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Claim No: CFI 054/2020

THE DUBAI INTERNATIONAL FINANCIAL CENTRE COURTS

IN THE COURT OF FIRST INSTANCE

BETWEEN

(1) EMIRATES REIT (CEIC) PLC
(2) EQUITATIVA (DUBAI) LIMITED

Applicants

and

NASDAQ DUBAI LIMITED

Respondent

ORDER OF JUSTICE ROGER GILES

UPON the Applicant’s claim filed on 22 June 2020 for a Norwich Pharmacal order (the “Application”)

AND UPON hearing counsel for the Applicants and counsel for the Defendant at a hearing on 19 October 2020

AND UPON reviewing the documents recorded on the Courts’ file

IT IS HEREBY ORDERED THAT:

1. The Application is dismissed.

2. The Applicants shall pay the Respondent’s costs of these proceedings, assessed at AED 50,000, within 14 days of this Order.

Issued by:
Nour Hineidi
Registrar
Date of issue: 4 November 2020
Time: 1pm

SCHEDULE OF REASONS

1. This is an application for a Norwich Pharmacal order, after Norwich Pharmacal Co v Customs and Excise Commissioners [1974] AC 133. In that case the House of Lords, drawing on the ancient procedure of a bill of discovery in equity, endorsed relief whereby a third party is required to assist a person who has suffered damage from wrongful conduct by providing information, typically information enabling identification of the wrongdoer. Lord Reid summarised the principle (at 175):

“… if through no fault of his own a person gets mixed up in the tortious acts of others so as to facilitate their wrong-doing he may incur no personal liability but he comes under a duty to assist the person who has been wronged by giving him full information and disclosing the identity of the wrongdoer. I do not think that it matters whether he became so mixed up by voluntary action on his part or because it was his duty to do what he did. It may be that if this causes him expense the person seeking the information ought to reimburse him. But justice requires that he should co-operate in righting the wrong if he unwittingly facilitated its perpetration.”

2. The basic principle has since evolved. While relief is usually by ordering production of documents, it can be by ordering other means of providing information. The principle extends to contractual or other wrongdoing as well as tortious wrongdoing (eg P v T Ltd [1997] 1 WLR 1309), and the applicant need not intend to bring legal proceedings but may have another legitimate purpose, such as disciplinary action or the dismissal of an employee (Ashworth Hospital Authority v MGN Ltd [2002] 1 WLR 2033; The Rugby Football Union v Consolidated Information Services Ltd [2012] 1 WLR 3333: “The Rugby Case” at [15]). The relief goes beyond providing the identity of the wrongdoer, and can extend to provision of information necessary for bringing a claim against the wrongdoer (sometimes referred to as the missing piece of the jigsaw); but it remains an exceptional power, and cannot be used as a fishing expedition to determine whether the applicant has a good case, or to gather evidence for the applicant’s case (Ramilos Trading Ltd v Buyanovsky [2016] CLC 896 (“Ramilos”) at [62]).

The February Trades

3. The First Applicant (the “Company”) is an investment company whose shares are admitted to the DFSA‘s Official List of Securities and traded on, and only on, the Nasdaq Dubai exchange. The Second Applicant (the “Manager”), a private company registered in the DIFC, is the fund manager for the Company. The Respondent (“Nasdaq”), also a private company registered in the DIFC, conducts the DIFC regulated exchange on which the Company’s shares are traded.

4. The Company’s shares are relatively illiquid, due to low volumes of trading, lack of depth of investors and some restriction on international traders. They are vulnerable to trading with a view to manipulation of the market price.

5. On each of 5 February, 6 February and 13 February 2020 a small trade in the Company’s shares was executed at the start of the “closing auction“ period, the period at the end of the day at which the closing price for the traded securities is determined. Each was by entry of a sell order at a price below the last transaction price, and below the prevailing best bid price by 3.3%, 11.3% and 8.9% respectively, and had the effect of lowering the closing price for the shares and so the opening price on the next day. The Applicants contend that there is no apparent economic rationale for the trades (in particular, on 5 February 2020 there was an unexecuted buy order at a price above the sell order), and that from the timing, size and nature of the trades they were entered into in order to lower the closing price, a form of market manipulation known as “marking the close”.

