Bank Leumi (UK) Plc v Linda Joy Wachner
| Jurisdiction | England & Wales |
| Judge | The Honourable Mr Justice Flaux |
| Judgment Date | 22 March 2011 |
| Neutral Citation | [2011] EWHC 656 (Comm) |
| Docket Number | Case No: 2009 FOLIO 178 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 22 March 2011 |
[2011] EWHC 656 (Comm)
The Honourable Mr Justice Flaux
Case No: 2009 FOLIO 178
Raymond Cox QC and Marcus Smith QC (instructed by Addleshaw Goddard) for the Claimant
Sue Prevezer QC and Felicity Maher (instructed by Quinn Emanuel) for the Defendant
Hearing dates: 22 and 23 November, 2 and 3, 6–9, 13 and 16 December 2010
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
THE HON MR JUSTICE FLAUX
The Honourable Mr Justice Flaux:
Introduction and background
This case concerns trading in foreign exchange options conducted by the defendant, Linda Wachner, (to whom I will refer as Ms Wachner), with the claimant bank, (to which I will refer as "BLUK", to distinguish it from its affiliate company Bank Leumi USA, "BLUSA" with which Ms Wachner also traded during the relevant period). The dispute is focused on one particular type of Euro/dollar foreign exchange option which Ms Wachner traded in 2008, both in the form of calls and puts, namely reverse knock-in options ("RKIs"). The nature of these options is discussed in more detail below. No complaint is made about other foreign exchange trading in which Ms Wachner engaged during the relevant period, including in vanilla options.
Ms Wachner had traded foreign exchange with BLUSA since 2003 pursuant to a foreign exchange (FX) trading facility she had with that bank, on an execution only basis. She traded increasing volumes over the years, spots and forwards, as well as some options. In 2005 she wished to set up another FX trading facility with BLUK. For the purposes of that facility, she was classified by BLUK pursuant to the Financial Services Authority ("FSA") Code of Business Rules ("COB") as an "intermediate customer" rather than a "private customer". Under BLUK's internal policy, only those individuals who were classified as intermediate customers were permitted direct access to the dealers in BLUK's Dealing Room.
The facility provided to Ms Wachner was on an execution only basis. Between September and December 2005 under that facility, Ms Wachner traded FX spot, forwards and options with BLUK. She did so primarily through a professional trader who acted on her behalf, Mr Nabil Moussallem. She terminated that trading abruptly in December 2005 because losses were being made and she was evidently not happy with Mr Moussallem's trading. She closed all her positions and transferred the funds elsewhere, although her account with BLUK was not formally closed. She remained a customer of BLUK throughout 2006 and 2007, but on a dormant basis. At various stages she exhibited an interest in resuming trading with BLUK, but after initial enthusiasm, declined to take up a facility. In the meantime she continued to trade with BLUSA.
From July 2007 onwards, the so-called BLUSA Agency Agreement operated, which enabled Ms Wachner to trade under her facility with BLUSA not only during New York hours (when BLUSA's trading desk was open), but also during London hours, through the dealing room at BLUK, until New York opened at 1230 London time each day. She dealt initially with Mr Daniel Gabb (one of the traders at BLUK), but from March 2008 increasingly with Mr Martin Leslie, the senior trader in BLUK's dealing room, with whom she had initially dealt in 2005. One of the issues in the case is as to the legal effect of the BLUSA Agency Agreement, specifically whether, as she contends, Ms Wachner acted as agent for BLUSA in her dealings with BLUK or whether, as BLUK contends, it was BLUK which was acting throughout as agent for BLUSA with which all Ms Wachner's trades were concluded.
In March 2008, Ms Wachner traded her first RKIs with BLUSA through the BLUSA Agency Agreement. Within a short period of time she was also trading RKIs with HSBC Geneva pursuant to a separate trading facility she had had with that bank since about February 2008.
In June 2008, BLUK extended a €75m nominal value FX trading facility to Ms Wachner. On this occasion, she did take up the facility at the beginning of September 2008, which, as had been the case with the facility in 2005, was on an execution only basis. At various dates in September and October 2008, she closed out her positions with BLUSA and HSBC and transferred those positions into BLUK, albeit in the form of new options in each case, not by way of assignment, novation or the like. From early September 2008 she traded options (principally RKIs) with BLUK, rolling out the options she had transferred in from BLUSA and HSBC. This coincided with the collapse of Lehman Brothers and what was undoubtedly a period of unprecedented turmoil and volatility in world markets, including currency markets. This affected Ms Wachner's marked to market loss and, as it was entitled to do under the terms of the facility, BLUK made a series of margin calls on Ms Wachner.
