Market Volatility Litigation: A Breeding Ground for Fraud?

16th March 2026 | Greg Pooler | Dispute Resolution, Financial Markets, Market Volatility

The primary concern following geopolitical events in the Middle East is of course the lives that have been lost or adversely affected by the conflict and not its macroeconomic effects.

With that sentiment in mind, this article is a reflection on how market shocks and the wider marketing volatility can influence the commercial litigation market and the types of dispute they tend to precipitate. We do not attempt to analyse how this latest episode of market turbulence affects specialized litigation markets in energy, shipping and commodities which is best left to practitioners in the field. We concern ourselves here with the broader relationship between adverse market conditions and general commercial disputes, looking at a few recent examples of the kinds of dispute that tend to arise.

Historical patterns: why market volatility leads to litigation

Market volatility has historically precipitated a rise in contentious behaviour. Periods of market volatility frequently lead to an increase in commercial litigation, as financial pressure exposes contractual weaknesses and misconduct. The specie of dispute is unsurprisingly influenced by the underlying market forces going awry, for example the spate of misselling cases that followed in the wake of the 2008 global financial crisis or supply chain disputes following the 2020 pandemic. 

If there is one feature adverse market events share, it is the contraction in liquidity and tightening of credit conditions, creating acute economic pressures on entities and individuals. Likewise, if there is a pattern as to the types of disputes that follow on from those economic conditions, history shows battles are typically fought in the arenas of contract termination and renegotiation and that commercial fraud practitioners in particular can expect to feast on an increase in fraud and financial misconduct that tend to get unveiled during episodes of market turbulence.

How market volatility exposes fraud in financial markets

Market shocks and scandal tend to go hand in hand. In particular, market volatility often exposes financial misconduct where leverage, collateral or liquidity structures are placed under sudden stress. One well established mechanism by which wrongdoing is unveiled occurs in situations of over-leveraging. The market contexts in which this presents are many and varied, but in broad terms the basic features of this scenario concern lending against secured assets or collateral, with those that are tethered to assets traded in financial markets being particularly vulnerable.

Market Financial Solutions provides a good recent case study of how tightening credit conditions combined with other forces is ultimately revealing of fraud. MFS provided bridging loan and property finance, with that finance in turn being supported by wholesale lending from a consortium of banks including Barclays and Apollo. 

MFS’ issues came to light owing to a sector-specific tightening of credit conditions in private credit markets in turn triggered by wider concerns over underwriting standards, particularly in riskier lending situations. This led many lenders to review their portfolios and due diligence protocols. In the case of MFS and prompted by mounting concerns in private credit, the banks and credit funds funding MFS undertook such a review that revealed various financial malpractices within MFS. In the main this included so-called “double-pledging” (where the same property had been pledged to multiple banks) – the collateral shortfall (that is the shortfall in the value of the underlying securities versus the amount of lending outstanding) is thought to be nearly £1bn.  Irregular features of MFS’ business model and the particulars of the financial misconduct by its management continue to emerge. Indeed, recently issued creditor claims allege that MFS lent money to persons connected to MFS’ owner, Paresh Raka.No doubt there is more to come.

Another area where share price volatility and collapse is exposing of wrongdoing is in the realm of margin lending risk management. This is where an entity builds highly leveraged positions in the market and confronts a situation of falling share prices: when this happens banks make margin calls or call on additional posting of capital which if not complied with triggers investigations and enforcement action. 

Archegos Capital Management is a recent infamous example from across the pond of poor margin lending risk management that is unveiling of fraud against a backdrop of falling share prices. Archegos had taken leveraged positions in a portfolio of risky shares (including some “meme-like” stocks including Baidu and Tencent Music). When the stock prices declined a classic margin-call cascade ensued: a fire sale of the shares further degraded the value of those shares leading to more margin calls with the same result. This mechanism revealed the true scale of Archegos’ hitherto concealed leverage as well as share price manipulation by Archegos executives. The losses were in the billions and attracted criminal investigations as well as SEC enforcement action.

Impact on general commercial litigation

Pivoting away from the exotic world of structured finance, economic pressures can distort incentives in more prosaic legal contexts. Rapid cost inflation can erode (or at worst eliminate) profits and bottom lines, leaving parties confronted with the choice of either termination, renegotiation or trying to climb the steep slopes of a frustration claim. Supply contracts with unhedged long-term pricing mechanisms are particularly vulnerable. 

More cunning counterparties might exploit a situation of economic pressure to renegotiate more favourable terms, giving rise to the question: when does economic pressure exerted by one party on another cross the line into economic duress?  A good illustration of the distinction is the Supreme Court’s consideration of the issue in Pakistan International Airline Corporation v Times Travel (UK) Ltd [2021] UKSC 40. PIAC was facing claims of unpaid commission of circa £1.5m from a Birmingham based travel agent, Times Travel (UK) Ltd. PIAC terminated the contract with Times Travel, pulling the rug from under its business because of Times Travel’s dependency on its revenue stream with PIAC, being pretty much the sole provider of direct flights between the UK and Pakistan. 

PIAC offered to resurrect the contractual relationship on the basis that Times Travel sign a waiver in relation to its claims and agree to a new, much less favourable, commission regime. It did so, but subsequently brought a claim seeking damages for economic duress. The Supreme Court held that PIAC’s termination of the contract was lawful and while it had brought severe economic pressure to bear on Times Travel, it was “lawful economic duress” that did not found a claim.

Conclusion

These are unpredictable and disruptive times, and periods of market volatility frequently generate commercial litigation as financial pressure exposes legal and contractual risks.Contract formation is all about the allocation and management of risks, and certain market contexts require careful management of risks that are tethered to, and seek to provide insulation from, adverse market events. We will be keeping a watchful eye on the evolving situation in private credit markets in particular and how the contractual framework regulating the relationships within that sector holds up under what appears to be deteriorating conditions. 

English law thankfully has a highly developed and sophisticated toolkit of remedies that is adept at dealing with the myriad of disputes thrown its way in times of economic trouble. Sherrards Solicitors is well positioned to offer clients access to teams of specialist and agile litigators with expertise in English law and its broad range of remedies, whatever the market context.