Describe the nature and extent of securities litigation in your jurisdiction.
Securities litigation in Nigeria generally entails disputes between capital market operators, investors and clearing agencies, the Securities and Exchange Commission (SEC), a federal government agency and the apex regulator of the capital market in Nigeria, and investors, etc; disputes arising from the administration, management and operation of investment schemes relating to securities transactions.
When a party files a complaint at the SEC against an operator for any securities transaction, the complaint is referred to the Administrative Proceedings Committee for determination. The decision of the Committee is appealable to the Investment and Securities Tribunal (IST). The Investment and Securities Act 2007 (ISA) prescribes that all actions must be concluded within 90 days at the IST.
Parties can also commence an action directly at the IST. The IST has exclusive jurisdiction to hear and determine:
- any question of law or dispute involving a decision or determination of the SEC in the operation of the ISA;
- a dispute between:
- capital market operators;
- capital market operators and their clients;
- an investor and a securities exchange or capital trade point or clearing and settlement agency;
- a capital market operator and the SEC;
- the SEC and a self-regulatory organisation; and
- an investor and the SEC, or an issuer and the SEC; and
- a dispute arising from the administration, management and operation of collective investment schemes, etc.
The decisions of the IST are appealable to the Court of Appeal and subsequently to the Supreme Court.Available claims
What are the types of securities claim available to investors?
Securities claims available to investors in Nigeria can be categorised into statutory and common law claims. For instance, where an investor is of the view that losses arising out of his or her securities transaction were because of the negligence of the operator, the investor is entitled under the law to seek claims against the operator based on the alleged negligence. The investor, however, has the burden of proof to the IST that the investor was negligent in handling the transaction.
The IST also exercises jurisdiction in any other matter as may be prescribed by an Act of the National Assembly. Other types of claims available to the investor include:
- misappropriation of clients’ funds by a stockbroker;
- non-remittance of issue proceeds by an issuing house to the issuer or company;
- non-remittance of dividends by a registrar or public company or stockbroker;
- late transfer and registration of shares or stocks by any stockbroker;
- disputes or claims arising from misrepresentations; or
- false statements in offer documents or in a securities transaction.
How do claims arising out of securities offerings differ from those based on secondary-market purchases of securities?
There is no specific statutory provision or case law that creates a difference in relation to claims arising out of securities offerings from those on security market purchases. However, claims arising out of securities offerings primarily relate to the misrepresentation in the offering document, while claims on secondary market purchases generally feature negligence, false trading, market manipulations and minority protection actions against the company.Public versus private securities
Are there differences in the claims available for publicly traded securities and for privately issued securities?
Yes, there are differences in the claims available for both. For instance, in publicly traded securities, the SEC and Nigeria Stock Exchange (NSE) can sanction the operators for negligent conduct, while for privately issued securities, the NSE and the SEC generally have no jurisdiction over them. The standard of proof in obtaining damages against both on grounds of negligence is still based on the balance of probabilities. Following the enactment of the Federal Competition and Consumer Protection Act in 2019, which repealed sections 118 to 128 of the ISA dealing with mergers and acquisitions, the Federal Competition and Consumer Protection Commission is now vested with all the powers previously held by the SEC regarding mergers and acquisitions.
Primary elements of claim
What are the elements of the main types of securities claim?
The claims are either statutory claims or common law claims. For statutory claims, liability exists for untrue statements in a prospectus. Section 85(1) of the ISA provides that where a prospectus invites persons to subscribe for shares in a company, all persons who subscribe for shares or debentures are entitled to compensation for the loss or damage they have suffered by reason of their reliance on any untrue statement or misstatement included in the prospectus.
The elements of a common law claim for negligent misrepresentation are as follows:
- there was a duty of care based on a ‘special relationship’ between the representor and the representee;
- the representation was false or misleading;
- the representee reasonably relied upon the misrepresentation;
- the representor acted negligently in making the misrepresentation; and
- the reliance was detrimental to the representee, in the sense that harm resulted.
