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Can Financial Analysts Libel Companies?

Tuesday, 21 October 2014

This is an interesting question as some financial analysts have considerable power over the fortunes of company stock prices in the financial markets. A lawyer’s standard answer is that it will always depend upon the circumstances but a recent case in the UK shows that it is possible.

Legal services firm Quindell, an AIM-listed alternate business structure (ABS), recently claimed victory against analyst Gotham City Research, following a recent High Court judgment.

The US analyst was found to have libelled the ABS, following the publication of a report questioning the profit quality of the firm and the accuracy of its accounts; the report resulted in close to £1bn being wiped from Quindell’s market value.

When a Victory in Court Might be Rather Shallow

Although the victory for Quindell does prove that it is possible for a company to win a libel case against a research company in court, the facts are not as persuasive as they seem on the surface.

In this case judgment was made in default, with Gotham City Research failing to even acknowledge the particulars of claim and indeed failing either to file a defence or to show up. Therefore, in practice, Quindell’s victory may be seen as a mere procedural step or formality, following the unlikelihood and difficulty of both the judgment being recognised in the US and for costs to be recouped.

The fact that US courts can, under the Speech Act, refuse to enforce a foreign libel judgement (if it would undermine the First Amendment) is one reason for the difficulty. Another reason is the perceived nature, i.e. the lack of legal substance, especially in terms of disclosure and factual analysis, of an undefended default judgment.

Furthermore, the fact that the libel claim was made by a British company against a non-resident and non-domiciled legal person, in conjunction with the fact that the report was published on a US website for a US audience, makes it probable that Quindell would find it difficult to have judgment upheld and indeed enforced in the US, where Gotham City Research operates.

Analysts Beware

The victory presents another reminder to analysts and publishers to be wary of the information they publish, especially when such information is market-sensitive. Reports of specific companies, such as leading company analyses or critiques of a given company’s annual reports, are typical of the types of reports which may be responsible for directly increasing or decreasing dramatically a company’s market value.

If a company were to issue shares at a lower market value than would otherwise be the case following a libellous report making untrue insinuations, then the tortfeasor may be held liable for the resulting loss in capital raised.

Although the High Court, in Quindell’s case, will begin its assessment of damages in November, it remains the case that for Gotham City Research to pay damages and/or costs, a US court in Delaware would need to enforce the English judgment.

Such a legal proposition differs dramatically from a purely domestic libel case, where both putative tortfeasor and claimant are automatically legally obligated to comply with the court’s decision.

For specialist advice contact Peter Gourri today by email PGourri@rollingsons.co.uk or telephone 0207 611 4848.

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