In an historic first, the High Court has delivered a judgment on liability arising from a breach of s 90A and schedule 10A, Financial Services and Markets Act 2000 (FSMA) in the case of ACL Netherlands BV & Ors v Lynch & Anor  [2022] EWHC 1178 (Ch). These provisions impose liability on issuers of securities to pay compensation to persons who have suffered loss as a result of misleading or untrue statements made by the issuer. Two conditions of liability must be met: (i) that a person discharging managerial responsibility (PDMR) within the issuer knew that the statement was untrue or misleading; (ii) that the claimant reasonably relied on the statement.

As it is the first decision on the merits of such a claim, it is one of the most important judgments in recent times for fraud and financial services lawyers. Running to 1,657 pages, it is also one of the longest judgments ever published by the High Court.

The decision, which found the defendants liable for untrue or misleading disclosures to the market, is significant for several reasons:

  1. The court provided some helpful analysis of the constituent elements of the cause of action provided by section 90A and schedule 10A.
  2. The judgment covers in considerable depth the practices for which the defendants were held responsible and the fraudulent vice of each. Some of these practices are explained below. Familiarity with these practices is valuable for financial services and fraud lawyers alike.
  3. The judgment considers what is and is not a ‘recognised information service', these being important gateways to liability under schedule 10A, FSMA.
  4. The judgment articulates certain principles as to what will constitute ‘guilty knowledge' on the part of the PDMR (given actual knowledge of the PDMR is one of the conditions to establishing the liability of the issuer of the securities under s 90A and schedule 10A).

This article analyses these issues.

Summary of the decision

The claimants included ACL Netherlands BV (ACL) and Hewlett-Packard BV (BidCo). ACL received the assets and liabilities of Autonomy Corporation Inc (Autonomy) from BidCo, which purchased the assets and liabilities of Autonomy in the first instance.

Mr Justice Hildyard found the defendants Michael Lynch and Sushovan Hussain, directors of Autonomy, liable for disclosures to the market which were untrue or misleading. The disclosures regarding Autonomy's financial performance were untrue because they did not accurately reflect Autonomy's practices of re-selling hardware at a loss and selling to parties not at arms' length on terms that would never be enforced. ACL and BidCo relied upon those disclosures when making their decision to purchase Autonomy's business. Had the true position been revealed, ACL and BidCo would have paid considerably less for Autonomy's business.


Autonomy was a highly successful UK start-up listed on the FTSE 100 and subject to IFRS accounting standards. Ostensibly the revenue that Autonomy received reflected the success of IDOL, which is an advanced software program. However, it was found that Autonomy was artificially inflating its revenue by at least six different methods. These methods became the focus for the claims made by ACL and BidCo. Two of these practices are explained in detail below. It was considered that each practice had the aim of accelerating the booking of revenue well in advance of receiving it and/or creating the appearance that Autonomy was more profitable than it actually was.

Autonomy's annual and quarterly reports recorded that it regularly met or exceeded its revenue targets. The reports did not disclose the practices described below. Likewise, the defendants did not disclose any of the practices during earnings calls held with market analysts. Once the claimants obtained access to all of the books and records of Autonomy, the position became clearer.

As set out above, s90A and schedule 10A FSMA contain a framework for imposing liability on issuers for misleading or dishonest statements. In this instance, the issuer of the securities was Autonomy, now owned entirely by BidCo. As it would have been pointless for BidCo to sue its own subsidiary, Autonomy formally accepted that it was liable to BidCo and Autonomy and then pursued the defendants. The claimants sought to fix the defendants with liability on the basis of clause 7(2) of schedule 10A, which gives the issuer a right of action against persons involved in the publication of untrue or misleading statements that cause others to suffer loss. The defendants are liable under that provision as PDMRs.

To succeed against the defendants, BidCo would have to establish liability as against Autonomy and then Autonomy would have to establish liability against the defendants. The judge referred to this as the “dog leg” structure of the claim.