What is the standard for determining whether the offering documents or other statements by defendants are actionable?
The standard for determining whether the statements are actionable in Nigeria is whether statements in the offering documents relied upon by the investor are untrue, false or misleading. However, an expert is exempted from both civil and criminal liability for misstatements in the offering documents not attributed to him or her as an expert during preparation of these documents. For claims emanating from common law, the onus is on the applicant to prove that the representation was misleading and inaccurate. The standard of proof is on the preponderance of evidence and on the balance of probabilities. When the misrepresentation has criminal liabilities, it may be referred to the Attorney General of the Federation for criminal action to be instituted against the defendants. The standard of proof for the criminal action would be beyond reasonable doubt.Scienter
What is the standard for determining whether a defendant has a culpable state of mind?
The requirement for determining whether the defendant has a culpable state of mind would generally depend on the nature of the claim. For instance, when the claim is to do with false trading and market rigging transactions, the applicant must show that the defendant was reckless or negligent in disseminating false information and likely to induce the sale or purchase of securities or likely to have the effect of raising, lowering, maintaining or establishing the market price of securities. On the other hand, when the claim relates to misstatements in the prospectus, the applicant should be able to prove that the defendant’s principal officers, employees who participated in the production of the prospectus, issuing house, etc, omitted to state material facts to make the prospectus not misleading. In Union Bank of Nigeria Plc (Registrar’s Dept) v Securities & Exchange Commission (Appeal No. IST/APP/03/2003) the court held that the registrar, as custodian of shares, owed shareholders and other market operators a duty of care and due diligence, and was therefore liable to restore the shareholders to their original position in the event of wrongful transfers. Failure to reverify dematerialised certificates sent back from the Central Securities Clearing System was held to be a breach of statutory duty to investors and other capital market operators who rely on information from the registrar. Failure to perform their duty made the registrar culpable and liable to pay compensation for damage.
There are also some defences available to the defendant depending on the claim. For instance, in the former claim, if it is established that at the time the defendant recorded or stored the information, he or she had no reasonable grounds for expecting that the information would be available to any other person, he or she may avoid liability. See sections 107 to 108 of the ISA.
In the latter claim, the defendant may also not be liable if he or she can show that the prospectus was issued without his or her knowledge or consent and, on becoming aware of its issue, reasonable notice was given to the public, or after the issue of the prospectus and before allotment, he or she, upon becoming aware of the misstatement, withdrew his or her consent in writing. See section 85 of the ISA.Reliance
Is proof of reliance required, and are there any presumptions of reliance available to assist plaintiffs?
By virtue of section 94 of the ISA, proof of reliance is not required for an applicant to bring an action for rescission of all allotments against the defendant if the prospectus contained a material statement, promise or forecast that was false or misleading. All the applicant is obligated to show by virtue of the provision is that the prospectus contained deceptive statements.
However, by virtue of section 85(1) of the ISA, while it does not also require the applicant to show that he or she relied on the untrue statement or misstatement to institute the action, defendants are liable to pay compensation only to persons who relied on the prospectus and incurred loss or damage by reason of the untrue statement. In Dr Sunday Folorunso Kuku & 2 Ors v Geoff Ohen Ltd & 2 Ors (in Suit No. FHC/L/CP/25/12 delivered on 7 May 2018), the Federal High Court found that one of the applicants and the third defendant participated in the production of a false document and thus held that the applicant could not benefit from the transaction. The matter is currently on appeal.Causation
Is proof of causation required? How is causation established?
Section 85(1) of the ISA requires that the negligence or breach of duty that led to the misstatements are the direct cause of the loss or damage suffered.Other elements of claim
What elements present special issues in the securities litigation context?
There is no specific statutory provision or case law that has been deemed a special issue in securities litigation.
One element that used to be notable was the issue of jurisdiction regarding securities litigation involving the SEC. The issue has, however, been resolved in favour of the IST as opposed to the Federal High Court.Limitation period
What is the relevant limitation period? When does it begin to run? Can it be extended or shortened?