6. The trades were placed by a London broker (the “Broker”) on behalf of client(s) (hereafter, the “clients”). At the time of the trades, Nasdaq did not know the identity of the clients on whose behalf the trades were placed. In the course of reviewing the trading activities following complaint by the Applicants, in the exercise of its investigatory powers against the Broker as a Member, it ascertained their identities. Pursuant to its regulatory obligations, Nasdaq referred the trades to the DFSA for its further review and investigation, the referral including the identities of the clients. However, Nasdaq considers that it is constrained by confidentiality obligations from providing the identities of the clients to the Applicants and has declined to do so.

7. By this application, filed on 22 June 2020, the Applicants seek to obtain from Nasdaq the identities of the traders, and also details of any further trades made by the same traders from 1 February 2018 to date.

8. Nasdaq adopts a neutral stance in the application, subject to provision of an undertaking as to damages and payment of its reasonable costs and expenses of the application and of compliance with any order made. It provided a witness statement of its Chief Executive Officer, and appeared at the hearing to make brief submissions on the two above matters.

Conditions for Relief

9. A frequently adopted statement is that of Lightman J in Mitsui & Co, Ltd v Nexen Petroleum UK Ltd [2005] 3 All ER 511 at [21]:

10. When these conditions are satisfied, it remains for the court to consider all the circumstances in order to assess whether the interests of justice require the relief. In The Rugby Case, their Lordships said at [16] that the need to order disclosure will be found to exist only if it is “a necessary and proportionate response in all the circumstances”, and at [17 ] that the essential purpose of the remedy is to do justice and that this involves the exercise of discretion by a careful and fair weighing of all relevant factors. A number of factors were identified, the first being “ the strength of the possible cause of action contemplated by the applicant for the order”; others were the strong public interest in allowing the applicant to vindicate his legal rights; whether making the order will deter similar wrongdoing in the future; whether the information could be obtained from another source: whether the respondent ought to have known that he was facilitating arguable wrongdoing; whether the order might reveal the names of innocent third parties and, if so, whether they might suffer harm as a result; and the degree of confidentiality of the information sought.

11. In the present case, I am satisfied that (albeit innocently) Nasdaq was mixed up in and facilitated the claimed wrongdoing: see also Burford Capital Ltd v London Stock Exchange Group plc [2020] EWHC 1138 (Comm) (“Burford”), in which it was not questioned that the Stock Exchange was innocently mixed up in alleged market manipulation. Nasdaq can provide the information – its concern for confidentiality obligations comes in at the discretionary stage. I am also satisfied that relief against Nasdaq, at least by providing the identities of the clients, is necessary if the Applicants are to bring legal action against the clients: the Applicants need the identities for that purpose, and it is not realistic to require them to obtain the identities from the Broker or from the DFSA. The matter for consideration is the wrongdoing and the legal action founded on it proposed by the Applicants.

The Applicants’ Causes of Action

12. The Applicants submitted that the trades, as market manipulation, founded action for injunctive relief and/or compensation for loss; alternatively (although they said they did not need to go this far) when taken with other matters, a claim for unlawful conspiracy.

Injunction and/or compensation

13. The Market Law, DIFC Law No 1 of 2012, applies in the jurisdiction of the DIFC. Article 54 on which the Applicants relied provides:

14. Breach of Article 54 may be restrained by injunction. Pursuant to Article 94 of the Regulatory Law, DIFC Law No 1 of 2004, an intentional, reckless or negligent breach of Article 54, or fraud or other dishonest conduct in connection with a matter arising under it, gives rise to liability to compensate for any loss or damage suffered as a result of such conduct.

15. It is necessary, but also sufficient, that there is a “good arguable case” for the wrongdoing; see Ramilos at [12] – [23] and Burford at [33]. On one view, in Trustee in Bankruptcy and Liquidator of Cash Plus Ltd [2009] DIFC CFI 024 at [14] Sir Anthony Colman suggested a more demanding standard of proof, but the standard of a good arguable case is now well established and on a proper reading his observations were directed to proof that the respondent held the information sought: that is not here in question. What is less clear, and is discussed by Andrew Baker J in Burford at [35] – [43], is whether, even if the legitimate purpose is not to bring legal proceedings, the applicant must have a cause of action against the wrongdoer, or whether existence and strength of a cause of action wholly come in at the stage of weighing all relevant factors.