She paid some of these margin calls but after 23 October 2008, she made no further payments and her position continued to deteriorate. In the circumstances, under the terms of the facility, BLUK was entitled to close out Ms Wachner's open positions and, on 14 November 2008, it began to do so. After applying the margin that Ms Wachner had provided, closing out her positions resulted in a loss to Ms Wachner's account of €13,434,947.98.
The present proceedings were begun by BLUK to recover that sum plus interest, on the grounds that, under both BLUK's Terms of Business, (which have applied since Ms Wachner first became a customer of BLUK in 2005) and the terms of the June 2008 facility, Ms Wachner is liable to make good that loss. Subject to her Counterclaim, that is no longer disputed by Ms Wachner.
The Amended Defence and Counterclaim (as elucidated by Further Information provided as recently as 24 September 2010) raises three causes of action against BLUK:
(1) That BLUK failed properly to categorise or classify Ms Wachner under the relevant FSA COB and its successor COBS (which came into force with the Markets in Financial Instruments Directive with effect from 1 November 2007), in that she should never have been classified as an "intermediate customer" or "elective professional client" at all. Ms Wachner contends that if she had been properly classified as a private customer or client from the outset or at one or other of a series of later dates, she would either never have traded RKIs at all or would have ceased doing so. Ms Wachner claims damages for breach of statutory duty under section 150 of the Financial Services and Markets Act 2000 (" FSMA 2000"). The amount claimed varies depending upon the date upon which it is alleged that she should have been re-categorised.
(2) Ms Wachner alleges that BLUK, through Mr Leslie and Mr Gabb, made a series of misrepresentations to her about RKIs and how she would be allowed to trade them, which induced her to enter into the various options. Ms Wachner claims damages for misrepresentation under section 2(1) of the Misrepresentation Act 1967.
(3) Ms Wachner alleges that, in breach of a duty of care (arising out of a Hedley Byrne/Henderson v Merrett assumption of responsibility) owed to her by BLUK, BLUK gave her negligent advice about RKIs. It is important to note from the outset of the judgment, that the alleged negligent advice consists of precisely the same matters as are alleged to constitute the misrepresentations relied upon. In other words, this cause of action is in a relatively narrow compass and there is no pleaded case of any wider failure to provide advice to Ms Wachner. This limitation on the pleaded case is important, not least because in the expert reports of Dr Desmond Fitzgerald, the foreign exchange trading expert for Ms Wachner, wide ranging criticisms are made of the failure of BLUK to advise Ms Wachner against particular trading and, in effect, to protect her against improvident investment decisions. However, there is no pleaded case for a wider duty to advise and in my judgment, this is a case in which it is particularly important that the criticisms made of BLUK are limited to what is pleaded.
Although the misrepresentation and breach of duty of care cases remained alive throughout the trial, in her closing submissions, Ms Sue Prevezer QC indicated that the thrust of her client's case was really focussed on the case of breach of statutory duty, realistically recognising that the other causes of action do face problems which I will indicate later in the judgment.
The nature of the various options traded by Ms Wachner
Prior to March 2008, Ms Wachner traded only vanilla options. These involve the seller agreeing to sell, for a premium payable now, a set amount of the relevant foreign currency (usually Euros in the case of Ms Wachner) if the exchange rate rises or falls (depending on whether it is a call or a put) to a particular level ("the strike price") by the maturity date. If the strike price is not reached by the maturity date, then the option expires worthless and the seller simply retains the premium. If the strike price is reached and the buyer chooses to exercise the option, the seller will have to sell the relevant foreign currency to the buyer. How much it costs to do so will obviously depend upon how much the exchange rate on the maturity date exceeds the strike price, colloquially how much the option is "in the money".
From March 2008, Ms Wachner also traded reverse knock in options or RKIs. In her statement and in the various submissions put before the Court these were described as exotic matched derivative options...
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