Elements of the claim

As explained above, the dog-leg structure of the claim required the claimants to prove two headline points. First, that Autonomy was liable to BidCo. Second, the defendants were liable to Autonomy. More specifically, section 90A and schedule 10A requires the claimant to prove four essential elements:

  • The issuer of securities published information by a recognised means, such as a recognised information service or other means authorised to communicate to the market in question.
  • The published information contained untrue or misleading statements or omitted matters that should have been included.
  • A PDMR knew the statement to be untrue or misleading or was reckless as to whether it was either of those things. As to an omission, the PDMR must know that the omission is a “dishonest concealment of a material fact”.
  • The claimant must have purchased, held or sold, the securities in reliance on the information in question. The person's reliance must be reasonable.

The precise scope of defences to a schedule 10A claim are unclear at this stage. However, Hildyard J held that the defendants cannot defend such a claim on the basis that the claimants had an opportunity to discover the truth or should have conducted better due diligence. In particular, the judge held that the defence of contributory negligence is not available.

We now turn to the practices that Autonomy and the defendants engaged in. It is these practices, and the concealment of them, that gave rise to the claims.

Fraudulent practices

Two of the practices discussed in the judgment were as follows.

(i) Reselling of hardware

The hardware reselling practice was simple. Autonomy would purchase computer hardware and resell it to its customers. This practice generated significant revenue but made a loss after expenses. Where necessary, Autonomy justified the practice as a means of building a relationship with a potential purchaser of IDOL. Autonomy's annual reports aggregated the sales of hardware and software for the purposes of reporting profit such as to make it impossible to discern which category of sales generated revenue, profit or both. Similarly, the annual reports did not disclose the practice and referred to “appliance sales” and described the profit margins on those sales as being similar to software sales. By way of illustration, Autonomy recognised USD 31.1M of pure hardware sales as revenue in the second quarter of 2010. That amounted to 14% of total revenue for the quarter. Without that revenue, Autonomy would not have been able to meet its revenue target for the period. Critically, Autonomy then sought to minimise the role of hardware reselling in its annual report for 2010 and further sought to minimise the expenses associated with the reselling as sales and marketing.

(ii) Selling to friendly intermediaries

The second practice was to sell hardware to friendly resellers, who would sell on to third parties at arms' length. When Autonomy entered into a contract with the friendly reseller it would make clear to that reseller that it would not enforce the terms of the agreement. After completing the contract with the friendly reseller, Autonomy would book the revenue that it anticipated receiving after that reseller had on-sold the products to the third party. In reality, Autonomy would receive that revenue if and only if the friendly reseller completed a transaction with a third party. That was not guaranteed. In this way Autonomy could accelerate the receipt of revenue prior to any actual sale taking place. If the friendly reseller could not in fact resell the goods, Autonomy would find an alternative third party to whom the friendly reseller could resell the goods or Autonomy would forgive the debt that the friendly reseller owed to it. The sales to resellers made up a significant proportion of the revenue that Autonomy recorded. Because of these transactions, Autonomy met its revenue targets.

These practices enabled Autonomy to represent that it met its revenue forecasts in its audited accounts, reports (quarterly and annual) and during earnings calls with market analysts. Reliance on these statements persuaded the buyer of Autonomy as to its financial worth.

This article will now discuss three issues considered in the judgment. The first is what constitutes a recognised information service for establishing liability under these parts of FSMA.

Gateway to liability: publication through a recognised information service

The claimants framed their claims around the representations made in Autonomy's reports (quarterly and annual) and the earnings calls which the defendants held from 1 October 2010. The claimants did not attend these calls but had access to the transcripts. The earnings calls addressed Autonomy's practice of selling hardware and the impact on revenue. At no stage during the earnings calls did the defendants disclose that hardware sales were making losses. Indeed, the judge considered that the representations were “patently false” and the answers given to questions had the effect of “exacerbating the falsity”. However, the judge held that the representations made during the earnings calls and recorded in the transcripts could not be the basis of a claim under s90A, FSMA. What explains this gap in the legislation?