16. In the absence of adversarial submissions, that is not a matter to be decided now, and it need not be because the Applicants assert and rely on possible legal action against the clients and maybe others. But where the point of the application is contemplated legal action, the strength of the possible cause of action may have particular importance amongst the factors to be weighed. Being an exceptional power, a Norwich Pharmacal order should not be made unless there is a real purpose to be served because it is shown that the contemplated legal action, aided by the information sought, has a sound basis, and its strength or weakness is then placed in the scales.

17. I accept that the February trades have the hallmarks of market manipulation, and that there is a good arguable case of breach by the clients of Article 54 by, in short, creating an artificial closing price for the Company’s shares. But this is a quite limited conclusion. There were the three occasions only. There was no evidence of trading after the occasions to take advantage of the low closing price, or indeed of absence of such trading, and the evidence did not show one way or the other what effect they had on future trading or suggest what effect they had on the share price beyond the immediate opening price. Nor does it mean that one or both of the Applicants have a cause of action resting on the breach of Article 54.

18. The Applicants were not directly affected by the lowering of the share price: the Company does not hold shares in itself, and it was not suggested that the Manager held shares (other than the “Manager Share”) or traded in shares in the Company. They outlined their potential losses from the market manipulation as follows. For the Company, it was said that it required finance for its investment activities, and financiers were influenced by its share price; so that an artificial lowering of the share price could hinder it in obtaining finance and thereby affect its profitable investment activity. For the Manager, it was said that its performance fee was determined by reference to the net asset value of the Company’s investment fund, so that lesser value because the investment activity was hindered brought a loss to it; and also that, under an agreement with a “market maker” – perhaps more accurately, an approved liquidity provider under the DFSA Rules – engaged to fund trading in order to encourage liquidity in the Company’s shares, it was obliged to make good losses suffered by the market maker, so that an artificial lowering of the share price could bring a loss to it through making up any such losses.

19. The witness statement of Mr Sylvain Vieujot, a director of the Company and the Chief Executive Officer of the Manager, said nothing of these matters. I permitted supplementary oral evidence. While describing these avenues to loss, Mr Vieujot had clearly been called upon unprepared, and did not say that any of these things had happened. His evidence as a whole did not rise above description of ways the Applicants could have suffered loss, and fell short of evidence that they had or even were likely to have done so.

20. There was nothing to take this beyond what could have been. I have said that there was no evidence of trading to take advantage of the low closing price; nor was there evidence of the share price after the three occasions suggesting a continued effect of the February trades. While the Company’s shares are illiquid, they are not stagnant: the February trades were parcels of 110, 365 and 257 shares, but on the respective days over 54,000, 158,000 and 1,640,000 shares were traded. It is by no means evident, and there was no evidence to support it, that any effect of the trades on the share price was not soon overtaken by the market’s view of the true value of the Company’s shares. There was no evidence that the Company had sought finance at a time when the share price might have been affected by the trades, or been hindered in obtaining it or obtained it on less favourable terms because of a current low price, being an artificially lowered price. From the Manager’s perspective, this meant there was no evidence to support that the net asset value of the Company’s investment fund might have been less than it otherwise would have been, or that any trading by the market maker (there was no evidence of such trading) involved loss attributable to the manipulative trades.

21. That is of importance in the weighing of factors. The causes of action contemplated by the Applicants, for which the suffering of loss or damage from the breach of Article 54 is necessary, are weak. It is by no means evident that loss would have been suffered in the circumstances suggested in the evidence of Mr Vieujot, and no evidence supports that those circumstances came about.

