Expert Comment
Group Litigation on the Horizon for Woodford Investors
The high profile failure of the LF Woodford Equity Income Fund (“WEIF”) is the latest example of potential group litigation involving financial services firms. The WEIF litigation is estimated at £100m. Pradeep Oliver, partner at Cripps Pemberton Greenish, writes
The financial services firms have some features that that mean that group litigation is more common than in other sectors.
Firstly, in most instances there is less of a “recovery risk” for claimants. Within a regulatory landscape, compulsory professional indemnity insurance is often a requirement for firms and therefore the risk that a defendant will not have sufficient assets to meet a judgment is greatly reduced. If a firm were to fail without insurance coverage, the Financial Services Compensation Scheme will pick up the tab (subject to statutory limits).
Secondly, there is more scope for a systematic failure to affect large groups of investors. In the WEIF case, the alleged mismanagement of the fund has caused many investors to suffer loss. In these circumstances, it is likely that the material facts of each individual claim are so similar that they can be managed as a group with other similarly affected investors rather than on an individual basis.
Collective actions can have huge costs benefits. For example, it is anticipated that the average loss per investor in the WEIF is likely to be in the tens of thousands. In usual circumstances the legal costs involved in bringing a claim on an individual basis for such an amount would make such an claim economically unviable, however by combining similar claims in a collective action, the claimants benefit from the sharing of costs which mean that the legal costs are likely to be proportionate to the damages claimed. This means that it is viable to bring the claims as a group even though the individual claims are for a relatively low amount.
Such collective actions are generally managed through a Group Litigation Order (“GLO”), which is the principal procedure for collective actions. The GLO is the mechanism by which the court manages those individual claims where the claims give rise to common or related issues of fact or law. The GLO enables the Court to manage the group as a whole rather than as disparate actions.
Background to the WEIF claims
The WEIF was an open-ended investment fund launched on 2 June 2014 by celebrated fund manager Neil Woodford.
In 2019 it emerged that WEIF surprisingly held a significant amount of high risk and illiquid shares in a variety of AIM-listed and unquoted companies. These holdings meant that the WEIF could not meet redemption requests from investors.
On 3 June 2019, Link Fund Solutions Limited (“Link”), WEIF’s FCA-authorised corporate director (“ACD”), suspended the WEIF. In October 2019 Link confirmed that the fund would be wound up through the liquidation of its investment portfolio to commence in January 2020.
While the liquidation process takes place it is clear that investors have suffered substantial losses.
Following the suspension of the fund, several law firms are putting together legal actions to recover funds for the investors.
At present the targets of the litigation are Link Fund Solutions (“Link”) and Hargreaves Lansdown (“HL”).
The claims
As ACD of WEIF Link and owed duties under the FCA’s Collective Investment Schemes Sourcebook Rules (the “COLL Rules”).
The role of the ACD is an essential one in protecting the best interests of every investor in the fund this includes providing oversight of the investment manager, ensuring that the fund is being marketed correctly and to its intended audience and carrying out due diligence.
It is alleged that Link wrongly permitted a shift in the asset portfolio of WEIF away from well-established UK equity income securities towards increased holdings in smaller and unquoted (and therefore highly illiquid and risky) companies.
If the investors are able to establish that Link acted in breach of its obligations they may be able to recover damages for their losses.
HL operates an investment platform enabling customers to make investments and hold those investments in a HL account. HL operated a 'best buy' list of recommended funds known as the 'Wealth 50'. WEIF featured on HL's Wealth 50 ranking from its launch until the day on which the fund was suspended.
It is alleged HL continued to promote WEIF when they knew or should have known of the potential liquidity issues. It is also alleged that if HL customers relied upon the information provided by HL in respect of the WEIF fund, HL should be liable for the losses suffered by its customers.
It is still too early to tell whether or not the claims against Link and/or HL will succeed. It is clear however that due to the particular features of the financial services arena, it is likely that financial services firms will prove to be fertile ground for group litigation actions for the foreseeable future.
Pradeep Oliver, partner at Cripps Pemberton Greenish