Liability for Misstatements to the Market and the Role of Expert Economic Testimony -- Response to the Davies Review

27 April 2007
By Dr. Chudozie Okongwu

A new section of the UK Financial Services and Markets Act 2000 establishes a statutory liability regime under which issuers will be liable for fraudulent misstatements in periodic disclosures to the market as required under the Transparency Directive. In response to stakeholder concerns about the scope of the new regime and whether common law rights of shareholders were at risk, the Economic Secretary to the Treasury appointed Professor Paul Davies of the London School of Economics to conduct an independent review on liability for misstatements to the market and to recommend whether changes should be made to the existing statutory regime.

In March 2007, Professor Davies published his analysis by way of a discussion paper in order to invite comments from interested parties. A NERA team led by Senior Vice President Dr. Chudozie Okongwu contributed a response, which was published on 4 June 2007 along with the Final Report. In NERA's response, the authors addressed a number of questions raised by Professor Davies, including whether statutory protection should be extended to short sellers and to investors who held but did not trade shares during the relevant period. The response also discussed what the measure of damages should be, and whether excessive levels of fraud-based litigation can be avoided. In addition, the authors examined how economic theory has been applied to US cases involving alleged liability for misstatements to the market in order to gain insight that can be applied to cases in the UK.

The Final Report of and the responses to the Davies Review can be downloaded from the HM Treasury website.