The relevant limitation period in Nigeria is three years if the action is on the grounds of a misleading statement, an untrue statement or a misrepresentation on the prospectus. When the action is based on breach of contract, it would be six years. Time begins to run from the date of discovery of the misrepresentation and cannot be extended after the relevant limitation period.
Defence, remedies and pleadingDefences
What defences present special issues in the securities litigation context?
The Investment and Securities Act 2007 provides for an exemption from liability for a director, an employee, the issuing house and its principal officers if these persons withdrew consent in writing before the issue of the prospectus, and that it was issued without their authority or consent or the prospectus was issued without their knowledge or consent, and that on becoming aware of its issue, they immediately gave reasonable public notice that it was issued without their knowledge or consent. Defendants may also be able to limit liability by raising contributory negligence on the part of the investor. They may also be able to deny liability entirely if they can show that they did not act negligently but the loss was as a result of market collapse.Remedies
What remedies are available? What is the measure of damages?
An important remedy for an applicant in an action for misrepresentation is damages, and the applicant is required to plead the particulars for special damages (if any) he or she suffered. It is within the discretion of the Investment and Securities Tribunal (IST) to determine the quantum of general damages to be paid to the applicant irrespective of whatever amount he or she sought.
Any director convicted for fraud becomes prohibited from being a director by reason of a disqualification order obtained after conviction for a period of 10 years.Pleading requirements
What is required to plead the claim adequately and proceed past the initial pleading?
The applicant is required to file an originating application.This statement sets out the necessary facts that support the claim and the applicant is also required to attach the documents it intends to rely upon, alongside necessary witness statements.Procedural defence mechanisms
What are the procedural mechanisms available to defendants to defeat, dispose of or narrow claims at an early stage of proceedings? What requirements must be satisfied to obtain each form of pretrial resolution?
The IST rules provides that even when the defendant has a preliminary objection that may dispose of the claim, it would only be entertained by the tribual at the stage of adoption of the final arguments (ie, after the evidence of the parties). In essence, the IST does not entertain applications by the defendant to terminate the claim at an early stage of proceedings. However, when the IST is of the view that the grounds of the preliminary objection would most likely terminate the suit, it would entertain the preliminary objection by the defendant. In Mr Benson Onokurhefe v LeadCapital Plc & Anor (Suit No. IST/LA/05/18), the IST entertained the preliminary objection at the preliminary stage on the grounds that the action was res judicata and the suit was struck out at an early stage of proceedings.
Are the principles of secondary, vicarious or ‘controlling person’ liability recognised in your jurisdiction?
The concept of ‘controlling person’ liability is recognised mainly with respect to prospectus liability. The liability extends to persons who were not directly involved in the preparation but were in a position to exert control over the misleading or untrue prospectus.Claims against directors
What are the special issues in your jurisdiction with respect to securities claims against directors?
There are ongoing cases in court against directors for negligence and fraud with respect to securities transactions. Section 282 of the Companies and Allied Matters Act placed a duty of care and skill on directors; directors are required to exercise a reasonable degree of care, diligence and skill while carrying out the functions of the office. Subsection 3 of the Act's provision makes every director of a board individually and collectively liable for actions of the board, except when the director can, for example, justify his or her absence at a board meeting at which the alleged decision was reached.
From the above, there need not be actual intention to issue a misleading prospectus in civil cases; however, a major element for criminal liability is the intention to commit fraud.Claims against underwriters
What are the special issues in your jurisdiction with respect to securities claims against underwriters?
One of the special issues with respect to securities claims against underwriters is the refusal of the underwriters to pay claims; however, they risk losing statutory deposits to the National Insurance Commission if they do so. The National Insurance Commission has also passed a resolution to dismiss the managing directors of the underwriting companies to serve as a deterrent to other underwriters.Claims against auditors
What are the special issues in your jurisdiction with respect to securities claims against auditors?
