic developed in Re H (Minors) Sexual Abuse: Standard of Proof11 where Lord Nichols raised the suggestion that the issue of the balance of probability should be examined in the context of the likelihood of the events having occurred. He went on to say:

When assessing the probabilities the court will have in mind as a factor, […] that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability. Fraud is usually less likely than negligence. Deliberate physical injury is usually less likely than accidental physical injury […]. Built into the preponderance of probability standard is a generous degree of flexibility in respect of the seriousness of the allegation.

To which he added:

Although the result is much the same, this does not mean that where a serious allegation is in issue the standard of proof required is higher. It means only that the inherent probability or improbability of an event is itself a matter to be taken into account when weighing the probabilities and deciding whether, on balance, the event occurred. The more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence will be established.

In CD Re, Northern Ireland12 Lord Carswell continued the argument when he stated that it is:

[…] recognised that there is a single civil standard of proof, the venerable debate as to whether there was a third or intermediate standard between the civil and criminal standards having been put to rest by the decision in Re H (Minors) (Sexual Abuse: Standard of Proof) where the flexible approach to the civil standard of proof was applied because of the seriousness of the allegations against the accused. […] The offences alleged against the appellant called for a flexible approach to the civil standard of proof requiring more cogent evidence than would be conventionally required. In that case the court went on to say that the need to look for compelling evidence to discharge the burden of proof is not confined to the situation where it can be said that the commission of offences is inherently unlikely.

This is an issue we will return to.

Thus, despite its crucial importance this area of law remains less than clear and we have a situation where the House of Lords does not have a fully consistent position. Further analysis had been provided by Lord Nicholls of Birkenhead who suggested in Re H Minors) (Sexual Abuse: Standard of Proof)12 that:

[…] some things are inherently more likely than others. It would need more cogent evidence to satisfy one that the creature seen walking in Regent's Park was more likely than not to have been a lioness than to be satisfied to the same standard of probability that it was an alsatian. On this basis, cogent evidence is generally required to satisfy a civil tribunal that a person has been fraudulent or behaved in some other reprehensible manner. But the question is always whether the tribunal thinks it more probable than not.

As Lord Brown of Eaton-under-Heywood remarked13 not all the earlier cases can be reconciled with this approach14, but even if they could there is still an inherent problem, i.e. whether the logic itself stands up. Surely the fact that an event is less likely to have happened will require proof of sufficient strength to offset the extent of the improbability, but this is not the same thing as the issue of the level of proof that is required in civil actions alleging matters that are either criminal in nature or serious in the impact they will have on the accused. It is not the case that the respondent in a civil case is always less likely to have done something that is criminal or likely to damage his career; it depends on the precise facts and circumstances. The assumption of inverse proportionality between the likelihood of an event and its illegality seems to be an assumption rather than a conclusion reached on the basis of careful analysis ( Mirfield, 2009 ). This is particularly relevant in the context of market abuse actions. Is it really the case that a type of market abuse that falls foul of one of the Sub-sections of S. 118 Financial Services and Markets Act 2000 (FSMA) and also amounts to a criminal offence is less likely to occur than one that is not also criminal? Indeed, as is seen below, statistically the opposite seems to be the case.

It has been accepted15 that the criminal standard of proof is appropriate in some civil cases. This includes cases where the proceedings are so closely connected to criminal ones that it is deemed appropriate to recognise the fact in the evidential approach, e.g. commitment for civil contempt of court and binding over. It is also applied in a range of cases where what Mirfield (2009) as a “policy...

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