22. As to other factors, in favour of ordering disclosure of the identities of the clients are that the information is readily available from Nasdaq; there is a public interest as well as their private interests in the Applicants being able to obtain redress for breach of the Markets Law; and disclosure will be confined and not impact innocent third parties. But on the other hand, Nasdaq’s Rules require that subject to exceptions (which include disclosure to the DFSA and other compliance with the law), information it receives is to be treated as confidential, and it is not irrelevant that it received the identities of the clients in the exercise of contractual powers against the Broker; and the referral to the DFSA can vindicate the public interest in maintaining an honest market. Having regard to the weakness of the Applicant’s cases for redress by legal action, on the ultimate question of whether justice requires disclosure of the clients’ identities, I am not satisfied that it does.

23. As noted above, the Applicants relied also on an entitlement to injunctive relief. The trades were long ago and so far as appears have not been repeated: there was no evidence of any subsequent trading to “mark the close” or otherwise manipulate the price of the Company’s shares. I do not think that there is a real prospect, in the absence of threatened repetition, that an injunction would be granted to restrain the clients. On a like balancing of factors to that above, I am similarly of the view that disclosure of the clients’ identities is not warranted.

Unlawful conspiracy

24. The other matters on which the Applicant relied were what they described as steps by activist shareholders to undermine the Manager and its fund management. The evidence was as follows.

25. Lazard Asset Management (“Lazard”) is a shareholder in the Company. At the Company’s Annual General Meeting on 19 June 2019 its fund manager, Mr Fadi Al Sa’ed, “criticised” the Manager: the evidence did not further describe the criticism. On 12 March 2020 Mr Al Sa’ed met a representative of Dubai Islamic Bank (“DIB”), the largest largest shareholder in the Company, and told him that a group of investors was unhappy and had serious concerns about the Manager, and that their objective was to remove it. The note of the meeting, provided to the Applicants, recorded a number of quite serious allegations against the Manager, and included that the investors had approached a law firm to draft a complaint to institute a “Special Auditor” to examine the allegations. The allegations included that the Manager had exposed shareholders to significant financial risk, which the Applicants said was a reference to share price performance.

26. Mr Zachary Cefaratti is the CEO of Dalma Capital Management Ltd (“Dalma”) a shareholder in the Company, and also the fund manager for another Dubai-based investment company said to be controlled by a Mr Manohar Lahori. On 18 March 2020 Mr Cefaratti had an arranged telephone conversation with the same representative of DIB, in which (according to the note, also provided to the Applicants) he said that Dalma was one of a number of activist shareholders, was critical of the Manager’s performance, and said that the objective of the activist shareholders was to appoint a new manager for the fund. The criticism included that the fund was overvalued, but also that it was trading at an 85% discount to its net asset value.

27. We then move forward to 2 September 2020. On that day the Manager hosted a teleconference with investors to discuss the fund’s results for the first half of 2020. Questions were invited. Questions were submitted by Mr Lahori prior to the call. During the call questions were submitted which, for reasons given in an investigative report, the Applicants contend were not from their purported source but from a person connected with Mr Cefaratti (the “Person”). The Applicants submit that there is a “degree of similarity “between the questions; there is enough similarity for an arguable connection between Mr Lahori and the Person.

28. The Applicants submitted that the February trades may have been manipulation of the share price as part of a wider strategy between the activist shareholders to discredit the Manager and make it vulnerable to an attempt at replacement. It pointed to a degree of concealment at the teleconference, and submitted that if the trades were undertaken as a similarly concealed activity by or with the agreement of the group of activist shareholders, there would be a claim for unlawful conspiracy as recognised in Article 36 of the Law of Obligations, DIFC Law No 5 of 2005, the unlawful act being the market manipulation. The identities of the clients was required in order to see whether there was a case for the trades being acts in furtherance of an agreement between the activist shareholders (“Conspiratorial Acts”); if there was, the clients and the activist shareholders would all be exposed to action.

29. As before, I accept the good arguable case of breach of Article 54 by market manipulation. The activist shareholders are entitled to agitate for replacement of the Manager as manager of the fund, including by criticising its performance and the performance of the fund, and this application is not concerned with whether the criticisms are well-founded. But if the Manager were to be replaced and a contributing factor to its replacement was the February trades as Conspiratorial Acts, the Manager at least would have arguably suffered a recoverable loss of its performance fee.