Auditors are bound in performance of their duties to exercise the care, diligence and skill that is reasonably necessary in each particular circumstance. Thus, when a company suffers loss or damage as a result of the failure of the auditor to discharge his or her fiduciary duty, the auditor may be liable for negligence and the directors may institute an action against him or her. If the directors fail to institute an action against the auditor, any member of the company may do so after the expiration of 30 days’ notice to the company of its intention to do so.
In what circumstances does your jurisdiction allow collective proceedings?
The circumstances for collective proceedings in Nigeria are as follows:
- the person, the class or some members of the class interested cannot be ascertained or cannot readily be ascertained;
- the person, the class or some members of the class interested if ascertained cannot be found; or
- the person, the class and the members of the class can be ascertained and found, but it is more expedient to appoint one or more persons to represent that person, class or member of the class (in this instance, a judge may make the appointment and the judge's decision in the proceedings shall be binding on the person or class of persons so represented); and
- the necessary permission of the court is obtained or direction is given.
In collective proceedings, are claims opt-in or opt-out?
Nigerian law stipulates that in any collective proceedings a person, a class or some members of the class may apply to a court or a judge in chambers to opt in or opt out of the class action. A court or judge in chambers may, with good and justifiable cause, permit any person, class or members of the class represented in a class action to opt in or opt out.Damages
Can damages be determined on a class-wide basis, or must damages be assessed individually?
Generally, damages are assessed individually. However, the nature of the injuries of the class action will determine the nature of assessment. There is no specific rule or procedure for assessment in Nigeria.Court involvement
What is the involvement of the court in collective proceedings?
In collective proceedings, the court is vested with the power to allow the application for class action, representative action and other similar actions provided the court is satisfied that the requirements of the law as contained in the rules of court have been duly complied with. Where parties decide to explore settlement, they would need to obtain the approval of the court or the Investment and Securities Tribunal to enter the terms of settlement as a consent judgment.Regulator and third-party involvement
What role do regulators, professional bodies and other third parties play in collective proceedings?
There is no established role for regulators, professional bodies and other third parties in collective proceedings in Nigeria.
Funding and costsClaim funding
What options are available for plaintiffs to obtain funding for their claims?
In Nigeria, third-party funding is frowned upon by the courts based on the common law principles of champerty and maintenance, which (i) prohibit a third party from funding litigation between disputants (in which the funder has no legitimate interest) and (ii) render an agreement to provide these funds illegal and void, on the ground of public policy. Under Rule 50(4) of the Rules of Professional Conduct for Legal Practitioners, a lawyer shall not enter into a contingency fee arrangement without first informing the client of the potential effects.
A contingency fee arrangement is only permissible when:
- it is a civil matter, whether contentious or non-contentious;
- the contract is reasonable in the circumstances of the case, including risk and uncertainty of compensation;
- the contract is not vitiated by fraud, error or undue influence; or
- the contract is not contrary to public policy.
Who is liable to pay costs in securities litigation? How are they calculated? Are there other procedural issues relevant to costs?
The general rule is that costs will follow the event. Therefore, it is not in every case that the winning party will be paid for the expenses of litigation. Costs are usually at the discretion of the court. The successful party may be asked to pay costs if he or she conducted him or herself in an improper manner that caused delay, if the other party was successful on a part of his or her claim or if an action was done or an omission was made improperly. Some of the factors the court considers in awarding costs include the cost of legal representation and assistance of a successful party, the travel and other expenses of the parties and witnesses and such other expenses that the judge determines ought to be recovered.
Costs are usually determined by the judge; however, where the judge cannot determine the quantum, it will be referred to a taxation officer. When the court awards costs, further proceedings maybe stayed until payment is made; there exists a right of appeal against costs, but this appeal can only be made with the leave of the court.
Investment funds and structured financeInterests in investment funds
Are there special issues in your jurisdiction with respect to interests in investment funds? What claims are available to investors in a fund against the fund and its directors, and against an investment manager or adviser?