The reasons why the defendants were not liable for those deceptions are located in the terms of schedule 10A itself. As set out above, the schedule creates liability for issuers of securities in respect of untrue or misleading statements, but applies only to misleading or untrue statements published through recognised means. This is further defined to mean a recognised information service. Item 2(4) of schedule 10A identifies recognised information services as those used in relation to securities markets for the dissemination of information in accordance with the transparency rules. The judge held that earnings calls are not a recognised information service.

In their submissions on this issue, the claimants pointed to the inclusion of dial-in details in the quarterly and annual reports to enable analysts to join the earnings calls. The annual reports were transmitted through a recognised information service. Accordingly, the claimants argued that what was said during the calls and recorded in transcripts should be treated as incorporated into these reports. The judge rejected the claimants' argument for three reasons. First, the dial-in details did no more than assist one to participate in the call. Second, Autonomy neither authorised, issued nor approved of the transcripts of the calls. Third, there was no evidence that the claimants' representatives relied on those transcripts in deciding to purchase Autonomy's business. In this regard, the claimants must show that they actually relied on the statements. We return to that final issue later.

The representations made during earnings calls and recorded in the transcripts were therefore not a legally sufficient foundation for a breach of schedule 10A, FSMA. Parties should bear in mind however, that even if representations made on earnings calls will not lead to liability under FSMA, they may still lead to liability for misrepresentation under the common law. On the other hand, this may be a safe harbour for PDMRs: can they limit their exposure under FSMA by making financial projections during earnings calls and omitting them from annual reports? Alternatively, perhaps PDMRs would be well served by making it clear during the call that they honestly hold the views that they articulate. Further still, perhaps consideration should be given to disclaimers at the end of the call regarding reliance.

However, the annual and quarterly reports were published in accordance with schedule 10A, FSMA. The claimants proved that the statements regarding revenue in those reports were false. We now consider the state of mind that defendants must hold in order for the court to find them liable in respect of such statements.

The required mental state of the PDMR: dishonesty (“guilty knowledge”)

The second issue for discussion relates to the test of dishonesty of the defendants as PDMRs. The claimant must show that a PDMR knew that the relevant statements were untrue or misleading at the time of publication in order for the issuer to be liable. Schedule 10A, FSMA provides for two types of dishonesty. The first is actual, subjective dishonesty. The second, in relation to an omission, is dishonesty by reference to what persons who regularly trade on the securities market in question would regard as dishonest (schedule 10A, clause 6). The latter reflects the common law rule in Ivey v Genting Casinos (UK) Limited  [2018] AC 391, [74], which provides that dishonesty should be assessed by reference to the standards of ordinary people.

The judge articulated specific principles in relation to the knowledge that a PDMR must hold, and the time that they must hold it, to give rise to liability. He drew considerable support from a fraudulent misstatement decision, Derry v Peek (1889) 14 App. Cas. 337, to identify the three specific principles. First, actual knowledge of the falsity of each pleaded statement is necessary in order to render the defendant liable. Second, the defendant must appreciate that the statement is untrue at the time that it is made or appreciate that relevant information is not being disclosed. Further, in the case of omissions, the PDMR must know that there is a requirement to disclose the concealed information. Third, the judge considered that there could be statements that fall within a range of opinions on a matter in respect of which it is possible to hold differing, but nonetheless reasonable, views. Provided that a statement falls within a continuum of views that are supported by the judgment of professional advisers, such a statement will not be regarded as dishonest.

These principles seem to raise more questions than answers. For instance, senior executives often look at one draft only, in reliance on assurances from subordinates as to the truth of the statements made in the drafts. To what extent can PDMRs rely on those assurances? Further still, can a PDMR rely on their ignorance of legal or accounting requirements in respect of an obligation to make a specific disclosure that is overlooked? The judge held that the more important a matter that is omitted, the more likely that its omission was deliberate and therefore dishonest. Difficult questions emerge about how one determines the relative importance of a particular matter and to whom it is important.