30. On the evidence, it can readily enough be concluded that a group of shareholders wish to see the Manager replaced, and that their reasons for doing so, as expressed, include dissatisfaction with its performance and the performance of the fund. But it is not easy to see the February trades as Conspiratorial Acts in the pursuit of their end. The Applicants point to the timing of the complaints to DIB in March 2020, shortly after the trades. That does not seem to me to be a strong point. I have already referred to the absence of evidence that the effect on the share price was not soon overtaken by the market’s view of the true value of the Company’s shares, and if complaints to the largest shareholder over the share price made a month later were to carry weight, one would expect more sustained manipulation and/or similar “marking the close” proximate to the complaints; and at least as recorded, the complaints were not specific as to the share price around the time of the trades. The Nasdaq Rules were subsequently changed to prevent using a bid less than USD 3,000 to manipulate price in the same way, but until then (or thereafter), so far as the evidence shows, there was no further manipulation, and the questions from Mr Lahori and the Person in the teleconference in September 2020 did not complain of the share price. If they were meant to be a discrediting of the Manager, the trades seem to have been ineffectual and were not pursued, casting considerable doubt on whether they were Conspiratorial Acts.

31. Even if their identification shows that the clients were members of the group of activist shareholders, eight months have now passed, and the Manager has not been replaced. The manipulation has not been repeated. If in the future the activist shareholders get their wish, in my view the prospect of it being shown that the February trades contributed to that as Conspiratorial Acts is remote; equally, on the evidence before me I do not think there is a real prospect of injunctive relief to restrain repetition as Conspiratorial Acts.

32. Again, the weakness of the Applicants’ cases is important in the weighing of factors. On a similar balancing of factors to that earlier explained, including regard also to the Applicants’ interest in protecting the management of the fund from unlawful attack, I do not think that justice requires disclosure of the clients’ identities.

Further trades?

33. As noted above, the Applicants also seek disclosure of any further trades made by the clients since February 2018. This was scarcely mentioned in evidence or submissions. There was evidence that Mr Al Sa’ed and Lazard sold shares in the Company in January – February 2018, but the significance of this is not evident and the selected period was not otherwise explained. Nor was the point of obtaining the information explained, beyond Mr Vieujot saying that it was “in order to establish if any further trades were abusive”, which rather smacks of fishing or gathering evidence.

34. It is sufficient that, since the identities of the clients are not to be disclosed, this further relief should not be granted.

Undertaking as To Damages and Costs

35. At the hearing, Nasdaq submitted that any relief should be accompanied by an undertaking as to damages. If I had made a Norwich Pharmacal order, I would not have required such an undertaking. The application is for a final order. If an order is made, there is no occasion to take account of the possibility that it was wrongly made. I should say that in a post-hearing note, submitted with leave, Nasdaq properly conceded this position.

36. The Applicants accepted that they should pay Nasdaq’s reasonable costs if an order was made; that is equally so when I have declined an order. At the hearing Nasdaq submitted a Statement of Costs for the total amount of AED 72,490.83, the Applicants submitted that it was excessive, and it was sensibly agreed that I should determine costs on submissions then made.

37. Nasdaq was entitled to consider the relief applied for and the witness statements of Mr Vieujot and Racha Al Khawaja on which the Applicants relied, to take advice, and to explain its position in the witness statement of its Chief Executive Officer. The last-mentioned witness statement appropriately and helpfully provided information as to the workings of the exchange. It was also appropriate that Nasdaq should attend the hearing. However, while the rates used in the Statement of Costs are broadly in line with those in Registrar’s Direction No 1 of 2017, the hours of the “fee earners” for out of court work are in my view generous. On a necessarily broad-brush assessment, reducing those hours and allowing for the hearing taking a little longer than in the Statement of Costs, the costs should be AED 50,000.

Orders

38. While I have concluded that the disclosure sought should not be ordered, that is a matter on which minds can reasonably differ. Given Nasdaq’s neutrality, and with a view to the overriding objective and avoidance of unnecessary formality, expense and delay, I indicate that I would give permission to appeal if the Applicants asked for it.

39. I order that the application be dismissed, and that the Applicants pay the Respondent’s costs assessed at AED 50,000.