The major investment funds in Nigeria are unit trusts, venture capital funds, open-ended investment companies, real estate investment schemes and specialised funds. The volume of litigation involving investment funds in Nigeria is relatively low. The most notable claim relates to the breach of fiduciary duty of the fund’s investment managerStructured finance vehicles
Are there special issues in your country in the structured finance context?
The most common types of structured finance vehicles in Nigeria are mortgage-backed securities, asset-backed securities and credit risk. One major issue with structured finance vehicles in Nigeria is the high rate of interest and the cost of securitisation; this problem usually arises because of the low percentage level of assignment of investment grades to the vehicles.
Another issue is the systemic bias towards lower quality loans among securitised loans. Underwriting, credit rating and investor due diligence are not properly performed in Nigeria. There are, however, ongoing attempts by the credit reporting agencies to entrench due diligence in credit reporting, and there are calls for improvement in the area of credit ratings.
Cross-border issuesForeign claimants and securities
What are the requirements for foreign residents or for holders of securities purchased in other jurisdictions to bring a successful claim in your jurisdiction?
It is settled law that a foreign company can sue and be sued in Nigeria, irrespective of the incorporation status of the party. Section 60 of the Companies and Allied Matters Act provides that a foreign company can sue and be sued in its name or in the name of its agents, and there have also been judicial pronouncements: one of which was in Watanmal Singapore PTE v Liz Olofin & Co Ltd (1998) 1 NWLR (Pt. 533) 311; and another was in Ritz & WKG v Techno Ltd (1994) 4 NWLR (PT.598).Foreign defendants and issuers
What are the requirements for investors to bring a successful claim in your jurisdiction against foreign defendants or issuers of securities traded on a foreign exchange?
In Nigeria, there is a general presumption against the applicability of a law that gives rise to a claim, when the claim originated from transactions outside Nigeria. However, if it can be shown that there is a legislative intent that such a law is applicable to extraterritorial conduct, the presumption becomes rebuttable. Upon fulfilling the conditions negating the presumption, Nigerian courts can entertain such matters where the transaction had substantial effects in the jurisdiction.
When the foreign defendant is in Nigeria, the claim based on extraterritoriality of a law will be possible. However, when the foreign defendant is not within the geographical territory of Nigeria, the claim may be subject to the principles of conflict of laws.Multiple cross-border claims
How do courts in your jurisdiction deal with multiple securities claims in different jurisdictions?
Whenever there are identical claims between the same parties in a foreign jurisdiction, the court may stay the proceedings if there is an existing treaty between the countries; otherwise, the Nigerian court will proceed with the matter. The court may also entertain matters on behalf of purchasers from other jurisdictions when the claims had been dismissed in proceedings outside Nigeria.
However, if a judgment has been obtained in the foreign jurisdiction and the court is informed of the development, the claim in Nigeria may not continue so far as the foreign judgment falls under the ambit of the Foreign Judgment (Reciprocal Enforcement) Act.Enforcement of foreign judgments
What are the requirements in your jurisdiction to enforce foreign court judgments relating to securities transactions?
Foreign judgments can be enforced in Nigeria either by an action at common law, or by reciprocity or reciprocal enforcement. For enforcement by action at common law, the element of reciprocity is not required; thus, a foreign judgment may be enforced in Nigeria irrespective of whether the foreign court would reciprocally enforce the judgments of Nigerian courts. This distinguishes it from the other method of enforcing foreign judgments in Nigeria.
The foreign judgment creditor will commence an action in a high court in Nigeria, using the reliefs given in his or her foreign judgment as the cause of action.
There is also no need for a lengthy trial as the foreign judgment creditor can institute an action under the summary judgment procedure available in some high courts in Nigeria. For the enforcement of a foreign judgment through an action at common law to be successful, the foreign judgment must be final and conclusive, have been delivered by a superior court of competent jurisdiction and be for a definite sum of money, provided that it is not money recoverable as tax, a penalty or fine.