Looking back on the principles articulated, one wonders whether the statute should be construed without reference to Derry v Peek. That decision fitted well with the commercial and legislative context of the period. However, the FSMA offers a comprehensive legislative scheme that is framed with regard to the 2004 Transparency Directive. Greater reliance on the text of the legislation and the Transparency Directive may assist to resolve the problems identified above.

The role of professional advisers

One defendant in particular argued that he prepared the quarterly and annual reports in complete reliance on the company's auditor and for that reason his conduct should not be regarded as dishonest. The judge did not consider that this was a catch-all defence.

The judge held that the extent to which a defendant can rely upon their consultation of advisers turns on the context in which they were consulted. By way of example, he considered that a person responding to an allegation of a misleading omission from the company's accounts could rely upon advice received from the company's auditors that the relevant information could be appropriately omitted. However, and by way of contrast, it would not be open to the defendants in this case to rely upon the company's auditors for misleading statements in “narrative front-end” reports and presentations of Autonomy's business activities. Could the company's solicitors have provided advice in relation to the formulation of those narrative reports which would have insulated the defendant from schedule 10 liability? The judge did not resolve this matter, ending the discussion with the cryptic statement that “on matters within the directors' proper province, the company's auditors cannot be regarded as a litmus test nor a safe harbour”. Whether a matter is within the proper province of a company director, such that professional advisors cannot assist, is a factual matter to be worked out on a case-by-case basis.

Reliance on the misleading or untrue statements

The third issue is proving that the claimants actually relied upon the untrue or misleading statements and that the reliance was reasonable. The judge made three important points regarding reliance.

First, the statute expressly requires that the claimant must actually rely on the  information at the time that they made their decision to invest. The judge decided that the misleading statement that the claimant relies upon need not be the only reason for the claimant to make the investment decision. It is sufficient that the misleading statement “has an impact on the mind”. Accordingly there may be other reasons why the claimant invested but this fact will not excuse the defendants from liability if they relied upon a representation that the defendant knew to be false. Helpfully for claimants, the judge further held that claimants can rely upon a “presumption of inducement”. That is, once the claimant shows that the defendants made a statement that is material and likely to induce the claimant to make the investment decision, the judge should infer that the claimant relied upon the statement. 

Second, reasonableness should be decided by reference to the circumstances surrounding the decision to invest. The conditions under which the claimant is working, any caveats and the “apparent reliability” of the statements made are all relevant to the decision as to whether reliance is reasonable. In this way the objective surrounding circumstances have a bearing on deciding whether the reliance was reasonable.

Third, the defendants in this case could not attack the claimants' reliance on the misleading statements on the basis that the claimants' due diligence was deficient. Even if it were deficient, that would be no defence to the claimants relying on a false statement intentionally made.

Applying these principles to the claimants' conduct, the judge found that they did actually rely on the accuracy and completeness of the figures and descriptions in the annual and quarterly reports, and their reliance was reasonable in light of the assurances that the defendants gave to the claimants.

Concluding remarks

This saga has not yet concluded. Issues of interest for fraud and financial services lawyers are yet to be resolved. First, what is the appropriate measure and what is the proper quantum of compensation? The judge was at pains to point out that a no-transaction case was unsustainable; the purchaser regarded IDOL as an “almost magical” computer program. The claimants were anxious to have it. Second, what is the significance of the judgment for at least one of the defendants who is facing charges overseas?

In light of the judgment, difficult issues arise in the preparation of accounts and annual reports. The judge indicated that if a matter is left out, then it will be inferred to have been intentionally left out if it is an important matter. It is a challenging task to determine what matters are important to whom. Further, it is a challenging matter to determine what matters may assume a greater or lesser importance as time passes. More problematic is the extent of the role that professional advisers can play in providing comfort to directors. For anyone holding PDMR status, perhaps even greater vigilance is required in supervising the preparation of the company's reports.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.