If the judgment is for a res other than money, the res must have been situated at the jurisdiction of the foreign court that gave the judgment at the time of delivery.
Not all judgments are enforceable by this method. Any foreign judgment to which Part I of the Foreign Judgment (Reciprocal Enforcement) Act applies cannot be enforced in Nigeria through an action at common law but can only be enforced through registration under the Act (reciprocity). That is, any judgment to which reciprocal enforcement applies cannot be enforced by an action at common law. See section 8, Foreign Judgment (Reciprocal Enforcement) Act.
Reciprocal enforcement, on the other hand, is based on the enforcement of judgments given by foreign courts in Nigeria that accord reciprocal treatment to judgments given in Nigeria. The countries that are engaged in reciprocal enforcement with Nigeria are those listed in an order made by the Minister of Justice under Part I of the Foreign Judgment (Reciprocal Enforcement) Act 1961.
Alternative dispute resolutionOptions, advantages and disadvantages
What alternatives to litigation are available in your jurisdiction to redress losses on securities transactions? What are the advantages and disadvantages of arbitration as compared with litigation in your jurisdiction in securities disputes?
The major alternatives to litigation are arbitration, mediation and conciliation. The Investment and Securities Tribunal (IST) has an alternative dispute resolution (ADR) centre (the ADR centre) whose the primary aim of the centre is to provide opportunities for parties to mutually settle disputes that will thereafter be entered as a judgment of the IST. The various techniques adopted at the ADR centre involve mediation, neutral fact finding, early neutral evaluation, conciliation, judicial appraisal and negotiation, among others. These techniques are used to assist the parties on the particulars of each case.
Exploring a separate means of ADR is usually difficult if one of the parties is the Securities and Exchange Commission. This is because of the existing framework of the ADR centre. Generally, the type of parties will determine the nature and process of ADR proceedings. The ADR centre is the common resort for parties involved in a securities dispute.
A major advantage of ADR in Nigeria is the speedy resolution of disputes; however, the Investment and Securities Act 2007 stipulates that every dispute at the IST must be disposed of within 90 days. Although this lengthens proceedings, it is advantageous in respect of matters at the Federal High Court. An advantage of arbitration proceedings is the availability of experts; arbitrators are usually professionals in securities and have a greater level of expertise than the trial judge. The nature of securities disputes requires a requisite level of knowledge about the industry, hence the need for experts.
In practice, the cost of arbitration is a disadvantage in securities litigation because there is no statutory legal fee structure in Nigeria. The parties must bear the fees incurred by the arbitrators and other administrative expenses that would otherwise have been incurred by the state.
Update and trendsKey developments of the past year
What are the most significant recent legal developments in securities litigation in your jurisdiction? What are the current issues of note and trends relating to securities litigation in your jurisdiction? What issues do you foresee arising in the next few years?
One of the most recent legal developments related to the jurisdiction of the court to entertain a claim where the Securities and Exchange Commisson (SEC), or another government agency, is a party. This is essentially because the Constitution provides that all actions against a federal government agency ought to be instituted at the Federal High Court. It was finally determined that securities litigation, even with the SEC as a party, should be at the Investment and Securities Tribunal (IST), as provided by the Investment and Securities Act 2007 (ISA).
The constitution of the IST is a current issue. Most of the members of the IST, while conversant with the market, do not have detailed knowledge of the principles of law as most of them are not lawyers. Thus, recent judgments of the IST have gone against the established elementary principles of law.
Most operators would also allege bias against the members of the IST as they perceive them as competitors in the marketplace. Thus, the operators would relate any judgment against them as mala fide.
Another recent legal development is the enactment of the Federal Competition and Consumer Protection Act, which has repealed sections 118 to 128 of the ISA dealing with mergers and acqusitions. The new Act has established a tribunal that is vested with jurisdiction to determine disputes concerning mergers and acquisitions.
Law stated dateCorrect on
Give the date on which the information above is accurate.
5 February 2020